The Implication of VAT Increment to Nigerian Economy
The Federal Executive Council has concluded plans to increase Value Added Tax (VAT) from 5% to 7.2%. This represents a 44% increase as VAT has remained at 5% since January 1, 1994, when it became active.
Sources said the Federal Government’s decision to increase the tax rate is informed by the need to increase government revenues.
The Special Assistant on Digital and New Media to President Buhari, Tolu Ogunlesi, in a tweet, made this public. He said it was one of the decisions taken at the Federal Executive Council meeting held on Wednesday at the Presidential Villa Abuja. He claimed that since Nigeria collected about N1 trillion in VAT in 2018, a 44% increases could generate over N400 billion in additional revenue for the government if everything remains constant.
In multiple tweets, Ogunlesi, however, noted that for VAT to be increased, the National Assembly will have to approve it and pass an amendment to the current VAT ACT following which the president will append his signature.
According to him, the process could take months if not years and part of it will involve “extensive” nationwide consultations which will mostly be with the organised private sector, Nigeria Labour Congress and other labour unions, foreign investors and multilateral organisations, media, state governors and members of the National Assembly.
Meanwhile, Nigeria is widely believed to be facing a revenue crisis following the drop in oil prices in 2014. It is on record that since the Buhari administration assumed power in 2015, government revenue has failed to hit the heights of the immediate past administration which was over N12 trillion.
In 2018, total revenue accruing to the Federation Account was about N7.1 trillion compared to budget of N10.4 trillion. It was worse in 2017 at about N4.9 trillion. VAT revenues are also a significant portion of government revenues. In 2018, total VAT revenue accruing to the Federation account was N1.04 trillion or 14% of revenues.
Sources said the Federal Government is in a more precarious situation as last year it budgeted N7.1 trillion as targeted revenue but only actualized N3.8 trillion in collection, out of which, VAT collection was about N146.5 billion (target N207.5 billion).
The implication of a new tax rate is that there will be more money for the States & Local Government which will both collect about 75% of the VAT leaving the Federal Government with 15%.
The Federal Government only makes more money from its share of Company Income Taxes and Custom Import duties where it collected N660 billion and N296.7 billion respectively. Total non-oil revenue was about N1.1 trillion.
Nigerians will have to wait to see how the consultations pan out over the next few months. If the FG is able to convince various stakeholders, then it could likely sign the act amending the increase. Implementation could be January 1st, 2020 just like it was in 1994.
If the tax rate increment is implemented, there will be major push backs from Unions who have also just secured increases in the minimum wage. Also, unions could call for a lesser increase reducing it from 7.2% to anything else above 5%.
Another fact is that VAT is a consumption tax and it is borne by the final consumer who is mostly an ordinary citizen of Nigeria. Meanwhile, in addition to VAT, Nigerians also pay personal income tax, withholding taxes and sales taxes as collected by some state government (Lagos especially). The Nigerian masses will be most hit by a raise as their disposable income will be dented further.
The Executive Chairman of the Federal Inland Revenue Service (FIRS), Babatunde Fowler, also recently reiterated that the payment of VAT on VATable online transactions is required by the law. If this increase is passed by law, there will likely be an increase in online transaction cost.
Nigerians will see an increase in nearly all items except the 11 items that are currently exempted (see page 14). Corporations are merely collecting agents for the government and only incur a VAT cost when they are final consumers or fail to net off their VAT from purchases from VAT on sales.