Increase in VAT will pressure stock prices, reduce patronage, say experts
Capital market experts have faulted the proposed upward review of Value Added Tax (VAT), saying its implementation would further depress stocks’ price and increase transaction cost in the bourse.
Already, every purchase or sale of shares by stockbrokers to investors attracts five per cent VAT, as commission on the Nigerian Stock Exchange (NSE).
Operators, who expressed worry over the proposed review, argued that further increment would cause more apathy on the market and reduce investors’ patronage.
The experts regretted that the challenging business climate occasioned by elections anxiety, insecurity and unfavourable government policies, have continued to constrain yield in the nation’s bourse across all segments.
Capitalisation, which stood at N15,549 trillion as at Wednesday, February 28, 2018, stood at N11,337 trillion as at Friday, December 28, 2018, representing N4.2 trillion or 37 per cent loss.
Also, the All-Share Index (ASI) declined by 12,292 points or 39 per cent to 31,037.72 from 43,330.54, as at February 28, 2018.
They argued that any increase in VAT could only be productive if it forms part of a broad fiscal strategy of rebalancing the tax mix in favour of consumption tax, which would entail lowering company income tax.
Doing otherwise in an economy that is grappling with double-digit inflation, weak growth and high unemployment rate, would cause more distortions and jeopardize government efforts at revamping the nation’s economy.
They described the move as a disincentive to the market, urging government to stop making pronouncements capable of eroding further investors’ confidence in the market.
Chief Executive Officer of Crane Securities Limited, Mike Ezeh, said: “When investors’ patronage on the market reduces, we will start seeing a free fall in companies’ share prices. Of course, this will impact negatively on the market.
“Every transaction in the market attracts VAT, and you know that dividend attracts 10 per cent VAT, so you can see the enormity of its effect. This will be on the negative side because investors will have to pay.”
Validating Ezeh’s views, Managing Director of Highcap Securities, David Adonri, said: “Since stockbroker already charge five per cent, further increase in VAT will increase cost of transactions in the capital market. VAT is added to the cost of transaction, which is paid by investors.
“If VAT is increased, it means investors will pay more. The aggregate cost of transaction in the Nigerian capital market is already one of the highest in the world.
“This is a disincentive to investing in the market. We shall continue to advocate discontinuation of VAT in the market, because it is erroneous to tax investment.”
Speaking, professor of Capital Market and Head, Banking and Finance Department, Nasarawa State University, Keffi, Uche Uwaleke, affirmed that companies, especially those producing items with elastic demand, will experience reduced sales, as they may not be able to easily transfer the cost to their customers.
According to him, this will lead to inventory accumulation, low capacity utilisation, lower profits and downsising of workers, thereby complicating the already bad unemployment challenge in the country.
“Various reports by the National Bureau of Statistics (NBS) had shown that inflation in the country is driven more by cost-push factors than demand-pull against the backdrop of weak aggregate demand.
“Therefore, if the VAT rate is increased without a corresponding reduction in CIT, it will further increase the cost of goods and services and worsen inflationary pressure.
“The CBN will be compelled to further tighten monetary policy, resulting in high cost of funds for businesses. This will lead to inventory accumulation, low capacity utilisation, lower profits and downsizing of workers thereby complicating the unemployment challenge in the country.
“Moreover, reduced profits for quoted companies on the stock exchange will bring about reduced investments by these firms and depressed stock prices. In fact, an increase in VAT will lead to an increase in the cost of transactions in the capital market, making it less attractive to investors,” he said.
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