People & Money

How Much VAT Can Market Traders Pay?

On the 3rd of July, 2023, the Federal Inland Revenue Service (FIRS) announced a partnership with the Market Traders Association of Nigeria (MATAN) to charge Value Added Tax on market traders, particularly those in the informal sector.

According to the tweet by FIRS, the initiative is called VAT Direct Initiative, and it will involve the use of a digital platform owned by MATAN. It also noted that the initiative is targeted at helping FIRS curb multiple taxation in the marketplace. FIRS stated that by collaborating with security agencies, it intends to suppress the actions of individuals such as touts, troublemakers, and unauthorized tax collectors engaged in illicit tax collection within Nigeria’s market areas.

Also Read: Nigeria to Introduce 7.5% VAT on Diesel Imports, Diesel May Hit N900

Based on the available information about the informal sector and tax collection in Nigeria, let us examine the framework and methods of this initiative for a comprehensive review.

First of all, the tax revenue in Nigeria is low. In 2021, the FIRS revised Nigeria’s tax-to-GDP ratio upward to 10.86%, the highest level in years. In contrast, OECD countries had a tax-to-GDP ratio of 33.5% in 2020, while the average tax-to-GDP ratio for 31 African countries, as reported by the OECD, stood at approximately 16%.

The low level of the tax-to-GDP ratio in Nigeria is far-fetched. According to Taiwo Oyedele, the Africa Tax Leader at PwC,

“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.” He however noted that during an engagement with the Nigerian Economic Summit Group in 2019, research showed that Nigerians have very low tax morale. He noted,

“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.”

Also Read: VAT: Political Heat Rises as El Rufai Hosts Northern Governors

While it seems like Nigerians are not big on paying taxes, especially in the informal sector, the reality is quite different and the FIRS acknowledges this. One of the key things to note about its partnership with MATAN is that the initiative will help to “tackle multiple taxation in the marketplace.” While the official tax figure in Nigeria does not reflect illegal collections from touts or “agberos” informal sector players in Nigeria are accustomed to paying these taxes either daily weekly, or monthly to these local tax collectors, who are sometimes backed by local governments.

Now, let us review the legal nuances of this initiative. In his post on LinkedIn, Taiwo Oyedele thoroughly covered the different provisions valid for exemption from this initiative. The first of which is concerning the turnover provision of the VAT Act. As per the provisions of the VAT Act, businesses with an annual turnover of N25m or less are exempted from the obligation of charging VAT on their sales, regardless of the nature of the goods or services being offered. How many market traders make up to 25 million Naira in turnover every year? Essentially, considering that the majority of the players in Nigeria’s informal sector are micro and small enterprises, they ought to be exempt from this tax drive.

Taiwo Oyedele also noted, “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.”

He also noted that those traders who do not have any category of exemptions will be responsible for charging and submitting a VAT of 7.5% on their sales, but they can’t reclaim the input VAT on their purchases. Essentially, the additional VAT burden will be passed to the customers. In Nigeria, FMCG manufacturers often set a Recommended Retail Price (RRP) that includes the VAT, relieving traders from the responsibility of calculating and adding it separately. However, with the introduction of this initiative, the traders have a responsibility to calculate the 7.5% VAT on their potential profit margin and introduce it to their selling price.

One viewpoint relating to this initiative is that Nigerians pay enough in consumer taxes. According to the report by OECD, the tax structure in Nigeria revealed that Corporate Income Taxes comprised 38% of Nigeria’s total tax revenue, followed by consumer taxes which are comprised of VAT and non-VAT, 25%, Personal Income Taxes makeup 12% of tax revenues, social security contributions makeup 12%, other taxes makeup 7% of total tax revenue. While there is no one-size fits all approach concerning taxes, there is significant concern about the purchasing power of Nigerians.

With the inflation rate at an astronomical 22%, and the MPR already at 18.5%, there is seemingly no respite for Nigerians from the monetary policy side of things. Hence, the only respite will probably come from the government’s fiscal policies. However, the new administration appears to be adopting a more direct and decisive approach to making tough decisions, regardless of the pressures on the Nigerian economy.

Also Read: Nigeria’s Stock Market Dips by N42bn over Profit-taking

It is without doubt that the Nigerian tax situation needs to improve, as the country faces a paucity of funds to fund its development. However, the currency of exchange between the governing and the governed is trust, which is seriously lacking in the polity. According to Mr Oyedele, “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. The government needs to address these issues for the initiative to truly work.”

David Olujinmi

David Olujinmi studies Engineering but his true passion is research and analysis. He writes about finance, particularly the capital market, investment banking, and asset management. More »

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