The Nigerian government has approved the increase of VAT (value added tax) from the current 5% to 7.5%. This has been expected as we have noted in many articles in Tekedia. Our thesis remains that Nigeria will equilibrate at 10% VAT within the next seven years. Please read this piece where we noted that the Government’s only way to fund the national budget would be increasing tax! With the recurrent expenditure exceeding tax receipt, the key roadmap is tax since debt funding may not evidently come easily with our current debt profile.
One positive takeaway was how much work Nigeria is doing in the ease of doing business. While we are yet to get there, a lot of progress has been made; targets top 100 in Global Ease of Doing Business Index.
But I was so worried listening to the two ministers, especially as it relates to the Budget and how to close the Funding.
Gap. Put mildly, “the government is unable to figure out any other way to fund the budget, so be ready to come to their aid”. In other words, expect more taxes!!!
This 7.5% position still needs to be approved according to the nation’s TAX Act. Everyone expects this approval to go through.
The federal executive council (FEC) has approved an increase in value added tax (VAT) rate from 5 percent to 7.5% percent
Zainab Ahmed, minister of finance, budget and national planning, disclosed this to state house correspondents at the end of the cabinet meeting on Wednesday.
However, this is subject to an amendment of the VAT act of 1994 by the national assembly.
If approved by the federal lawmakers, the new rate will take effect in 2020.
Expect some demonstrations because the little increase on salaries for public workers has been cancelled by this tax increase. VAT affects poor people more as it is a consumption tax: things will cost more since producers will add the VAT on the prices of items which the buyers will pay. Simply, I expect the Nigerian Labour Congress to begin another agitation of minimum wage increase since the yet-to-be fully implemented minimum wage has already been knocked out by this VAT increase. Yes, the vicious circle continues in Nigeria!
She [Minister of Finance] said: “We also reported to council and council has agreed that we start the process towards the increase of the VAT rate. We are proposing and council has agreed increase the VAT rate from five percent to 7.5 percent. This is important because the federal government only retains 15 percent of the VAT — 85 percent 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.
“This process involves extensive consultations that need to be made across the country at various levels and also it will involve the review of the VAT act. So, it is not going to be implemented immediately until the act is reviewed.”
“Following these assumptions, the total revenue estimate is the sum of N7.5 trillion for the year 2020 and N2.09 trillion that will be accruing to the federation account and VAT respectively,” she said.
“There will, of course, be the distribution to the three tiers of government based on the statutorily revenue sharing formula as defined in the constitution and to this effect, it means the federal government will be receiving proposed aggregate of N4.26 trillion from the federal account and the VAT pool, while the states and the local governments are expected to receive N3.04 trillion and N2.27 trillion respectively.”
By 2025, Nigeria will be at 10% VAT. Whenever you have population growing faster than economic opportunities, governments will resort to tax to normalize disequilibrium in the economy. Nigeria has tough decisions ahead.
The proposed increase of the Value-Added Tax (VAT) rate from 5 to 7.5 per cent by the federal government is subject to the review and approval of the National Assembly, the Minister of Finance, Budget and National Planning, Zainab Ahmed, has said.
Also, the minister clarified that the increment will be to 7.5 per cent and not 7.2 per cent she announced on Wednesday at the end of the meeting of the Executive Council of the Federation in Abuja