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Economic Imbalance: How FG’s proposed VAT increase will affect Nigerians

THE recent decision by the Federal Executive Council (FEC) to increase the Value-Added Tax (VAT), on goods from 5 per cent to 7.2 per cent in a bid to increase the country’s non – oil revenues and also reduce its reliance on crude oil sales has continued to generate hot debate among experts and Nigerians.

The Minister of Finance, Budget and National Planning, Zainab Ahmed, in a news report explained that the extra revenue will create the required funds to meet the new minimum wage obligation.

“This is important because the Federal Government only retains 15 per cent of the VAT, 85 per cent is actually for the states and local governments to enable them to meet the obligations of the minimum wage,” the minister had said.

“We were proposing and the council has agreed to the increase in the VAT rate from five per cent to 7.2 per cent. Though, a decision is yet to be taken on the effective date of the new rate.”

Although, Ahmed made a U-turn in a statement by her spokesperson, Yunus Abdullahi, saying that that the proposed increase was 7.5 per cent instead of the initial 7.2 per cent earlier announced based on the recommendation of the presidential technical advisory committee.

After the increase in the minimum wage from N18,000 to N30,000 in April 2019, the Federal Government had argued that majority of the 36 states would struggle to pay salaries of their workers, insisting the proposed VAT hike is part of its drive to increase tax revenue for states to pay their staff.

A VAT is a consumption tax payable on goods and services consumed by individuals, government agencies and business organisations.

Currently, Nigeria has one of the lowest VAT rates globally when compared with other African countries like Ghana with a VAT rate of 15 per cent, South Africa 14 per cent, Egypt 10 per cent, Morocco 20 per cent and Mauritius 15 per cent the difference is quite obvious.

At the current rate of 5 per cent, Nigeria raised N1.1 trillion in 2018 from VAT which amounts to 0.9 per cent of it’s Gross Development Product, (GDP), which is insignificant when matched with several Commonwealth and ECOWAS countries earning 3.8 per cent of their GDP from VAT according to a report by PriceWaterhouseCoopers (PWC).

What does this increase mean for Nigerians?

It has been argued that the proposed VAT increase has implications for the ordinary Nigerian. For instance, a Nigerian who earns N30,000 monthly wage and wants to obtain a product worth N10,000 with the VAT charge inclusive will have to pay N10,720 which means he has spent 35.73 per cent of his income, while another Nigerian earning N500,000 monthly will spend 2.14 per of his monthly income to purchase the same product.

Analysis carried out by The ICIR shows that Nigerians with higher income will pay less proportion of their income as VAT on taxable goods or services and save more while Nigerians with lesser incomes would pay more and save less.

However, some items most Nigerians consume enjoy VAT exemptions namely basic food staples, water, medical, veterinary and pharmaceutical raw materials, books, newspapers, infant products, and
magazines.

Apart, from the exempted goods listed above, other goods are subject to VAT which includes Sanitary protection for women such as pads and tampons, television, amongst others.

BudgIT NG, a civil advocacy organisation in a 2018 report revealed that final consumption expenditure of households in Nigeria moved from N42 trillion in 2012 to N74 trillion in 2015 reflecting a leap of about 76 per cent. It also revealed that the consumption pattern of most households in Nigeria tilted towards food, accommodation, and transportation.

Though 2.2 per cent VAT increase looks minimal it is yet prone to lead to a 40 per cent increase in cost to small businesses and consumers according to the report.

The result is a likely reduction of spendable income for poor households resulting in lower consumption patterns, increase in prices leading to higher inflation, and a decline in the GDP growth rate.

On the bright side, extra VAT revenue will help reduce budget deficits, reduce government debt and fund social services if utilised appropriately.

What is Statistics saying?

Nigeria had raked in N3.627 trillion as proceeds from VAT between 2015 to 2018 according to data obtained from the Federal Inland Revenue Services (FIRS).

The country earned its highest VAT income in 2018 receiving N1.1 trillion. In 2017, it earned N972 billion and N828 billion in 2016. The least was in 2015, which was N767 billion.

If the proposed VAT increase of 7.2 per cent is implemented, Nigeria would earn an extra N440 billion annually from VAT according to a PWC forecast.

It also means that the Federal Government will earn an additional N66 billion, the 36 States would also earn N220 billion more and the Local Governments would get extra N154 billion at the level of 2018 collection.

However, VAT revenue of N767 billion generated in 2015 is less than 1 per cent of Nigeria’s consumption GDP of about N80 trillion despite the country being import-dependent.

Lagos sits on the top of the pack in terms of VAT receipts generated across the country. For example in 2018, Lagos State averaged N8.033 billion monthly up from its average of N6.38 billion in 2017.

While Nasarawa, Bayelsa, Gombe and Ebonyi complete states had the least VAT remittances.

The VAT increase will lower demand which would create more revenues for the government but the timing and impact on low-income earners will be huge because not every Nigerian can afford the new tax regime.

 Available records suggest that a better approach would have been to expand the tax collection base through efficient use of other revenue outlets for public services and infrastructure to act as palliatives and catalyst for growth.

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