Expert advocates expansion of tax net, faults increase in VAT

The immediate past General Secretary of the Nigeria Labour Congress (NLC), Dr Peter Ozo-Eson, has urged federal and state governments to expand the tax net to capture high earners in the informal sector of the economy.

Ozo-Eson, who stated this in an interview with The Guardian in Abuja, Tuesday, described the planned increase in Value Added Tax (VAT), as a lazy way of tax management.

He explained: “I think there is a major problem with the tax regime in Nigeria. There are tax laws that are in place, which are not being effectively applied. For example, the Personal Income Tax is largely collected from only those that are on salaries in the formal sector, who cannot hide their income.
Many others who earn multiple incomes compared to civil servants, but are not in the formal public service or private sector; government is unable to capture their taxes. So, broadening the tax base and improving the efficiency of collecting the existing taxes in place is a major way of increasing revenue, and that is what it needs to pursue.

“But because government has not been able to do what it should do in this regard, it keeps looking for short cuts to increase revenue. The greatest shortcut in this regard is usually taxes that are easy to collect such as value added tax.”

Ozo-Eson argued that easy to collect taxes are ‘excessively regressive’, adding: “When we talk of regressive taxes in economics, we mean that those taxes are proportionately borne more by the poor compared to the rich.

“So, VAT is one of the most regressive taxes you can think of. Therefore, going the route of VAT increase from 5% to 7.5% is a misplaced logic. It is going to put an excessive tax burden on the poor, who consumes virtually all his income compared to the rich who consumes a small fraction of his income, and therefore does not feel much economic pain.”

He argued that taxes should not be seen as a means for collection of revenue, but as a policy instrument to promote economic wellbeing, and promote production.

“In an economy whose demand side is so weak and not growing, to again suffocate the consumer to an increment in VAT is going to further decelerate aggregate demand, which could throw us back into recession,” he stated.

While admitting that it is indeed good to raise government revenue, but that must be done in a more efficient manner.

He added that by broadening the tax base, tax regimes should target the rich through taxes that focus on luxury lifestyles and wealth that can help to raise government revenue.

He submitted that unbridled tax regime will stifle production, and “will lead to domestic producers not having adequate demand for their products, and the level of capacity utilisation of the few manufacturing entities we have will further decline, and that will lead to lose of jobs.”
On the long run, Ozo-Eson cautioned that unwieldy tax regime will stifle job creation efforts.

“So, if we are talking about job creation, increase in VAT cannot be a way that can lead to job creation. We need to introduce taxes that will promote aggregate demand that will help manufacturing establishments to increase capacity utilisation that will lead to job creation on sustainable basis.

“Government can use tax policies and regimes to channel investment resources to specific sectors aimed at job creation. These are the ways to ensure economic development and growth,” he said.