THIS VAT initiative should be commended but it needs some safeguards to prevent abuse.
The social contract between the government and the people requires that every taxable person pays their taxes while government must apply the revenue collected for the benefit of the people.
I was the research director for the Fiscal Policy Roundtable set up by the Nigerian Economic Summit Group in 2019. We conducted a national tax perception study which revealed that Nigerians have a very low tax morale, that is, the willingness to voluntarily comply with your tax obligations and the belief that tax evasion is wrong. The study shows that only 17% of individuals and 31% of businesses believe that they should pay their taxes correctly. Interestingly there was no marked difference between geopolitical zones across Nigeria.
This initiative by the FIRS is therefore commendable as it seeks to bring the mostly informal sector traders under the MATAN umbrella into the formal tax net. The initiative will also help the traders ward off the menace of multiple taxes and extortions often by non state actors.
However, there is need for proper education to ensure that the traders know their rights and are not exploited by tax officers. Here are key points to note for effective implementation of this initiative:
- Bases on the VAT Act, businesses making annual turnover of N25m or less are exempted from charging VAT on their sales regardless of the goods or services involved. This is expected to cover the majoriry of the traders going by available data indicating that over 90% of these businesses are micro and small enterprises.
- Most basic items are exempted from VAT regardless of turnover threshold including basic food items, medical products, baby products and educational materials. I expect this to cover many of the traders not exempted by the turnover threshold.
- There is also an exemption by design where the manufacturer, usually a large firm, prescribes the retail price and has accounted for the VAT upfront taking the burden off the traders. Examples include mobile airtime, many beverages etc.
- For those who are not covered by any of the above exemptions, they will be liable to charge and remit VAT at 7.5% on their sales. However, they are eligible to claim input VAT on their purchases such that the 7.5% VAT is effectively charged only to their margins. For instance, if a trader buys an item for N1,000 and sells it for N1,200. The incremental VAT cost to charge to the customers is N15 i.e. 7.5% of N200 margin.
- The combined effect of the above means that the public should not be exploited either by the traders who may use this VAT arrangement as an excuse to hike their prices. The VAT should not apply to over 90% of the traders and for those who need to charge the VAT the impact should be about 1% to 2% of the sales value if not less. In fact, the traders should pay less “tax” overall if government can stop the illegal taxes the traders currently pay as a sweetener for the VAT pact.
Ultimately, the biggest win for government from this arrangement may not be the VAT to be collected by the FIRS but the tax awareness, data about the traders and their trades which can be used for economic planning and possible interventions to support the informal sector businesses. This should include simplified record keeping to help them access finance and scale their business.
One of the reasons Nigerians gave for the low tax morale is lack of trust in government, lack of commensurate fiscal exchange for taxes paid and corruption in tax administration. Government needs to address these issues for the initiative to truly work.
FIRS also needs to work with various states similar to their arrangements with Lagos State to ensure that the traders who are not in the tax net for personal income tax purposes do so subject to the income tax exemption of N360,000 per annum as provided under the law.
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