Capital market stakeholders have condemned the federal government directive to return Valued Added Tax (VAT), on all stock market transactions, saying the action is disincentive to investment.
Already, dealing member firms of the Nigerian Stock Exchange (NSE), have been directed to charge VAT on all commissions applicable to market transactions effective July 25.A notice to dealing member (stockbroking) firms by Olufemi Shobanjo, Head, Broker-Dealer Regulation at the NSE, recalled its circular dated October 27, 2014, referenced BDR/CIR/GOI/10/14, on VAT exemption on commissions on stock transactions order. This was granted by then Coordinating Minister for the Economy and Minister of Finance, in 2014, as published in the Government’s Official Gazette No. 95, Vol. 101 issued on July 30, 2014. Shobanjo said the order became effective on July 25, 2014, and valid for a five-year period, and will expire on 24 July 2019, following which dealing members, in the absence of a further extension, are to charge VAT effective July 25, on all commissions applicable to capital market transactions. But stakeholders, who spoke in an interview with The Guardian, argued that the market had suffered unprecedented lull with low patronage in the past five years even with the removal of VAT. According to them, the return of VAT would further dampen investors’ appetite on stocks, trigger migration of investment to money market instruments, and deter foreign participation in stock market.
They maintained that transaction cost in the Nigerian capital market is one of the highest in the world, noting that this has made it difficult to attract global investors to the equalities market, thus reducing its capacity to contribute meaningfully to capital formation in Nigeria. Recall that the former Finance Minister and Coordinator of the Economy, Dr. Ngozi Okonjo-Iweala, in approving the elimination of stamp duties and VAT on market transactions, said these were a panacea to reviving the Nigerian bourse, which then struggled to bounce back since its crash during the global recession in 2009. Okonjo-Iweala had noted that a vibrant capital market is, essential to the government’s Economic Transformation Agenda, especially in terms of raising the much-needed long-term financing for critical infrastructure and the housing sector.
She had said: “Research (by the IMF and the World Bank) has shown that solid economic growth in any country is closely linked to the joint development of the banking sector and the capital markets. While the banking sector has already been cleaned-up, the capital market needs some intervention. “Taxes on stock exchange transactions fees are as high as 12 percent (five per cent in VAT and up to seven per cent in stamp duties) – much higher than in other jurisdictions, and these constitute a major disincentive to invest in the Nigerian capital market. I will like to announce that the Federal Government has consented to: Waive the 0.075 per cent stamp duties payable on stock exchange transaction fees; and,“Exempt from VAT, commissions: (a) earned on traded values of shares, (b) payable to the Securities and Exchange Commission (SEC), and (c) payable to the Nigerian Stock Exchange (NSE), and the Central Securities Clearing System (CSCS); by including these commissions in the list of VAT-exempt goods and services.” Against this backdrop, stakeholders urged the Federal Government to, as a matter of urgency, abolish the withholding tax, VAT, and contract stamp from the market to enable it contribute meaningfully to capital formation.
Specifically, the President, Ibadan Zone Shareholders Association, Eric Akinduro, said the return of VAT on stock transactions at a time investors’ confidence in the market has been eroded, portrayed government as being insensitive to the plight of investors and growth of small and medium scale enterprises in Nigeria. Akinduro said: “Government must reconsider its stance on VAT to encourage local investors, who are already bowing to sell pressure due to the poor state of the economy and low purchasing power. “Also, the market is saturated with various taxes and commissions on transactions; therefore, including VAT will further send a wrong signal to investors and discourage them from investing in the market. “Recent statistics showed that the returns on investment and capital appreciation have reduced drastically and in view of this and on behalf of the entire members of the Ibadan Zone Shareholders Association, we hereby request that the Federal Government should extend the VAT exemption pending the time the economy recovers.”
The Managing Director, Highcap Securities Limited, David Adonri, noted that the elimination of VAT in 2014, was a deliberate action to reduce the high cost of transaction in the market, which was one of the major disincentives to investment. He recalled that when government took the action, the capital market was already showing signs of fragility arising from economy-wide distress as witnessed presently, saying the return of VAT and contract stamp will put equities at a competitive disadvantage. He added: “For the equities market to flourish and contribute meaningfully to capital formation, withholding tax, VAT, and contract stamp should be abolished from the capital market, Nigeria should stop subsidising consumption, and also stop penalising investment through counter-productive taxation.” The Chief Research Officer, Investdata Consulting, Ambrose Omodion, said the restoration of VAT on all transactions will discourage investors’ participation in the market. He described the move as multiple taxes, considering the withholding tax on dividend being collected by government, and other charges paid to regulators, and instead called for policies that will spur market activities and resuscitate the economy.