Nigeria’s Federal Executive Council (FEC) on Wednesday approved an increase in the Value Added Tax (VAT) rate from five percent to 7.2 percent. The disclosure was made by the Minister of Finance, Budget and National Planning, Zainab Ahmed, at the end of a cabinet meeting.
“We reported to the council and the council has agreed that we start the process towards the increase of the VAT rate. We are proposing and the council has agreed to increase the VAT rate from 5 percent to 7.2 percent,” Ahmed said while speaking to state house correspondents.
However, this move is still subject to an amendment of the VAT Act of 1994 by the National Assembly. If approved by the lawmakers, the new rate will reportedly take effect from 2020.
A VAT is a consumption tax levied at every stage of production and ultimately borne by the final consumer of a good or service. The tax is charged on most goods and services provided in Nigeria as well as goods imported into the country.
Why the government is increasing VAT
As explained by the minister, state governments need additional revenue that will be generated from the VAT increase to pay the new minimum wage. President Muhammadu Buhari in July approved the immediate implementation of the new national wage which was signed into law three months earlier.
According to Ahmed, the increase is important because the state and local governments get 85 percent of the VAT with the federal government retaining only 15 percent. “The states need additional revenue to be able to meet the obligations of the minimum wage,” she said.
Moreover, the minister had in June revealed that the upward review of VAT is a follow up on the agreement reached between the government and labour union following the minimum wage increase. Such a marginal increase in VAT, she says, would enable the government to handle the incremental cost of increasing wages.
Similarly, Chairman of the Federal Inland Revenue Service (FIRS), Babatunde Fowler, recently revealed that the federal tax agency will be expanding its tax net. According to him, the government will from January 2020, begin to impose VAT on online transactions, both domestic and international.
VAT currently contributes a significant percentage of Nigeria’s revenue from taxes. The FIRS reported a total VAT collection of N1.1 trillion of the total sum of N5.3 trillion generated in the fiscal year 2018. With the proposed increase in the rate, Ahmed says the “total revenue estimate is the sum of N7.5 trillion for the year 2020 and N2.09 trillion that will be accruing to the federation account and VAT respectively.”
Possible impacts of the VAT increase
In assessing the likely effects of the proposed increment of VAT, it is important to state that the current five percent value-added rate is among the lowest in Africa and globally. Despite this, wide criticisms have greeted the suggested 7.2 percent new VAT rate.
The government considers the planned increment as the most effective channel to meet the new minimum wage implementation and this is justifiable. After all, income received from taxes makes up a significant portion of overall government revenue in developed countries such as the United States and the United Kingdom.
There is an apparent need for an increase in the Nigerian government’s revenue considering the dwindling oil prices and weakness of the naira against the U.S. dollar. But a paper by a global consulting firm, Andersen Tax, says an increased VAT rate may have a detrimental impact on the country’s economy. This is because the increment would have reductive effects on consumers’ disposable income, which in turn can lead to a contraction in general economic activities.
Although there are plans to increase the minimum wage of public servants, there is also the concern that the increase in the VAT rate will simply deplete the value of the increased wage. Moreover, it is only a marginal proportion of the working population that may be positively impacted by the increase in the minimum wage.
In addition to VAT, Nigerians also pay personal income tax, withholding taxes, and sales taxes collected by some state governments. With the planned increase, Nigerians will see prices on nearly all products skyrocket except the few items that are currently exempted from the tax net. Ordinary consumers will be most hit by a raise as their already low disposable income will be dented further.
In other words, a sudden increase in tax rates – be it on personal income or value-added – without an equivalent or significant rise in the value of personal income, would increase the economic burden on the poor.
“Contemplating an increase in VAT rate now is bad timing and inconsistent with current economic reality,” Head of Tax and Corporate Advisory Services at PwC Nigeria, Taiwo Oyedele, said in a Proshare report. “VAT increase will lead to higher inflation, interest rate hike, (and) more unemployment and generally make people poorer.”
According to the tax expert, any increase in VAT rate without a registration threshold and zero ratings of basic consumption will increase the burden on the poor and small businesses. While he added that trying to expand the VAT net while also increasing the VAT rate at the same time is a “faulty tax strategy.”
Moving forward, the Nigerian government could opt for an alternative option in trying to increase revenue without necessarily putting more burden on the ordinary citizen. As Oyedele points out, the country can make twice as much from the tax at the current rate by “reforming the law, expanding the net and ensuring robust administration” instead of increasing the VAT rate.