The Federal Executive Council (FEC) on September 11, 2019 approved an increase in the Value Added Tax (VAT) rate from 5% to 7.5%. The Finance Minister, Budget and National Planning, Zainab Ahmed, said “This is important because the federal government only retains 15% of the VAT; 85% is actually for the states and local governments and the states need additional revenue to be able to meet the obligations of the minimum wage.’’ The minimum wage payment that is yet to be fully implemented by most states in Nigeria.
Value Added Tax popularly called VAT is payable on goods and services consumed by any person, whether in government agencies, business organization or individuals. It is a consumption tax that is backed by the Value Added Tax Act of 1993. It is managed by the Federal Inland Revenue Service (FIRS).
It is typically administered by taxing the total value of sales of all businesses, and allowing businesses to claim a credit for taxes paid on their purchases of raw materials, intermediate materials and capital goods from other businesses. Every time there is a transaction which adds value, that extra value is subject to VAT.
Yes, the average African VAT rate is 16%. Yes, the argument that Nigeria’s VAT is the lowest in Africa does not really count much except that the increase would bring about a growth in our Gross Domestic Product (GDP). There are other avenues we can use to cover up our deficit financing but we are snail-speeding. Would we increase or reduce our deficit budget? Let’s wait and see…In Nigeria, revenue for developmental projects is depleting everyday and government expenditure is increasing. For some time now, we have been running on deficit budget, borrowing from local and foreign sources. How long are we going to continue in the cycle of borrowing?
It is expected that the increase of VAT from 5% to 7.5% will rake in not less than N2 trillion into the government treasury in 2020. Is this enough? It is almost natural to respond to an increase in income with an increase in spending. This tendency to spend more as your income increase is called lifestyle inflation. Put in another way, for every N1 that tax revenues grow, spending climbs by N1.2. That is human nature.
Let’s move away from what might look like a theoretical lesson. If we vigorously expand our tax drive, rejig our poor collections and dig deep into our untapped resources, we have more than enough to turn around our fortune. It has been reported that the country loses about N50 trillion annually from her untapped resources. Hey, someone might want to fault the claim but let’s start from untapped gold alone, an estimate of N8 trillion was discovered to have been lost annually in Nigeria…
The bitter truth is that the VAT increment will come to stay but it becomes an aberration when funds are not channelled to developmental projects and which was budgeted for.
As mentioned earlier, VAT is a money making machine for nations and it has helped countries to generate more revenues than they would have had without the VAT in place. However, as Paul Harvey said, when any nation has taxed its people more than necessary of their national income, initiative is destroyed and the nation is headed for economic collapse.
It is hoped that the Finance Bill when fully implemented would address the issue of multiple taxes holistically and drive small and medium scale enterprises in Nigeria.