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Published On: Fri, Mar 22nd, 2019

‘Higher VAT Rate without CIT reduction will increase Unemployment, Inflation, Others’ -University Don

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By Etuka Sunday

Nigeria’s first Professor of Capital Market, and Head, Banking and Finance Department, Nasarawa State University, Keffi, Uche Uwaleke has said that increase in Value Added Tax (VAT) without corresponding reduction in Company Income Tax (CIT) would increase unemployment and inflationary pressure on the economy.
In a chat with Peoples Daily yesterday, Prof. Uwaleke said, various reports by the National Bureau of Statistics have shown that inflation in the country is driven more by cost-push factors than demand-pull against the backdrop of weak aggregate demand.
“Therefore, if the VAT rate is increased without a corresponding reduction in CIT, it will further increase the cost of goods and services and worsen inflationary pressure.
“The CBN will be compelled to further tighten monetary policy resulting in high cost of funds for businesses.
“Many firms especially those producing items with elastic demand, will experience reduced sales as they may not be able to easily transfer it to their customers.
“This will lead to inventory accumulation, low capacity utilization, lower profits and downsizing of workers thereby complicating the unemployment challenge in the country,” he said.
The University Don said, “moreover, reduced profits for companies quoted on the stock exchange will bring about reduced investments by these firms and depressed stock prices.
“In fact, an increase in VAT will lead to an increase in the cost of transactions in the capital market making it less attractive to investors,” he said.
Uwaleke said, the idea of increasing the VAT to fund the new minimum wage will end up being counterproductive. “Past experience has shown that a new minimum wage will not necessarily lead to higher inflation.
“In 2011 for example, when the wage floor was increased from N7,500 to N18,000, average inflation rate actually dropped from 13.7 per cent the previous year to 10.8 per cent.
“But if a new minimum wage can only be implementated by increasing taxes, then it simply amounts to digging a hole to fill a new one as the associated hike in the cost of goods and services will erode the purchasing power of any increase in wages.
“There is no doubt that the current VAT rate of 5 per cent is among the least in the world. However, It is equally true that many countries with a higher VAT rate have lower corporation tax.
“Ghana for example has a higher VAT rate of 14 per cent but a lower Company Income Tax of 25 per cent compared to Nigeria’s 30 per cent. Ditto for Egypt with a lower CIT of 24 per cent.
“Therefore, any increase in VAT can be productive only if it is part of a broad fiscal strategy of rebalancing the tax mix in favour of consumption tax which will entail also lowering the company income tax.
“Doing otherwise in an economy that is grappling with double-digit inflation, weak growth and high unemployment rate will cause more distortions and jeopardize government efforts at revamping the economy,” he said.
He noted that, “the major challenge with our tax system is low collection efficiency. In the case of VAT, a good number of tax payers who are supposed to be remitting VAT do not do so. I am in full support of implementing the new minimum wage without recourse to borrowing.
“The way forward is to devise means of improving the collection efficiency as well as widening the tax base as many eligible tax payers are still outside the tax net.
“To be able to implement the new minimum wage, the government should seriously consider ways of reducing the cost of governance and minimizing wastes in the public sector.
“This is the time to implement recommendations already made with respect to rationalizing government Ministries, Departments and Agencies in a manner that will also find productive engagements for those that will be affected by the exercise,” he said.

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