VAT removal: Antidote to reduced air fares?

The removal of Value Added Tax (VAT) on air transport was a long awaited one. However, the starting point should be a reassessment of the many taxes imposed on operators in the country. WOLE SHADARE writes

 

Long awaited action

One of the problems that had confronted Nigeria’s aviation industry for many decades was in a stroke of pronouncement became a thing of the past. The problem: VAT on air transport was removed by President Muhammadu Buhari penultimate week.

The relentless campaign against the “killing” taxes and charges regime, however, paid off last weekend when President while commissioning the ultra-modern Port-Harcourt International Airport terminal, said the recent decision by the Federal Government to remove VAT from domestic air transportation is to make air travel more affordable to citizens.
He said the removal of the VAT was also meant to create job opportunities in the nation’s aviation sector.
The president also explained that the government’s decision to charge zero VAT from domestic air transportation was in line with global best practices.
“This will make air travel more affordable and subsequently lead to the creation of jobs by the air transport service value chain as well as increase revenues for the government.
It follows that taxation of air travel or cargo directly reduces the economic benefit of all passengers and shippers, as well as, at the margin, stopping a number of people travelling and stopping a number of shippers using air cargo services.Turbulent times
Airline operators were not the ones paying VAT; passengers are the ones paying. Operators simply receive the VAT in trust for the government and were expected to remit same.
That the aviation industry in Nigeria is going through a turbulent time is not in doubt. It is a known fact that airline operators are struggling really hard to survive a harsh business environment. It is also understandable that the elimination of VAT on air travel may lead to reduction on air fare, which has the capacity to stimulate higher patronage and contribute to the growth of the industry. These issues and many more were responsible for the presidential committee set up in 2017 to review the issue of multiple leviesin the aviation industry.
According to Oxford Economics, the aviation sector pays over NGN 8.5 billion in tax including income tax receipts from employees, social security contributions and corporation tax levied on profits, with a further NGN 17 billion of revenue coming from VAT on domestic and international flights originating in Nigeria.
It estimated that an additional NGN 8.9 billion of government revenue is raised via the aviation sector’s supply chain and another NGN 7.1 billion through taxation of the activities supported by the spending of employees of both the aviation sector and its supply chain.
This adversely affects the sector by reducing the number of those who can afford to travel by air due to high fares in this tough economic time.

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Burden
VAT is an added burden on our passengers who have limited disposal funds and have reached their elastic point in this difficult time in the nation’s economy. This adversely affects the sector by reducing the number of those who can afford to travel by air due to high fares in this tough economic time.
Chairman, Airline Operators of Nigeria (AON), Capt. Noggie Meggison, stated that before now, domestic air transportation in Nigeria was the only mode of commercial transportation that pays VAT.
He said: “Road, rail, marine and even foreign airlines operating in Nigeria don’t pay VAT in their home country or in Nigeria with reference to an information circular by the Federal Inland Revenue Service (FIRS), which grants them VAT exemption (Information No.: 9701; Circular Dated Jan. 1, 1997); Part L (b) No. 8.
“VAT on commercial air transportation is a huge departure from what obtains worldwide and an increased burden on the Nigerian travellers.
“Ghana, Benin Republic, Togo and Cote d’Ivoire located next door to us have all abolished VAT for air transportation.
“The recent decision by the Federal Government to remove VAT from domestic Air transportation will go a long way to bring succor to groaning Nigerian travelers to be able to afford to travel by air.”

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Experts’ perspectives
The AON chairman added that the growth in demand for domestic air travel would lead to the creation of jobs by the whole air transport service chain (airlines, airports, ground handlers and catering companies) as well as increase revenues for the government.
Meggisson said: “This is a step that Ghana took over a year ago and the benefits are there for all to see today as Accra is fast becoming the aviation hub for West Africa.
“AON would therefore like to use this medium to once again thank the president and his administration for coming to the aid of domestic airlines by the recent Executive Order to remove VAT from all forms of shared transportation.
“It is our prayer that the president will go a step further to encourage the National Assembly to pass this Executive Order into law as quickly as possible.
“This will go a long way to encourage more Nigerians to fly and put the airlines on a positive footing to grow the economy and contribute to the Gross Domestic Product (GDP).
Giving an insight into why the issue lingered for so long, Chairman, Aircraft Operators of Nigeria (AON), Capt. Mohammed Joji, said the scrap of VAT in air transport sector was long overdue.
Joji recalled that VAT and its removal from air travel had been addressed since the era of the General Agreement on Tariffs and Trade (GATT) of 1947 and General Agreement on Trade in Services (GATS) that came into force in 1995. That explains why international carriers do not charge VAT on their ticket sales based on international agreements.
Joji, who is also the Managing Director of Skypower Express Airways Nigeria Limited, claimed that VAT Decree 102 of 1993, schedule three, under “Goods Except” actually exempted transportation by road, rail and water from VAT deductions.
“Erroneously, they (government of the day) left air transportation on the VAT list,” he said. “When we demanded to know the reason, they said because aviation was high- profile, unlike other sub-sectors. But that is a bad argument. They don’t know that aviation is a catalyst for the economy. That is what we have been telling them all these years.”
According to him, the removal of VAT is in the best interest of not only the passengers but the airlines in the areas of spare parts importation, payment of charges to regulatory agencies such as NCAA and Nigeria Airspace Management Agency (NAMA) and helping the airlines to compete favourably with their counterparts on the African continent.

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Last line
Many airlines have been liquidated in the past few years and many more are in distress. Nigeria does not require piecemeal but holistic reforms. The aviation sector must not be killed with unbearable tax burden.

Wole Shadare