Increased costs, consumers’ low disposable income are looming risks
Culled from Business Day (Nigeria)
Micro, small and medium scale enterprises ( MSMES) are very instrumental to economic growth and development with the potential to reduce Nigeria’s unemployment rate, create wealth and also re-distribute income. This is why in addition to the goal to grow the revenue base of the federal government through the newly approved Finance Act, certain incentives were put in place for MSMES based on certain thresholds.
The Value Added Tax (VAT) Act is one of such. Although the FG increased VAT – a consumption tax on the “value added” to the product throughout its production process – to 7.5 percent from 5 percent, companies with turnover of N25 million or less were exempted from filing VAT returns and Company Income Tax (CIT). Others above this threshold aren’t exempted. This is aimed at reducing the tax burden of small businesses. However, there are implications to this.
A slow paced economy results to lower disposable income – income remaining after deduction of taxes and social security charges, available to be spent or saved as one wishes. Therefore, businesses not exempt from the VAT hike and sell directly to the final customers, especially in the fast-moving consumer goods and services sector, will experience pressure to remain competitive and may have to absorb part or all the VAT increase so that the price of goods and services are not affected. This could affect their profitability going forward with lower fund reserved for expansion.
Also, for MSMES whose goods or services are VAT exempt, they would have to deal with increased cost from incurring inputs liable to VAT. Although the federal government expanded the list of VAT exempt products, there exists cascading effect on customers and businesses that operate in a value chain where VAT is un-claimable.
This is a cause for concern. A sustained pressure on cost could see these businesses seek to reduce cost from other cost outlets. This will limit the ability of MSMES who have been identified by the National Bureau of Statistics (NBS) as the largest employers of labour across all sectors of the economy with significant contribution to GDP. According to NBS statistics, the total number of MSMES as at December, 2017 was 41 million, with micro enterprises (ME) accounting for 99.8 percent and small and medium scale businesses accounting for 0.2 percent.
With a total employment contribution of about 59 million people, including owners, at December, 2017 ( equal to 86.3 percent of national workforce), MES alone contributed a whopping 95.1 percent. Still, they had a weaker capacity for creating jobs (1.37 persons per ENTITY compared with 39.5 persons for SMES). Also, the contribution to exports of MSMES by the subsector improved marginally to 7.64 percent (from 7.27 percent in 2013). They accounte for close half of the GDP(49.78 percent).
In a recent 2020 economic outlook by Deloitte, tax experts pointed out that some of the products exempted from VAT have in their value chain inputs not exempted from the tax. This will result in higher production cost and investment, which will be passed on to consumers. Hence, some large firms may prefer to engage suppliers who are registered for VAT to enable them claim all input VAT across the value chain.
For an effective tax system, the Nigerian federal government may need to consider allowing input tax credits – i.e. reducing the taxes paid on inputs from taxes to be paid on output. Most quoted consumer goods firms’ today battle with dwindling revenue as consumers move to cheaper options. The current VAT hike puts them in a dilemma as to whether to pass on cost to final consumers and risk more migration, hence further revenue decline or absorb the cost which will have a negative impact on profitability.