Why We Introduced VAT, Opted For Central Collection – Idika Kalu, Ex-Finance Minister
The Minister of Finance who introduced Value Added Tax [ VAT ] during the late Gen Sani Abacha regime, Dr Kalu Idika Kalu, shares with TUNDE AJAJA his views on the controversy surrounding VAT collection, the state of the economy and related issues
As the man who introduced VAT to Nigeria, what are your thoughts on the controversy surrounding who collects the tax?
This sort of development should not arise. I was part of a small group that introduced VAT in South Korea in the mid-1970s. I was a staff member of the World Bank at the time. It is natural to be looking for ways to introduce something that has been done successfully elsewhere, so I was eager for us to have a system like that, to complement our tax system, diversify the economy and create more sources of revenue. The question of who collects VAT and how you distribute VAT was not the priority then. I was far more interested in making sure we introduced it. In fact, I almost lost it. It was my second time in the Ministry of Finance under the late General Sani Abacha, having served under General Ibrahim Babangida (retd.) So, at the Council meeting we were arguing about introducing VAT and I began to feel some chest pain. My wife, who is a medical doctor, was summoned from the military hospital to come and attend to me in the corridor. While I was in the corridor, Abacha was telling the cabinet members inside, jokingly, that I was trying to con them into agreeing with my proposal by saying ‘my chest, my chest’ (laughs). When I went back to the meeting, Abacha, knowing what he had done, was looking down. So I asked Alex Ibru, who was the then Minister of Internal Affairs, what the joke was about and he told me.
Were there objections from your colleagues?
Yes, there were objections from some cabinet members. Most people were opposed to it, except the financially minded among us. People oppose tax everywhere, even in the United States. So, we introduced the five per cent VAT and I deliberately kept it that low. The committee that worked on it – I don’t even remember all the names now – and the Accountant General of the Federation pushed to make sure it went through. So, we introduced VAT at five per cent. The Ghanaians came to ask me about the VAT and I gave them some advice. They didn’t tell me the rate they had in mind. They went and put theirs at 15 per cent and there were riots in Ghana. I think they backpedalled a bit; I can’t remember correctly. Afterwards, there were different stories.
How would you describe where we are now?
When there is good governance, clearly this should be a national tax and from the narrow base we started, it was to expand over time, to bring in more products and services. Clearly, a tax system is most equitable where the benefits accrue to where the burden is high, meaning those who are paying the most should benefit most. If those administering it at the state and federal levels know that state services should spread evenly and they are providing these services people won’t be complaining so much. This whole debate mirrors the fact that people are suspicious of the administration, politics, equity and the extent to which we go to make sure there is fairness. If the economy was growing as it should have been growing, say about seven to 10 per cent annually, by now, VAT should have moved to about 17.5 per cent like you have in a lot of the developing countries. But if the economy is not growing, you can keep the tax at that rate but expand the base. Since 1994, we have been stuck there and I remember when I was to head the Niger Delta Technical Committee and one of the recommendations was for us to move the VAT to 7.5 per cent. That was during the tenure of the late President Umaru Yar’Adua. I suggested that we dedicate the 2.5 per cent as a development tax to be paid by all Nigerians for dealing with basic infrastructure in the Niger Delta, like a compensation for the region for all the money being derived from there. That was to take care of their rural roads, health centres, primary schools and such things but the report never saw the light of day. The only thing that came out of the report was the amnesty programme, but there was a whole lot I wanted us to do.
Why do you think successive governments remained fixated on oil when they could do better?
The fact that we got royalties from just taxing the oil and gas sector and we haven’t really taken time to make sure we identify the basic needs of the citizens and sustain a higher quality of infrastructure, education, health, etc., is the reason why we didn’t mobilise resources so we can spread things across. However, you also have reasons like lack of equity, lack of awareness of what needs to be done and the political consciousness of the citizenry that should demand these of any government. We really didn’t do much in that regard.
The VAT law was silent on who should collect it, which led to the ongoing legal dispute. Looking at today’s reality, who do you think should collect VAT?
That aspect has bordered me a little because we didn’t pay enough attention to the nitty-gritty due to the other issues we were dealing with at the time. So, it’s like saying the revenue from oil should just go to where the oil wells are situated. Since it’s a business turnover tax and not a resource tax, it should really be a function of where most of the transactions occur is where a lot of the revenues should go. But it’s difficult to explain it in those terms because there should be equity. If you want to build railway, you do it because of the overall benefit to the country and not where tax is paid or earned. That already gives a pointer to the fact that a lot of the collection comes from federal institutions, even if they are located in states. By the time you do that, you find that some states clamouring for VAT collection may not necessarily be the ones that would get the most. Like I said, depending on where federal institutions are located and headquarters effect. One of the analysts on the television mentioned it and I was very happy. If we decide that we should disaggregate the collection, don’t forget that collection is not necessarily coterminous with usage, meaning it does not mean what you collect was all used in your state, because some of the very heavy collections come from federal establishments and headquarters of big companies. By the time you do that, it would throw up another set of issues as to the equity in the distribution of facilities. For example, the southern states have been complaining about how those ports have not been developed and how the concentration is in Lagos. In the north, they could also say because they are landlocked and do not have ports, they are at a disadvantage. However, we are so full of suspicion of one another in this country.
How could we have avoided this?
If we had moved as fast as I had envisaged; spread the base of the tax to other services and goods that are in all parts of the country, it would make it more even. But where you don’t have those services, it would be like you are depriving those people when in fact they are indirectly contributing to the collection. Even if the states are to collect the tax, you may give a time frame for them to start collecting so that when they do, you know they are quite prepared to do it according to the new law which would be much more directly indicative of how the distribution should occur. There would be a lag for you to develop the infrastructure, manpower, reporting system and oversight system. Somebody already raised the fact that this may result in lowering collection.
What do you think should be done at this stage?
What government should do is to quickly summon the stakeholders, get experts knowledgeable in this area, let them sit down and advise the government on how to manage it. That is how a government should operate. We should not start a polemic that is based on ethnic or political factors. The issue should be how do you really distribute the revenue. Many of the people clamouring to collect their VAT may not have the system to collect effectively. Yes, they could train people on how to do it, bring in the infrastructure to make sure there is efficient collection, but ultimately it’s a question of where it is coming from. A lot of states may lose, which again goes to the issue of equity and distribution of federal facilities. Those that have these facilities would gain more than the others and that would be another thing. I also think it is better for the government to recognise that there are loopholes in the current tax structure. Like I said, these are issues a small team, maybe comprising lawyers, economists and social development specialists, can quickly deliberate on within two weeks, put all the factors into cognisance and come up with the solution. It is better to resolve it rather make it a legal issue. We should be hesitant to push it in a direction we know would create more cleavage in the system. However, when an environment is so poisoned by ethnic issues, politics and regionalism, it is difficult to have a solution. But again, if the economy was growing as it should have been, we could have increased VAT. If people were getting more revenue, maybe these clamours would not even arise.
With Nigeria’s population and its enormous natural resources, why has the economy refused to grow?
That is a very big question but there are no straight answers. You can bring in politics; the way we evolve our leadership. Also, and this is not just peculiar to Nigeria but ours is one of the special cases; economic fundamentals have been very difficult to get here. What is wrong with our economy; how do we repair the economy; what do you need to do and how do you mobilise the resources to rebuild it? If you don’t mobilise enough funds to do it, you cannot do it within the time frame you want to do it and you cannot do it as well as you should. People are quick to say we don’t want IMF or World Bank loans but whether you get them or not you still have to rebuild your economy. If you have those and they are the cheaper ones you get before going to commercial borrowing. The role these institutions would play in addition to supplementing your resources is to say, having identified your problems and got the right policies but you don’t have enough money, here is our own to add to what you have, being a member. Our politics is also a major area and that is the question of leadership, which is very intractable.
Where did we get it wrong with leadership?
Almost everybody has talked about the late Chief Obafemi Awolowo. He was focused on the needs of the people and on institutions. You also had Michael Opara and a few others who did the same thing. In the north, you had Ahmadu Bello. We didn’t maintain that kind of leadership focus and commitment to the good of the citizens. That is why institutions are not running the way they should be running. You can list up to 30 issues. There is no magic to growing your economy. Right from the 1960’s, Nigeria was a darling to almost every country in spite of all our politics. All we needed was to develop our resources but somehow, we came up with all kinds of things to dilute what should have been a fairly efficient system of policy making and implementation. Nigeria should have been growing at an average of seven per cent almost indefinitely, but look at us. How many of the by-products of our crude oil do we even make use of? We keep exporting crude.
In 2012, you headed a 22-member task force for the refineries to ensure self-sufficiency, what became of it?
Yes, I did and we recommended building three green fields and made suggestions about privatisation. Look at how we messed things up. There is no way to explain why we did relatively nothing to bring ourselves here. A lot of foreigners still see that potential in us and they can’t believe that things can be like this for us. Look at our public transportation; look at the industrial content in our GDP when we should have doubled where we are. Look at agriculture in terms of modernisation. Look at our productivity in so many of these basic products. We are behind for no reason. We should have been producing enough fertiliser and exporting it. For years, we should have been into petrochemicals. We should have been producing steel but look at what we made of Ajaokuta and Delta Steel. Look at Brazil; they had their plant set up when we started Ajaokuta. Look at them today, they are producing planes, but look at us. By now, we should be building 90 per cent of vehicles that we drive here. I don’t even know what we shouldn’t be producing by now. You can go on and on. I went to Korea with Abacha and if you see the way they welcomed us. I used to say if you want to know how economies fail, Nigeria will give you all the ingredients. The United States and European countries thought our country would be a major country now, but we started blaming the British and others. I think we should be more humble to see how we unknowingly contributed the biggest factor to where we are today. Look at the VAT issue, just call a few people together to review the situation and come up with an honest solution. Solve the problem quickly and move ahead. But no, we need to quarrel over it and issue threats back and forth and later we would blame others for our woes. It is very disturbing.
There have been calls for the restructuring of this federation, what would you suggest?
The way we should restructure is to try and redraw the map on the basis of the number of local governments that we have. Let us restructure from the local government. Everybody comes from a local government, so all the people in a local government would have that as their local government. They register there, they can vote there and can be voted for. The idea of people running back to their states to vote would stop. Of course, people can migrate but everyone there would have the same rights; political and citizenship and you would still belong to your ethnic group and religion, but once it comes to politics, anybody within that local government can be chairman, councillor, etc. However, the first question we have to answer is if we want to evolve into a modern nation state. If we answer that question in the affirmative, then let us get the experts to draw up about 350 local governments across the country. Some may be larger than others but you would have near-equal development areas. If Nigerians can accept that, we know that in another 50 years, Nigeria would emerge as a great nation. That would be the ultimate equity for development, representation and fairness in the distribution of assets. When I first mentioned it, some people said the north wouldn’t allow it and I said must you propose what they would like. The issues around indigeneity would be addressed. It sounds utopian but we have to take steps if we really want to develop this nation into a modern industrial nation. All the gerrymandering and struggle over resources and distribution would stop a true fiscal structure would emerge. It is not good to start with the fiscal angle. You must start with the political angle. This was what I planned to raise at the last national conference but my governor said I wasn’t supporting him so he replaced my name with someone else’s. I first raised it during the time of Abacha and he was very open to the idea but we had disagreements about certain policies. We agree to disagree. So, I left it.
There are concerns over borrowing but the Federal Government insists it’s about the only way to finance infrastructure. What do you make of this?
You cannot talk about borrowing in the abstract. It is not the absolute size of the borrowing that should alarm us, but whether what we are borrowing would yield the wherewithal to pay back even though we are also financing things that don’t necessarily yield high returns to pay back, but indirectly they benefit the economy and therefore benefit those sectors that would contribute to the means for repayment, like health, education and other social services. Not everybody has the expertise, and that is why the economists have to step up and discuss it in those terms and not just the absolute level of the debts. You cannot say we have borrowed N30tn and it is too much, no. If you borrow N30tn, maybe you are getting N40tn, but we know that is not true. We waste the money, we don’t appoint the right people, we don’t agree on what we want to do and we don’t do it in time. So, we lose time and so the cost rises but the benefit does not, proportionately. It’s a great concern but the discussion has to be more focused on the cost and benefit of borrowing rather than the level of borrowing per se. In essence, the rate of return must significantly be above the interest on the loan. In whatever way you measure the returns, it should be higher than the cost. However, people are worried about the way loans are being taken because I think we are not sure rigorous analysis goes into determining the net benefit of the borrowing.
Many countries generate huge revenue from tourism but Nigeria struggles in that sector, why is that?
Sometimes, I laugh when we talk about tourism. Why won’t we generate little revenue? Where are security, infrastructure, like transportation, communication, hospitals and tourism facilities for people to come in? You have to address those things first. What are you doing to make it work? There are myriads of issues attached to generating one per cent increase in revenue. We have so many things to compensate for not having too many wild animals here. The culture, music, dance, climate, the people, etc can generate so much, but each of these areas would require targeted investment to develop them. We need to maintain a very healthy environment so that someone can leave Australia or Canada to come to Nigeria and spend two to three weeks.
Many people find the value of naira compared to the dollar as embarrassing, how did we get here and how can we get naira to rise again?
It is a function of economic policies. The number of the Bureau de Change operators is not the problem but the pricing of the foreign exchange. You can rubbish whatever deleterious effect they were having by making sure they get the currency at the proper rate. When you give it to them with an arbitrage of N100, for example, that is the problem. That poor margin is a problem. If you give the BDCs at the normal arbitrage, their advantage would just be the ease of getting it by the roadside. But when you have about N100 difference, that is where the problem is. The commodity should command a price which is equivalent to the clearing rate between the supply and demand. Once you do that, you look at your profit before you decide whether to be a BDC operator or you go into another trade. If the profit is not worth it, you are not going to set up shop as a BDC. So, it is the improper pricing, ridiculous arbitrage and ridiculous give-away. That was what destroyed the pricing system.
Some people have blamed the CBN governor for coming up with policies that are not working while some say it is the Federal Government. What do you think?
I won’t address the issue of whose policy it is. CBN and the government are one and the same. No government, no CBN. No person worth his salt as a leader in the financial world should allow such arbitrage, because for example, why would anybody want to buy it at N500 when others are buying it at N400 or less.
There is a debate about the region to produce the next president. Some people say it’s fair to zone it to the South-East while some say we should jettison zoning. What is your view?
That goes to the fundamental question of leadership in Nigeria. Politics involves participation, especially in political parties. It is not when it comes to elections that you would say it should be zoned this way or that way. If they zone it that way and they don’t have grass root support from that area, it is more difficult. But again, you cannot talk about that without talking about issues around marginalisation and equity and so on. However, at our level, we don’t just go with general notion. Some days ago when someone from the South-East (Ifeanyi Ararume) was appointed as the chairman of the Nigerian National Petroleum Corporation, I was amused when someone said there was now a balance and nobody should talk about marginalisation. These were the same people talking about it a few weeks earlier and I laughed. I said see how shallow people can be. Is it one appointment that will ease all the complaints we have been hearing? I think it goes back to my question on modern federal state. I think the way people like Chief Ayo Adebanjo, the Afenifere leader, have been saying ‘don’t talk about election, let us restructure before the election’ is the way to go.
Do you think that is feasible?
We have enough time if we believe in the future of this country. I don’t believe we need more than six months to agree. What matters is the willingness to do it. People who are against it must tell us why they are against it. What are the major issues? You thrash them out. What we need are people who feel Nigeria in and out; people who are objectively focused on the problems and are ready to solve them in a way that would benefit everybody. Else, the election would bring up the wrong people who are only concerned with their own ethnicity. I don’t believe we should start talking about zoning or Igbo presidency. For me, I hate the sound of the phrase. It is as if Igbo president is less than any other president. I think it is a misnomer, but clearly idealistic and utopian and that is where we have to start from and we have enough time to do it. We would be saving time by solving the problem and that would give us a smooth sail and recovery which we need. We need economic recovery, including jobs. We also need structural recovery. Those things would move faster if we honestly identify the problems we should solve before we jump into elections. Look at all the noise about the electronic transmission of results. It’s very shameful. How can we be debating e-transmission of results in 2021? We are supposed to settle and look at how to make it work. We should restructure. We need to do it. It can be done very fast because it is a sine qua non for future stability. So, it is better we do it now. We need to set up a proper structure. There should be a level playing field with representation from the grass roots. If we don’t restructure, we might be carrying all the rubbish forward again. We have lost about two to three years, so let us face it now. Korea is a modern state now and it is highly industrialised. We were talking about the issue of artificial intelligence, and Korea was mentioned as being among those in the forefront. That is what would determine who the super powers would be, not a matter of population. Already, we can see how 200 million is not making much difference. Your purchasing power can bring you under a nation like Ghana that is less than one-quarter of your population. Your purchasing power overrides your numerical strength. Artificial intelligence would override nuclear muscle and the rest of it.