Valued Added Tax Increment: An Excessive burden or Economic Growth?
The Value Added Tax (VAT) is a tax levied on consumable goods and services. This system of taxation was set up in Nigeria in 1993 but became effective from January
1994. Value-added tax is administered centrally by the Federal Government of Nigeria using the existing tax machinery of the Federal Inland Revenue Service (FIRS) in
close cooperation with the Nigerian Customs Service (NCS) and the State Internal
Revenue Boards (SIRBs). Sadly, the Nigerian economy is heavily dependent on the oil sector which contributes less than 10% to the Gross Domestic Product (GDP) for the bulk of the country’s fiscal revenues and foreign exchange earnings. This makes the nation’s balance of payments and government budgets vulnerable to volatility in oil prices. Consequently, there is a huge hole in the government’s purse.
For a government that increasingly finances its fiscal deficit from loans, there is need for approaches that can increase its revenue capacity. Against this background, President Muhammadu Buhari on Tuesday 8th of October, 2019, proposed an increase in VAT from 5% to 7.5 %. The President stated this while presenting the Finance Bill to a joint session of the National Assembly for consideration and passage into law. The main justification provided by the government for the VAT increment is the increase in revenue accruable to state governments. The federal government only retains 15% of the VAT, while 85% is actually for the states and local governments. Therefore, this edition of ENGAGE NIGERIA Weekly examines the proposed VAT increment and offers practical solutions on how to manage the issue.
Nigeria’s VAT rate of 5% is said to be
among the lowest in the world. Globally, the highest tax rate in the world is in Bhutan, which is 50%. In Africa, Madagascar and Morocco hold the highest standard at 20%. Niger holds a 19% rate. Benin, Burkina Faso, Chad, Ivory Coast, Rwanda, Congo, Mali all have a tax rate of 18%. It is 16% in Kenya and Zambia, while Ethiopia, Gambia, South Africa, Zimbabwe stand at 15% rate.
Nevertheless, the decision of the Nigerian government to increase VAT was not unexpected. There had been rumours in government circles on the need for an increase as a veritable means of meeting the funding needs of governments at federal and subnational levels, which has been on the increase in the last five years. Subsequently, the National Tax Policy and the International Monetary Fund (IMF) had stressed the need for an increased focus on revenue generation from VAT in Nigeria.
There have also been attempts by previous administrations to increase VAT rate, especially the Yar’Adua administration which increased VAT to 10 percent in 2006. This move was met with nationwide protests and strikes led by Nigerian Labour Congress till the administration rescinded the decision.
However, evidence so far supports the view that VAT is an essential source of revenue for the government. For instance, in 1994, when the initiative was introduced the actual income was N8.189 billion from VAT, which was 36.5% higher than the projected N6 billion for the year. In terms of contributions to total federal revenue, VAT accounted for about 4.06% in 1994 and increased to 5.93% in 1995.
On the other hand, some economic experts have faulted the timing of the proposed VAT, considering the present economic reality. It is pertinent to understand that diminished scale in the consumption of goods and services affect the performance of VAT. From a purely economic point of view, any increase in VAT would disproportionately affect the poor. With an inflation rate of over 11%, the economic impact of the proposed VAT increase will have serious implications. The Central Bank of Nigeria has maintained that it is keen on containing inflationary pressures in the economy and bringing inflation back to a single-digit range of 6-9%. In conclusion, it is understandable that the Nigerian government needs more revenue to meet its expansive fiscal expenditure. However, this should be implemented in such a way that the negative impact will be minimal on the poor masses. The government must address the issue of corruption which has become an economic monster affecting the capacity of governments to deliver dividends of democracy to the general populace. The government should seal all identifiable loopholes in order for the revenue generated from VAT to contribute more significantly to the nation’s economic growth. Finally, the government should adopt the appropriate fiscal and monetary policies to control inflation arising from the imposition of VAT.