On Wednesday, 12 September, the President Buhari administration reached a decision to raise Nigeria’s Value Added Tax (VAT) rate from 5% to 7.5%. This decision to raise VAT by 50% was announced after the inaugural Federal Executive Council meeting of the newly formed cabinet.
Backdrop: Finance Minister Zainab Ahmed told journalists that the VAT increment should take place in the coming year and following consultations with the Nigerian people.
In Hindsight: Recall that the Executive Chairman of Nigeria’s internal revenue services, Babatunde Fowler, in March, hinted that Nigerians should brace up for an increase in VAT from 5% to between 6.75 & 7.25% in 2019.
So what are the motivations behind the government’s new tax hike?
- Budget shortfalls: Lower oil prices and poor economic performance has impacted on the country’s ability to raise funds. Per Bloomberg reporting, Nigeria could only meet 55% of its revenue targets in 2018. Furthermore, the IMF estimates that the currently is currently spending up to 70% of its revenue on debt servicing.
- Payment of new minimum wage: Behind the VAT hike is the quest by government to raise extra revenue to meet the obligations of a newly increased minimum wage in the country. TheScoop wrote about the implications of this new minimum wage at the time. Read here
It’s not a home run yet
The VAT increase cannot go into effect without the approval of the National Assembly. NASS will have to pass a bill repealing the Value Added Tax (VAT) Act Cap V1 LFN of 2004. At least one member of the House of Representatives, Akin Alabi (APC, Oyo state) has expressed public opposition to the hike pledging to argue against it when it comes to the floor. It is not certain if a bill to amend the VAT Act has been forwarded to the National Assembly yet or not.
The government’s narrative: The key officials of the government have continued to argue that the VAT rate in Nigeria is one of the lowest in the world. However, they refused to acknowledge that Nigeria, being the most extremely poor country in the world, will be affected by such increase in VAT as it would directly impact on consumption. Interestingly, the Buhari administration campaigned on a tax reduction for small and medium enterprises but is yet to fulfill those plans.
Bottomline: Per latest VAT collection numbers from the National Bureau of Statistics, the country is already experiencing about 16% YoY growth in VAT revenue. A better proposal would therefore be to stimulate the economy and widen the collection net as opposed to a significant increase that could affect the economy. While the FG is more disposed to having their way out to solve an immediate revenue deficit problem, analysts believe that the impact on the economy could be damaging overall.