On Monday, the Nigerian government, represented by the Federal Inland Revenue Service (FIRS), introduced the VAT Direct Initiative, a scheme that aims to facilitate the collection of Value Added Taxes (VAT) from the informal sector. The VAT Direct Initiative (VDI) is the first of its kind that will utilize technology to foster collaboration between FIRS and the marketplace for the collection and remittance of VAT.
According to the announcement, FIRS will partner with the Market Traders Association of Nigeria to collect & remit VAT from their members—especially those in the informal sector—using a unified systems technology. The partnership with MATAN is strategic; founded in 1995, the union prides itself as the largest player in Nigeria’s informal market space with a membership of over 40 million.
The MATAN has the responsibility to promote awareness of VAT collection and remittance in the marketplace and informal sector while simplifying VAT payment and remittances using a purpose-built digital platform. But why is this even important?
Nigeria is currently facing economic challenges, as evident from various economic indicators. But a major issue is the limited revenue available to address its debt and ensure the well-being of its citizens. Over the years, borrowing has become a major source of funding Nigeria’s budget. This year, out of the N19.47 trillion budget, Buhari’s administration planned to generate only N8.5 trillion. Hence the need for the exploration of various avenues to generate revenue. The current administration has been actively pursuing this goal since assuming office on May 29. It has eliminated the financially draining fuel subsidy and is now focused on expanding the tax base to enhance revenue streams.
Unlocking potential with a wider tax net.
The VDI is expected to boost VAT revenue generation for the three tiers of government which in turn means more money to fund infrastructure, provide social amenities and cater for the welfare of citizens.
Nonetheless, when examining the tax environment in Nigeria, it is imperative to confront the prevailing tax hurdles that have plagued the nation over time. Unfortunately, Nigeria’s tax culture has been far from praiseworthy.
According to the Federal Inland Revenue Service (FIRS) Nigeria’s tax collection rate, which is around 10.86% of GDP, is among the lowest in the world. A prominent factor contributing to this issue is the low level of tax compliance among individuals and businesses. This also can be attributed to a variety of factors, such as limited awareness of tax obligations, a lack of trust in the government’s ability to utilize tax revenue effectively, and a perception of widespread corruption in the tax administration system.
The new tax initiative is anticipated to address several of these challenges. For instance, it aims to tackle illegal taxation, where non-state actors often impose unauthorized fees on businesses in the informal sector. SBM Intelligence, an Africa-focused geopolitical research firm, says 98 per cent of businesses in Nigeria’s informal sector paid their taxes — but to non-state regulated actors. To put into context, the International Centre for Investigative Report once revealed that the Lagos chapter of the National Union of Road Transport Workers (NURTW) generates about N123.08 billion annually in levies and illegal taxes on passenger vehicles, motorcycles and tricycles alone. Interestingly, this is not remitted to the government and is only enjoyed by non-state actors.
The FIRS intends to collaborate with security agencies to curb the activities of individuals involved in illegal tax collection, including touts, miscreants, and self-appointed tax collectors operating within Nigeria’s marketplaces. This partnership will help combat multiple taxations and ensure a fair and regulated tax environment for businesses.
In addition to these measures, members of MATAN (Market Traders Association of Nigeria) will be issued identity cards with their Tax Identification Number (TIN) and other personal details, facilitating effective tax administration. Furthermore, the VAT Direct Initiative (VDI) will establish a monitoring and evaluation team consisting of officers from both parties to ensure transparency accountability prompt VAT remittance, sustained commitment and reporting which are bit to build public confidence in the initiative.
According to Taiwo Oyedele, a Fiscal Policy Partner and Africa Tax Leader at PwC, the VAT initiative should be commended but it needs some safeguards to prevent abuse. “This initiative by the FIRS is 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 a need for proper education to ensure that the traders know their rights and are not exploited by tax officers,” he tweeted.
On the 1st of February, 2020, the VAT rate went from 5% to 7.5%. However, according to the VAT Act, businesses with an annual turnover of N25 million or less are exempted from charging VAT on their sales, regardless of the goods or services involved. This exemption is expected to cover the majority of traders, considering that over 90% of these businesses are categorized as micro and small enterprises.
It is notable that certain essential items and services, such as basic food items, medical and pharmaceutical products, books and educational materials, fertilizer, and locally manufactured sanitary towels, pads, or tampons, are exempted from VAT. This is expected to provide relief for traders in the informal sector who may not meet the turnover threshold for exemption. Players in the informal sector need to be aware of these exemptions to prevent exploitation by tax officials.
VAT’s lingering controversy.
The recent development has again brought to the fore Nigeria’s longstanding controversy over the collection of Value Added Tax (VAT) and the question of whether it should be managed by the state or federal government. In 2021, the Rivers state government and the Federal Inland Revenue Service (FIRS) were at loggerheads due to reasons bordering on the inequitable distribution of VAT revenue among the 36 states of the federation. At a point, the Lagos State Government joined in the battle, but no significant resolution has been reached thus far.
Kalu Aja, a finance analyst noted that VAT should be collected by States, not the federal government. This, according to him, can serve as a competitive advantage to woo investors into states. “VAT is a final consumption tax and most certainly should not be shared. Allow States to determine their VAT rates so VAT becomes a marketing tool for States. Ebonyi and Gombe can set VAT at 2.5% to attract investors, not this one size fits all federally mandated consumption tax we currently have,” he stated.
The social contract between the government and its citizens necessitates that every individual subject to taxation fulfils their tax obligations, while the government must utilize the revenue collected for the betterment of the people.
Although time will tell how this new tax initiative will eventually pan out, the government must simplify the tax system while ensuring it is operated with transparency and accountability. Building public trust and confidence in the tax system is paramount, and this can only be achieved by showcasing the tangible things the tax revenue has been used for. It would be unacceptable to burden individuals with taxes without delivering substantial benefits in Nigeria’s current economic situation.
