The Federal Government of Nigeria has 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 of Nigeria 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 is however 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 should be noted 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.
The proposed increase is therefore to create more physical space especially within the states and local governments. Also worthy of note is 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 is gladdening that the VAT increase, if correctly implemented, could bring in huge revenues, which would actually reduce the fiscal deficit burden. The government’s borrowing programme could then ease and certainly the financially affected states and local governments could later focus on issues like poverty reduction, healthcare and power generation and transmission.
According to the industry experts, the VAT increase, if enforced properly, forms part of the fiscal consolidation strategy for the country. It could, in fact, help address the fiscal deficit problem and the revenues estimated to be collected could actually mean lowering of the fiscal deficit burden for the government across board.