Capital market experts said the implementation of an increase in Value Added Tax (VAT) would further depress stock price and increase transaction costs on the Nigerian Stock Exchange (NSE).
Presently, every purchase or sale of shares by stockbrokers to investors attracts five percent VAT as commission on the NSE.
Operators, who expressed worry on the proposed VAT increase, argued that further increment would cause more apathy on the already depressed market and reduce investors’ patronage. The experts also noted that the challenging business climate occasioned by election anxiety, insecurity and unfavorable government policies have continued to constrain yield in the nation’s bourse across all segments.
The capitalisation, which stood at 15.549 trillion naira as at Wednesday, February 28, 2018, stood at 11.337 trillion naira as at Friday, December 28, 2018, representing 4.2 trillion naira or 37 percent loss.
Also, the All-Share Index declined by 12,292 points or 39 percent to 31,037.72 from 43,330.54, achieved as at February 28, 2018.
According to the experts, any increase in VAT can only be productive if it is part of a broad fiscal strategy of rebalancing the tax mix in favour of consumption tax, which will entail lowering the company income tax. They noted that doing otherwise in an economy that is grappling with double-digit inflation, weak growth and high unemployment rate will cause more distortions and jeopardize government efforts at revamping the economy.
They described the move as disincentive to the market, urging government to restrain from making pronouncements capable of eroding further investors’ confidence in the market.
The Chief Executive Officer of Crane Securities Limited, Mike Ezeh, said “when investors patronage on the market is reduced, we will start seeing a free fall in the share prices of companies. Of course this will impact negatively on the stock market. Every transaction in the market attracts VAT, and you know very well that dividend attracts 10 percent VAT, so you can see the enormity of its effect. This will be on the negative side because investors will have to pay”.
The Managing Director of Highcap Securities, David Adonri said “since stockbrokers already charge five percent, further increase in VAT will increase cost of transactions in the capital market. This VAT is added to the cost of the transaction, which is paid by the investor”.
Adonri added that “if the VAT is increased, it means that 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 for discontinuation of VAT in the market because it is erroneous to tax investment”.
A professor of Capital Market and Head, Banking and Finance Department, Nasarawa State University, Keffi, Uche Uwaleke, who also spoke on the dangers of increasing VAT, said “various reports by the National Bureau of Statistics have 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”.
Uwaleke noted that “reduced profits for companies quoted 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”.