CPPE opposes VAT collection from the informal sector, proposes four channels for utilizing additional revenues

The Centre for the Promotion of Private Enterprise (CPPE) has shown its support for President Bola Tinubu’s recent Executive Orders, praising the measures aimed at alleviating burdens on businesses.

In a statement released by CPPE’s Director/CEO, Dr Muda Yusuf, the organization commended the suspension of excise duty escalation and the green tax, as well as the deferment of the Finance Act 2023 and customs tariffs. These actions not only demonstrate the government’s commitment to fair taxation and policy transparency but also provide relief to businesses amidst economic challenges.

The CPPE’s endorsement signifies the positive impact these Executive Orders could have on promoting private enterprise and stimulating growth in Nigeria.

It also includes the deferment of the effective date of the Finance Act 2023 and some customs tariffs.  This was to ensure compliance with the mandatory 90 days notice prescribed in the National Tax Policy as well as ensure reasonable notice for customs tariff reviews.

President Tinubu sensitive to the plight of manufacturers 

CPPE in the statement commended this move to normalize policy implementation processes consistent with the national tax policy and best practice principles.  

• It said, ‘’The executive orders also demonstrate the sensitivity of the Tinubu administration to the predicament of the manufacturing sector amid overwhelming headwinds and hassles to real sector activities in the Nigerian economy. The Manufacturing sector is a troubled part of the economy.  The sector’s growth slowed to 1.6% in the first quarter of 2023, from 2.8% in the fourth quarter of 2022 having contracted by 1.9% in the third quarter of 2022.  It barely contributes 10% to the Gross Domestic Product [GDP] in the first quarter of 2023.” 

The sector is grappling with the following, among others: 

• Challenges of depreciation in the exchange rate which is impacting adversely on the cost of production, a situation which is severely inhibiting production and productivity in the sector. 
• Intense pressure on the cost of production arises from numerous structural bottlenecks. This situation is creating sustainability challenges for investors in the sector, especially those in the SME segment.
• They have experienced significant spikes in the cost of raw materials, cost of funds, high import duty, elevated energy cost, prohibitive cost of transportation and high cost of logistics. A huge proportion of these costs cannot be passed on to the consumers because of high consumer resistance. 
• The economy is currently characterised by weak purchasing power amid intense inflationary pressures and recent fuel subsidy removal.  Disposable income has been considerably diminished.  This is taking a huge toll on the sales and turnover of many manufacturers. 
• Many manufacturers are currently struggling with unfair competition, especially from products imported from Asia which have flooded the Nigerian market, largely because of the porosity of the borders. These imports are often much cheaper than goods produced locally. 
• Energy costs remain high. Though the cost of diesel dropped slightly in the last one month, but still remains high at about N700 per litre. The cost of gas is also prohibitive just as electricity tariffs remain exorbitant. 
• The cost of logistics has continued to be on an upward trend. Some of the reasons for this are the state of the roads, the limited freight capacity of the railway system, the crisis situation at our major ports, the traffic gridlock around the Lagos ports, the numerous checkpoints around the ports and beyond.’’ 

4 recommended channels of the utilization of expected additional revenues 

CPPE stated that the recent reforms, especially the fuel subsidy removal and the adoption of a market-reflective exchange rate regime, have significant fiscal consolidation outcomes which are very positive for the economy. 

• It said, ‘’It would create ample fiscal space, reduce the fiscal deficit, enhance social spending prospects to protect the vulnerable segments and facilitate the stability of the macroeconomic environment.  The good news is that all three tiers of government would be beneficiaries of the increase in revenue – federal, state and local governments. 
• ‘’We propose four-dimensional channels for the utilization of these additional revenues. 

• The first is to commit part of the revenues to fill the holes created by the recurring fiscal deficit.  This will gradually reduce fiscal deficit, and by extension, the growing burden of debt. 
• The second channel is to increase the wages of public sector workers across all levels and in all tiers of government.  This would mitigate the current hardship inflicted by the fuel subsidy removal through an enhancement of their purchasing power. 
• The third channel is to provide relief to the populace by giving generous import duty concessions on agricultural sector inputs and types of machinery, intermediate products for manufacturers which are not available locally, generous fiscal incentives for food processing companies to reduce the cost of staple foods, and scrapping of Import duty on industrial machinery and equipment.  Other sectors deserving of tariff concessions are health, power generation, renewable power equipment, and machinery for petroleum refining.  
• Import duty on 15-seater passenger buses and above should be slashed by 50%. This would make it possible for more corporate bodies, government agencies and commercial transport operators to invest more in the provision of mass transit buses for their staff and commuters.  This would ease the burden of high transportation costs.
• Also, Import duty on cars of 2000cc engine capacity and below should be similarly reduced by 50%. This would give relief to the middle class and improve the supply side of public transportation. 
  We are confident these concessions would not materially affect the revenue of the government. If anything, it would reduce the rate of the smuggling of vehicles  into the country.’’ 

Opposes VAT collection from the Informal sector 

Meanwhile, the CPPE has advised against the decision of the FIRS to undertake VAT collection in the informal sector for the following reasons: 

• The economics of collection does not support the move.  The cost of collection would be much more than the amount that could be collected. 
• Over 98% of the informal sector traders are microenterprises who do not fall within the threshold of entities that are liable for VAT payment. 
• The informal sector associations are highly fragmented. It would be impractical to develop a partnership framework with the market associations for the collection as contemplated by the FIRS. 
• Most informal sector operators have not recovered from the shocks of the fuel subsidy removal and the associated inflationary impact. 

Most informal sector operators have no records which could be used for purposes of assessment. There is therefore a high risk of arbitrary assessment. 

The literacy level of the operators in the sector is very low which would create communication issues. 

The political cost to the government will be very high. 

Most informal sectors are already paying all manner of levies to local governments, and several non-state actors.  The government need not burden them with additional taxes. 

It stated, ‘’The FIRS should think of more creative ways of taxing the informal sector players in ways that will be more cost-effective, less disruptive and with minimal political cost.

 More importantly, the FIRS should adopt the pareto principle of focusing on the few players and individuals that could give the highest revenue yield. This is a model appropriate for an economy with a high level of inequality like ours.’’ 

READ ALSO: ICAN commends FG’s exchange rate floating

Source: nairametrics.com