What the proposed 7.5% increase in VAT portends

Posted by Mustapha Sumaila | 1 January 1970 | 1,229 times

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•Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed

The proposed increase in the Value Added Tax (VAT) from five per cent to 7.5 per cent by the Federal Government and its resolve to commence implementation in 2020 after necessary consultations has been raising dust by many Nigerians.

A lot of Nigerians complained that the planned increment would cause inflation and further aggravate the hardship being experienced by the people.

Some experts believe the proposed upward review of VAT is the right step in the right direction owing to dwindling oil prices while others faulted the timing.

The Federal Government had explained in various fora that the proposed tax was not targetting the poor and the rural dwellers but the rich in urban areas with a view to getting more revenue to run the government.

VAT is a consumption tax levied on products at every point of sale where value has been added, starting from raw materials and going all the way to the final retail purchase.

Ultimately, the consumer pays the VAT, buyers at earlier stages of production receive reimbursements for the previous VAT they have paid.

A VAT system is often confused with a national sales tax. With a sales tax, the tax is only collected once at the final point of purchase by a consumer and so only the retail customer pays it.

The VAT system is invoice-based and collected at several points throughout an item’s production each time value is added and a sale is made.

Every seller in the production chain charges a VAT tax to the buyer, which it then remits to the government and the amount of tax levied at each point of sale along the chain is based on the value added by the latest seller.

In September, after the Federal Executive Council (FEC) meeting presided over by President Muhammadu Buhari, the Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed announced plan by the Federal Government to raise VAT from five per cent to 7.5 per cent.

Ahmed had said that consultations would begin at all levels on the review of the VAT to 7.5 per cent, just as it was ready to begin deductions to recover bailout funds given to states.

“We will begin consultations and it will be at various levels in the country. Those to be consulted include the state governments,  the local governments, the parliament as well as the Nigerian public.

“For the VAT increase to take effect, there has to be an amendment to the VAT Act,” she said.

The finance minister also recently said the VAT increase would impact more on consumption by urban communities and the wealthier sections of the population.

She explained that the proposed tax increase would not affect the poor masses as perceived by some people.

“The proposed VAT increase is likely to impact more on consumption by the urban communities and the wealthier sections of the population than on the poor.’’

According to Ahmed, her ministry will coordinate its fiscal policies with the Central Bank of Nigeria (CBN)’s current tight monetary policy stance to ensure that the appropriate out turns are achieved in terms of growth, consumption and inflation.

She, however, said that Nigeria’s VAT contribution to the nation’s GDP had declined from one per cent between 2010 and 2013, to 0.8 per cent between 2015 and 2018.

“This is significantly below the median of five per cent of GDP in other comparable African countries.

“Nigeria’s low VAT-to-GDP is attributable to the low nominal VAT rate, which at five per cent is the lowest in the African region which averages at about 16 per cent.

“Furthermore, the efficiency of VAT collection at 0.2, is well below the African regional average of 0.33,’’ she explained.

Similarly, Mr Ben Akabueze, the Director-General, Budget Office of the Federation also said the proposed VAT would be implemented in threshold, adding that it would affect only certain category of businesses as some small businesses would be exempted.

Akabueze explained that the new VAT would not affect poor and vulnerable Nigerians contrary to perception in some quarters.

“The proposed VAT review has minimal engagement with the poor or common man because they hardly engage in platform where VAT is chargeable.

“In doing this, the new VAT will consider two things such as expansion of the exemption list and the threshold which considers the quantum of the capital of a particular business such with VAT registration to N25 million turnover per annum.

“The VAT has an exemption list as those selling basic commodities such as food, medical services and medicines as well as education and we have expanded it to cover as many basic things as possible” he explained.

The director-general said that VAT in Nigeria was still low considering the tax to Gross Domestic Product’s (GDP) ration which he said was about six per cent and the lowest in the world.

He added that Nigerians should not expect the government to perform optimally without increasing the revenue base.

According to him, 85 per cent of the total VAT goes to sub national governments while the remaining goes to the Federal Government.

Akabueze said the Federal Government was not pushing for increase to address its own problem but rather to ensure a vibrant economy.

In his reaction, Mr Godwin Emefiele, the Governor of Central Bank of Nigeria (CBN), said the plan to increase VAT from five per cent to 7.5 per cent was in the right direction to raise the country’s revenue.

Emefiele said the government had responsibility to fend for every Nigerian by providing basic infrastructure like roads, electricity and hospitals among others.

He explained that the government has only two ways to fund such projects, which are by raising revenue and through loan collection.

According to him, the present administration has been criticised by some people for high debt rate incurred.

“Government unfortunately has no option if it does not borrow, it must raise revenue and you all agree with me that it has obligations to meet up with.

”The increase of VAT to 7.5 per cent is low compared to other countries, in fact, with this increase, Nigeria has the lowest in the world.

“If the government can meet its obligations through this increment, it should be supported, I am therefore appealing to Nigerians to show understanding and support government’s policies,” he said.

Also reacting, Mr Akinsanya Niyi, a tax expert said he was in support of the upward review of VAT but the government should not be in a hurry to implement it due to obvious reasons.

Niyi said that the government should wait for the right time because the economy was just picking up and the standard of living was still low as well as high unemployment rate.

He said the new VAT might force a shift in consumption patterns which could affect consumption of some finished goods and production of such goods, thereby causing reduction of the work force.

According to him, VAT is an indirect tax charged by the service provider but being bore by the final consumers, its a stage by stage type of tax that is charged at a percentage of Value added.

The expert, however, tasked the management of the Federal Inland Revenue Service (FIRS) and other stakeholders in tax administration to sensitise the general public on what the proposed VAT was all about. (NAN)

Source: News Express

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