“FG taxes likely to stifle private investment, economic performance”

Abuja: Experts have stated that recent fiscal initiatives of the Federal Government targeted at closing gaps in revenues may dampen economic performance in 2019. However, pundits also added that the spiral effect of possible fiscal policy failure may be carried forward into coming years.

MarketForces investigation reveals that dwindling revenues is the key problem that the fiscal authority must rise to solve. However, experts think introduction of new taxes and adjustment thereof must be done with caution.

This is so especially because various economic agents are under pressure from weak macroeconomic condition. Both demand and supply side are at limbo.

Analysts who spoke with MarketForces said: “It is better for government to emphasise tax collection efficiency than introduction of new ones. For example, communication tax is not necessary and 50% increase in VAT not going to achieve more”.

Towing the same line of thought, Afrinvest stated that the recent raft of aggressive initiatives to boost tax collection is motivated by government’s unsustainable fiscal position.

It noted that it believes the FG’s approach towards taxes could affect economic growth and dampen the investment climate, with negative implications for tax collections

The investment banking firm stated that this is becoming increasingly fragile in the face of large spending on subsidies and weaker for longer oil prices as well as production.

On the fiscal side, actual revenues collected has been weak at N2 trillion or 29.2% of total proposed revenue amount at N6.9 trillion for 2019, meanwhile government’s expenditure was N3.4 trillion or 37.2% of total planned spending.

“Our analysis of the 2019 budget performance in half year shows that the FG’s deficit continues to rise given the slow increase in revenue. Between January and June 2019, the FG incurred a deficit of N1.3 trillion, which is 63.5% of its proposed budget deficit of N2.1 trillion”, Afrinvest said.

In an attempt to shore up dwindling revenue which has persisted for long, the Minister of Finance, Ahmad Zainab revealed the government plan to raise value added tax by 50% from 5% to 7.5%.

The Communication Service Tax Bill is back from the dead but now repurposed. The 2016 version was meant to help boost government revenues from non-oil taxes in the wake of the collapse in oil prices between 2014 and 2016, Afrinvest observed.

The 2019 version of the bill passed the first reading in the Senate this week and it proposes a 9.0% Communication Service Tax (CST) to replace the planned increase in VAT from 5.0% to 7.5% by the FG.

In its analysis, Afrinvest stated that the CST when passed into law will be levied on the consumers of voice calls, MMS, SMS, data usage and Pay per View TV services provided by mobile telecommunication and internet service providers.

According to the firm, it stated that as the companies must provide the government access to network nodes, non-compliant service providers could suffer penalties including 5.0% of gross annual revenue from the last audited financial statements or a revocation of their licence.

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The proposed bill reads that failure to file returns by due date will attract N50,000 as well as 10,000 per day until compliance while non-remittance of the tax by the due date will attract a monthly interest on the unpaid tax at 150.0% of the average of prevailing lending rates by commercial banks.

“In our opinion, the CST would overburden consumers who already bear 5.0% Value Added Tax (VAT) on telecommunications services.

“As Nigeria plans to boost digital connectivity and derive the attendant benefits, this could slow progress as consumers readjust spending patterns given the level of poverty in the country”, Afrinvest stated.

It said that for the telecommunications sector, the proposed CST worsens the issue of tax multiplicity. In addition to existing taxes, companies would bear increased costs of compliance and lower patronage as consumers react negatively to new taxes.

“With the sector contributing 1.2% to the real GDP growth of 1.9% in the second quarter of 2019, there is the prospect for even slower economic growth”, analysts remarked.

Afrinvest noted that considering that the penetration of telecommunications services is lagging in rural areas, the planned tax would slow progress towards expanding national coverage. This could have negative implications for financial inclusion which is expected to be driven by mobile money services.

“We do not expect the CST to generate as much as the proposed VAT of 7.5% which we conservatively estimate to bring in additional N545.1 billion as VAT revenue”, the firm remarked.

The firm further noted that looking at data on the sectoral distribution of VAT collections; it discovers that VAT from professional services, which includes collections from the telecommunications sector, was N86.3 billion in 2018.

The review shows that revenues from the CST of 9.0% would clearly fall short of the FG’s expected increase in VAT, even without considering the changes to consumer demand and growth in the sector.

However, we believe the strategies to boost revenues should be better coordinated and should be part of a comprehensive reform package that harmonises taxes, widens the tax net, reins in recurrent spending, reduce costs of compliance and eliminates spending on petrol subsidies.

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