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Friday, January 21, 2022

To Shore Up Revenue, FG Proposes Increasing Value Added Tax (VAT) To 7.5%

Tax is of course a permanent instrument for collecting revenues. It is as much a major source of revenue in the developed world as it has been an important source of revenue in the developing world. It has always been an instrument of social and economic policy for the government. Therefore, the fundamental objective of taxation is to finance government expenditure.

Just like any other nation, the Federal Government of Nigeria desires to carry out various development and welfare activities in the country. For this reason, it needs a huge amount of funds.

In its readiness to carry out various development and welfare activities in the country, the Federal Government has now proposed to increase the Value-Added Tax (VAT) from 5% to 7.5%, following the recommendation by a technical advisory committee. Early this year, the Federal Government set up a technical advisory committee comprising competent and leading economists from both the public and private sectors chaired by a renowned Economist, Mr. Bismack Rewane.

The Committee, inaugurated on the 9th of January 2019, was to advise on the implementation of the new minimum wage. It submitted its report on 21st March 2019 in which one of the recommendations was the VAT increase.

The proposed increase would however be subject to legislative intervention by the National Assembly who will have to amend the Revenue Act to reflect the proposed increase. Despite this proposed increase, it is worth noting that Nigeria’s VAT figure is only half of the African average and it is still one of the lowest in the world.

On the benefit of an increase in VAT, it is more beneficial to the State Governments and the Local Government Areas (LGAs) in the country who are already facing difficult fiscal conditions. It is noteworthy that in the VAT sharing formula, while Federal Government gets only 15% of the total VAT earnings, the States and the LGAs get 50% and 35% respectively.

There are mapped out initiatives to the effect that the proposed VAT increase is therefore to create more fiscal space especially within the states and the local governments.  

In addition to the mapped out initiatives, the Value Added tax (VAT) expansion programme is designed to ensure improved collection efficiency while also ensuring an automation of VAT collection at source in some key sectors. The target at improving the VAT collection, which was N148.92 billion as against the budgeted figure of N207.51 billion in 2018, also considers seriously the digitalisation and transformation initiatives, which are an integral part of the whole revenue collection process.

It would be recalled that recognising the critical role of the Ministry of Finance, Budget And National Planning in steering the economy and managing risks, and considering the robust relationship between the finance ministry and other ministries, department and agencies (MDAs), and other levels of government in the country, the finance ministry under the leadership of Zainab Shamsuna Ahmed has continued to remain resolutely responsible with ensuring revenue sharing to the three tiers of government is in accordance with the provision of the Revenue Mobilization Allocation and Fiscal Commission (RMAFC) Act.

Nigeria has witnessed strategic investments in critical infrastructure and in human capital meant to spur further economic growth. Therefore, the proposal, according to her, is also to improve the fiscal space by boosting revenues as well as implementing the ongoing effort through Strategic Revenue Growth Initiatives (SRGI). Considering revenue growth as a strategic priority for the ministry, the SRGI is a key aspect of the government’s strategy to improve non-oil revenue through fiscal buffers, and ultimately improve the revenue to debt service ratio and to improve the ratio of non-oil revenue to non-oil GDP. 

Fundamentally, a set of initiatives have been itemised in the SRGI to increase the country’s revenues across all revenue types and to ensure that government is focused on revenue generation. Of course, the greater efficiency is meant to stimulate and help the economy grow, and to make life better for Nigerians. Accordingly, through the revenue sharing formula, a total sum of N4.8 trillion was distributed to the three-tiers of government between September 2018 and April 2019 from the Federation Account. Similarly, the sum of N784.7 billion realised from value added tax (VAT) for the same period was also shared.

It is important to note the fact that the existing VAT Act exempts the basic necessities such as food, medicines and education which therefore minimises the impact on the poor and vulnerable segments of the Nigerian society. It is expected that the exemptions will be maintained in the Amended Act.

It should be gladdening that the VAT increase, if correctly implemented, would bring in huge revenues, which would actually reduce the fiscal deficit burden. The government’s borrowing programme would then ease and certainly the financially affected states and local governments would also focus on issues like poverty reduction, healthcare.

According to the industry experts, the VAT increase, if enforced properly, would form part of the fiscal consolidation strategy for the country. It would, in fact, help address the fiscal deficit problem and the revenues estimated to be collected would actually mean lowering the fiscal deficit burden for the government across board.

Yunusa Tanko Abdullahi
S.A Media and Communications to the Honourable Minister of Finance, Budget and National Planning


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