Nigeria: Intricacies of VAT Increment in Nigeria

3 December 2019

Lagos — It is a global phenomenon that whenever government wants to expand its fiscal revenue, the people governed are taxed. Essentially what makes a nation strong? Taxes?

I dug through the museum of history and it tells me the first income tax was paid by Abraham. As a matter of fact, it was written on a rock by the hand of spirituality and handed over to Moses at the top of Mount Sinai at a flat rate of 10%. Incredible but history confirmed it.

In the premise of the above, The Federal Executive Council (FEC) on 11 September 2019 approved an increase in the value added tax (VAT) rate from 5% to 7.5%. The Finance Minister, Budget and National Planning, Zainab Ahmed said that "This is important because the federal government only retains 15% of the VAT, 85% is actually for the states and local government and the state needs additional revenue to be able to meet the obligations of the minimum wage".

What is VAT? Value Added Tax popularly called VAT is payable on goods and services consumed by any person, whether government agencies, business organization or individuals. It is a consumption tax that is backed up by the Value Added Tax Act of 1993. It is managed by the Federal Inland Revenue Service (FIRS).

It is typically administered by taxing the total value of sales of all businesses, and allowing businesses to claim a credit for taxes paid on their purchases of raw materials, intermediate materials and capital goods from other business. Every time there is a transaction which adds value, that extra value is subject to VAT.

Nigeria economy is consumption-driven; in 2018, over 70% of Nigeria's GDP was made up of consumption expenditure. Apparently, the VAT is charged at source and there is no way one can escape it except the goods and services are excluded. The Value Added Tax Act Cap V LFN 2004 (as amended) itemized items that are excluded from VAT payment such as Medical and Pharmaceutical raw materials, basic food items, baby products, commercial vehicles and spare parts, fertilizers, diplomatic goods and many others.

The process for the amendment of tax is extensive and various stakeholders must be consulted, before the new tariff would be effective in 2020.

The argument that Nigeria's VAT is the lowest in Africa do not really count much except that the increase would bring about a growth in our Gross Domestic Product (GDP). There are other avenues we can use to cover up our deficit financing but we are snail-speeding. Would increase in VAT reduce our deficit budget? It is much deeper than that in Nigeria as revenue to engage in developmental projects is depleting every day and government expenditure is increasing. For some time now, we have been running on deficit budget, borrowing from local and foreign sources. How long are we going to continue in this pattern of borrowing?

It is expected that the increase of VAT from 5% to 7.5% will raked in not less than N2 trillion into the government treasury in 2020. Is this enough? It is almost natural to respond to an increase in income with an increase in spending. This tendency to spend more as your income increases is called lifestyle inflation. Put in another way, for every N1 that tax revenues grew, spending climbed by N1.2. That is human nature.

The question one might ask is: how does the increase in VAT affect me? Let's assume you are a business man, and your business is VAT registered, you must charge VAT on goods and services you sell to customers and similarly you must pay VAT on goods and services you buy from other businesses, and eventually you must file a VAT return every month. The good aspect of it is that the VAT you charged and the VAT you pay roughly balances, any difference is sorted out through your VAT tax return.

On the other hand, if you are a salary earner, the increase will affect the purchasing power as you would not be able to buy as before if your salary remains the same.

In summary, the VAT increase would ultimately create severe discomfort for a larger percentage of Nigerians as the prices of goods and services were bound to hit the top. Other unintended consequences that might creep in include: higher inflation, interest rate and unemployment.

The benefits of VAT can be manifold: one, the cascading of indirect taxes is avoided, it is perhaps harder to evade than other forms of taxation. It is transparent and simple to administer as compared to other indirect tax.

If we vigorously expand our tax drive, rejig our poor collections and dig deep into our untapped resources, we have more than enough to turn around our fortune.

Olusanya Anjorin, Lagos

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