STATE SALES TAX, INCREASED VAT AND HIGHER PRICES 14032005

In the same manner that everyone requires a regular inflow of income to meet the demands of everyday existence, such as food, health, transportation, children’s education and shelter, governments of all sizes, whether local, state, or national cannot survive without a regular pool of income at its disposal.  Government income is usually derived from diverse sources such as royalties, fees and taxes on both individuals and corporate bodies.  The government revenue so derived will be required for the provision of basic services such as improved health, security, transportation, education and also perform other functions of a responsible Public Administration.  In this regard, there can be nothing wrong therefore in a state’s exercising its rights to collect taxes from the public (corporate and private) to cover the cost of public expenditure.

Nonetheless, a government must be very circumspect in its choice of tax instruments to ensure an equitable distribution of its tax burden so that the weak and poor do not carry a bigger proportion than their income can comfortably accommodate.  The cost of tax collection should not also be adversely disproportionate to the amount collected!  These primary principles predicate the subject of public finance and will form the backdrop for our evaluation of recent Federal and State government pronouncements on increased VAT and the introduction of sales tax respectively.

The federal government recently published its intention to raise Value Added Tax from its present flat rate of 5 per cent to 10 per cent for all items with the exception of education and health supplies and equipment.  In the same vein, the Lagos State government has recently announced its resolve to collect a 5 per cent sales tax on all commercial transactions within the state.  The Manufacturers Association has been in the forefront of the opposition to the imposition of a general sales tax in Lagos State, the commercial and industrial hub of the nation.

It is fair to expect that the immediate impact of both taxes would be an increase in the general price level, particularly for mass consumer goods; in other words, the inflationary spiral in the economy will be adversely stimulated and thus make the attainment of government objective of a single digit annual inflation rate rather unlikely!!  The snowball effect of a ‘successful’ imposition of a 5 per cent sales  tax by the Lagos administration in other states will disrupt commercial activity and inflict much pain on the masses as their below poverty income will command still less value.

In this regard, one may wonder why the need for government to collect these taxes would impact negatively on the welfare of the masses when the object of government is to provide better services to make better life possible for the masses from the tax receipts.  There may be many reasons for this failure, but it will suffice to examine some of the more important ones in the rest of this analysis.

The political structure in the country has made government business at all levels rather unwieldy with the consequence of high and increasing recurrent expenses with little or no amount left over for development and capital projects.  In this regard, increasing government revenue derived from whatever sources often get swallowed up by increasing recurrent expenses for staff salaries and other regular operational expenses without creating any net positive value on the life of the people.  Thus, these taxes will take away money from the pockets of the masses, but these funds are not spent on projects that will bring benefits to the people.

Indeed, even where revenue generated exceeds recurrent expenses, the prevalence of endemic corruption in the system ensures that the surplus is frittered away in spurious contract awards to political associates, family and friends of incumbent political administrators.  These excesses have become  the norm with the result that the masses do not pay taxes gladly even when they can afford it because they are convinced that the money collected will only go into the private pockets of some ‘oppressors’ in governments.

The impact of the burden of increased VAT and the introduction of the 5 per cent sales tax will certainly not be equitably distributed, because both the poor and the rich will pay the same amount of tax.  The rich, as can be expected, will find it much easier to bear the price increases brought about by the imposition of these flat rate taxes, but for the masses, the higher consumer prices would be akin to a demand for a pound of flesh when considered alongside the diminished naira value in their below poverty line incomes.

It is expected that an additional 5 per cent VAT and the imposition of state sale taxes would impact adversely on the cost of industrial raw materials.  The likelihood is that there will be a duplication or multiplication of the payment of these taxes from the port of importation to the point of sale of the finished products as every organ of government, federal, state & local forcibly ensure compliance to boost revenue.  The situation could be made worse if the finished goods are transported through one or more states before arrival at the point of wholesale or retail sale.

The havoc wreaked on the operations of commercial transporters by overzealous thugs (consultants) employed by various local administrations to support their revenue generating programmes may be a mirror of what to expect if Lagos State succeeds in the imposition of a 5 per cent sales tax.  The net result can only be frustration of industrial enterprise and increased consumer prices to the detriment of the masses.

The Nigerian commercial landscape rests on the business activities of a great multitude of small retailers from the roadside Mallams and mammy market operators to the street hawkers, most of whom do not keep any record of their transactions.  Any attempt to include these operators in the tax net may create a lot of pain and sorrow throughout the nation among the poor and will only enrich the enforcers (thugs! including white collar ones) without significantly increasing actual government revenue!

In the above event, the government may be better advised to look elsewhere for additional revenue rather than pursue the path of a flat increase of 5 per cent on VAT and the imposition of a flat rate of 5 per cent on all commercial transactions in each state.

It would be wiser to pursue a selective tax regime that would protect the inadequate income of the masses, but lighten the burden of wealth of the rich; in other words, an adoption of the 80:20 principle may be a more realistic guide for an optimal tax regime; thus 80 per cent of total income are earned by only 20 per cent of the population.  It would serve no purpose to further impoverish 80 per cent of the population who earn only 20 per cent of total income with additional taxation!  The income of the 20 per cent elite and wealthy in the population can be targeted with a selective tax regime.  In this wise, an increased VAT of up to 25 per cent can be levied on luxury consumption expenditure such as cars above 1200cc, accommodation in 4 and 5 Star hotels, telecom equipment and GSM recharge cards, alcohol, cigarettes, air travel tickets, imported luxury goods, insurance premium on big engine cars and houses with a value of say over N2 million, luxury fast food outlets with more than 10 seating spaces, drycleaners, rental income in high brow districts, etc, etc.

Indeed, special taxes could be levied on huge and abnormal profits currently being declared by banks and so on, and so forth.  The impact of such a tax regime would be more on the rich and well to do and will free the poor from further impoverishment.

Alternatively, and in addition, revenue may be garnered and consolidated by the blockage of the heavy leakages from corruption in government business.  The recent alarm sounded by the Chairman of the Federal House Committee on Public Accounts that their investigations have revealed that 65 per cent of government expenditure is wasted is rather disturbing to say the least!  The expensive lifestyle of the multitude of our so-called religious leaders is an indication that the churches and mosques are also veritable sources of revenue to improve the lot of the masses.

In conclusion, we can only admonish the authorities to temper the revenue drive with mercy on the poor, and ensure our industrial dream is not truncated by increased VAT on primary raw materials; a word, they say, is enough for the wise.