• Sat. Jul 13th, 2024


Apr 18, 2019

Recently discussions regarding the proposal to increase the Value Added Tax (VAT) rate currently at 5% have been trending and as usual, there has been opposition to this proposal. I suppose urgency to this proposal has been found as the fiscal authorities scamper in search of additional revenue sources to fund the recent approved increase on the Minimum Wage.

This proposal has been opposed by some very powerful voices which recently climaxed during the Bola Tinubu 67th birthday colloquium, which was held in Abuja on Thursday, March 28, 2019.  Bola Tinubu, during his remarks at the colloquium had cautioned the government not to dare increase the rate of Value Added Tax as he argued that it could be counterproductive as it would worsen the economic hardship in the land, as the purchasing power of the population would be further depressed as a result of the price inflation which is bound to follow such proposed increase.

Closely aligned with this observation is the fear that such an increase would affect capacity utilization negatively which will lead to further job losses making an already bad situation worse.

Not long after Peter Obi, the Vice Presidential candidate of the People’s Democratic Party (PDP) congratulated Tinubu for his caution to the government as he shared the view that no positive outcome should be expected from the proposed increase but instead tax rates should be relaxed to act as an incentive to investors.

He further argues that, ‘It’s extremely unrealistic for anybody to think of growing the economy of this country, and creating jobs just by increasing tax; it is a simplistic approach.’ But as would be explained subsequently, all this opposition is due to the fact that compatriots have a mindset that perceive VAT just like any other tax; which of course reflexively must be opposed but fortunately, as would soon be made amply clear, it is not.

The intention to increase the VAT from the current rate of 5 per cent has been on the cards right from its first outing in 1993 as a replacement to the extant Sales Tax when the initial proposal was a VAT rate of 10 per cent but was upon introduction negotiated down to the current 5 per cent.

An attempt was also made to increase this rate following a review of the Act in 2007 without success following wide spread opposition. But my take, up front regarding these remarks is that to a large extent, the opposition is populist and ill-informed and are not aligned with the received technical knowledge on this matter. We hope to expatiate and shed better light on this observation during the course of this discussion.

What really is Value Added Tax to ensure that we are all on the same page? VAT is a consumption tax which is a type of indirect tax which the final consumer of designated goods and services are obliged to bear. It contrasts with direct taxes such as the Personal Income Tax, Company tax, Petroleum Profit tax, Capital gains tax etc. This tax is administered by the Federal Inland Revenue Services which collects the receipts into a pool which is shared amongst the Federal Government, the State Governments and the Local governments respectively in the ration of 15, 50 and 35 per cent. The tax does not include all goods and services produced in the country.

Exported goods, medicine and Pharmaceutical products, products for kids, basic food items, Commercial vehicles and spare parts, books and educational materials, fertilizers, farming machines, agricultural products, transportation and equipment, Vet. Medicines, magazines and newspapers amongst others are all exempted from this tax. Therefore for shouting out loud, the application of this tax is selective and not across board as it is being made to appear and for justifiable reasons there is no reason the list of excluded items cannot be increased.


The proposal by FIRS is to increase the rate between 35 to 50 per cent that is an increase from the current 5 per cent to 6.75 and 7. 25%. For comparability purposes it is salutary to observe that  VAT rates in selected African countries are as follows; Ghana 15%, South Africa 15%, Egypt 14%, Rwanda 18%, Kenya 16%, Angola 10% Algeria 19%. Therefore, even if the proposed increase is allowed, the rate of VAT in Nigeria will still remain the lowest in the African Continent.

The imperatives of this proposal are anchored on the urgent need to diversify the revenue base of the country from the unwholesome situation whereby government revenue is dependent up to 70 per cent on the extractive sectors of the economy.

It must be noted here that the attempt to achieve this desired diversification of the economic base has been on the cards since the introduction of The Structural Adjustment Program in 1986 without any noticeable, never mind, desired progress. There is also the need to urgently find other revenue sources to commence the termination of the current practice whereby the country borrows to pay salaries and also in view of many funding gaps for meeting the requirements of other desirable social investments.

To my mind, that misses the point as the responsibility for the determination of the levels of remunerations in the country is domiciled with the National Salaries, incomes and wages Commission and the argument really is that we have an anomaly on our hands which we must seize the next opportunity to rectify.

In the literature, it has been argued that VAT increases are not known to lead to sustained inflationary pressure on the long run. This argument is not too difficult to rationalize as the increase is not borne by the manufacturer or producer but included as the cost of the goods and services, so, the final consumer is determined.

We recommend that this important observation be corroborated by the commissioning of an empirical study as this has been the main argument against increase in VAT rate. The proper administration of this tax historically often resulted in quantum increase in the revenue that accrues to the treasury at a level that might not be obtained from the proposed cut in levels of remunerations.

For instance in 2016, VAT accounted for additional revenue of two trillion Naira at the current rate and it is famed to be seamless to administer at minimal administrative costs. Quite unlike direct tax, this tax is difficult to evade. The only problem experientially is obtaining the cooperation of receiving agents to make prompt remittance of such proceeds to the treasury. VAT is a popular indirect tax which most common markets would insist on its existence as one of the preconditions for admitting any member country.

The expectation is that with the light which has now been shed on this problem through these discussions, as we attempted to reinforce the impression that VAT must be clearly distinguished from the direct taxes which most people are familiar with, particularly from the consideration of the fact that it is a tax which is selectively applied, the fact that the current rate in Nigeria at 5 per cent is probably the lowest when compared to any other country in the world, the argument that in the long run it is not inflationary, which we have asked to be further subjected to empirical investigation, and the urgent need for alternative revenue sources to argument what accrues to the treasury now to fund inadequately funded social sectors of the economy: Education and Health, the opposition to this proposal should be reconsidered even if one must admit that part of  the problem has been credibility gap which the fiscal authorities suffer as sufficient discipline has not been demonstrated in husbanding the resources that hitherto accrued to the treasury.