* No plans to introduce new taxes next year, says minister
The International Monetary Fund (IMF) has advised the Federal government to increase the Value Added Tax (VAT) and excise duties.
However, the proposed VAT increase, it further advised, should be implemented when the economy bounces back from recession.
The IMF team that prepared the 2020 Article IV noted that poverty is high and recovery is slow. Therefore, mobilization of revenue through increased VAT and Excise duty should rely on efficiency of collection.
Higher VAT and excise rates should wait till stronger economic recovery is achieved.
The IMF staff made the recommendation at the end of its virtual mission from October 30 to November 17 with regards to the 2020 Article IV Consultation with Nigeria.
The mission to Nigeria said: “With high poverty rates and only a gradual recovery in prospect, revenue mobilization will need to rely initially on progressive and efficiency-enhancing measures, with higher VAT and excise rates awaiting until stronger economic recovery takes root”.
The mission stated that significant revenue mobilization-including through tax policy and administration improvements-is required to create space for higher social spending and reduce fiscal risks and debt vulnerabilities.
What this means is that the federal government has been advised to pursue the possibility of increasing VAT and excise duties which pose little threat to finances of the poor.
VAT is tax imposed on luxury goods and services and since Nigeria is in recession. Government needs to mobilize revenue to finance its activities. One of the best ways to do this is by taxing the wealth and marshalling excise duty on imported goods.
The mission stated that “following a significant decline in revenue collections-from levels that were already among the lowest in the world-fiscal deficits are projected to remain elevated in the medium term”.
The Article IV consultation report on Nigeria also advised the Central Bank of Nigeria (CBN) to reconsider its loan to deposit ration policy.
According to the IMF staff, “minimum Loan to Deposit Ratio (LDR) should be reconsidered because of the risk to financial stability associated with pushing credit possibly to higher-risk clients”.
In September 2019, the CBN ordered all Deposit Money Banks (DMBs) to attain a minimum LDR of 65% by December 31, 2019 and this ratio shall be subject to quarterly review.
To encourage SMEs, retail, mortgage and consumer lending, these sectors were assigned a weight of 150% in computing the LDR for this purpose.
With regards to interest rate management, the Article IV mission noted that the CBN’s “accommodative monetary stance remains appropriate in the near term given the constrained fiscal space, large fiscal financing needs and strained sovereign external market access”.
However, the IMF noted that if Nigeria’s Balance of Payment (BoP) and inflationary pressures intensify, “there might be a need to withdraw liquidity or raise rates.
“Given weak transmission and record low market interest rates, further cuts in the Monetary Policy Rates are unlikely to provide additional support to the economy”.
To check the incidence of non-performing loans (NPL), the IMF has called for “vigilance and corrective actions to prevent an increase in financial stability risks arising inter alia from increasing non-performing loans.
“In this connection, debt relief measures for clients should remain time-bound and limited to clients with good pre-crisis fundamentals, in line with existing regulations”.
The mission pushed what it considers a “durable solution to Nigeria’s recurrent BoP problems” which it said “requires recalibrating exchange rate policies to reduce BoP risks, instill market confidence and facilitate private sector planning”.
Going forward, the mission recommended decisive actions to tackle governance weaknesses and implement regulatory and trade-enabling reforms, including the lifting of trade restrictions to unlock Nigeria’s strong growth potential.
The mission urged the Nigerian authorities “to continue strengthening the anti-corruption framework and implement plans to improve the effectiveness of the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework”.
The IMF mission argued that “despite an expected easing of food prices, inflation is projected to remain in double-digits and above the Central Bank of Nigeria’s (CBN) target range, absent monetary policy reforms”.
The 2020 Article IV Mission to Nigeria is an IMF staff team that conveys preliminary findings after a visit to a country.
The views expressed in their statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board.
However, the Federal government has assured the citizens that it has no intention of introducing new taxes in 2021.
It will, instead, make efforts to reduce the tax burden on Nigerians in view of the current economic situation, Finance Minister Zainab Ahmed said on Friday.
Speaking at a public hearing on the 2020 Finance Bill currently before the National Assembly, the minister said the bill would bring about comprehensive reforms in the nation’s tax laws.
The Finance bill is expected to pave way for government to generate revenue to fund the 2021 budget.
She said the bill would enable Nigeria to adequately respond to economic challenges occasioned by the Covid-19 pandemic and the crash in crude oil prices.
She said: “We also need to defer tax rate increases to the domestic economic sufficiently recover and reduce compliance burden on tax payers in line with the ease of doing business reforms.
“The second principle is the need to reform fiscal incentives policies to help reduce proliferation of fiscal incentives by carefully assessing cost benefit of tax incentives and prioritise job creation, growth and incentives.”
Zainab Ahmed said government needed a closer coordination of monetary, trade and fiscal policies so that it would be able to align existing tax incentives for lending to agriculture with the recent CBN moratorium and interest rate reduction for agriculture and real sector loans, reform the stamp duty level on banking transaction and make provisions that will help harness funds in form of unclaimed dividends and unclaimed bank balance that has been sitting idle.
Zainab Ahmed
It is expected that the bill will promote fiscal equity by removing double taxation on companies during commencement and cessation of business, simplify the basis for calculating minimum tax and exempt profits that had been taxed from further taxation in the form of excess dividends.
The law will also increase revenue for government as it supports the increase of VAT from 5 to 7.5 per cent and will also introduce legislative backing for banks to charge stamp duties on electronic receipts.
She said: “What we don’t have in the finance bill 2020 is increase in tax. There are no new taxes that are being introduced and there is no increase in taxes.
“There are also no new incentives that have been introduced in this bill.
“The bill also makes provisions to create a legal framework for the creation of a crisis intervention fund that will address crisis that may arise in future, while introducing provisions that allow for the recovery of donations made towards the Covid-19 pandemic and other potential crises.”
In his remarks, House of Representatives Speaker Femi Gbajabiamila said even though the bill was only transmitted to the House about one week ago, it was committed to ensure speedy passage, but not at the expense of thorough examination of the various clauses.
The Speaker said that funding the budget to support economic recovery and address other challenges was the reason the House gave immediate attention to the bill.
He said: “The Finance Bill which we have gathered here to consider and to contribute to will determine amongst other things our ability as a nation to fund the 2021 budget, meet the obligations of government and implement policies to build infrastructure, address the problem of insecurity, grow the economy, and provide jobs that pay a living wage and lift families out of poverty.
“It is an important piece of legislation deserving of thorough consideration and reasoned debate by the parliament of the people, acting in the best interests of the people.
“We have a responsibility as legislators to meticulously review and examine every aspect of this Bill to ensure that we produce a legislative document that is clear in its objectives, thoughtful in the mandates it imposes and reflective of the best aspirations of all our citizens.”