Implications of the VAT increase in Nigeria.

Economic growth and development of any country depends largely on its revenue generation, usually taxation is the major source of this revenue.

VAT is a consumption tax that is relatively easy to administer and difficult to evade. Click here to find out more about VAT and the other taxes in Nigeria.

While the performance of Value Added Tax (VAT) as a source of revenue in Nigeria is encouraging, it remains difficult to systematically assess the impact of VAT on the economy.

It was hoped that Value Added Tax introduction will not only help boost revenue to the government, but also help boost economic growth.

However, many years after the introduction of Value Added Tax in Nigeria, economic growth is still below expectation, this in turn has raised questions about the effectiveness of VAT in promoting economic growth in Nigeria.

Recently, the Federal Executive Council (FEC) approved the increase in Value Added Tax from 5% to 7.2% which is proposed to be implemented come 2020. The motive behind this does seem questionable considering the evidence of its lack of effectiveness in achieving its goal of facilitating economic growth.

Below are some of the perceived effects of this increment:

To the Companies and Business Owners: The 2.2% increase will lead to an increase in the cost of production and provision of goods and services, especially for those involved in ventures that require multiple stages of production. This is due to the fact that they will encounter costs in which VAT will be charged, at multiple stages of their production process.

To the Consumers: consumers will typically wind up paying higher prices with the 2.2% increase in VAT. While the VAT theoretically spreads the burden of tax on the added value of a good as it moves through the supply chain, from raw material to final product, the reality is that these increased costs are typically passed along to the consumer. In Lagos state alone, restaurants are required by law to charge VAT and LSCT(Lagos State Consumption Tax), therefore consumers will now be charged 12.2% for a meal.

Even at that,the impact will still be felt less by the wealthy and shouldered more heavily by the low income households, who spend a larger percentage of their income on necessities. In fact, low income earners/consumers would pay a much higher proportion of their earnings in taxes with this VAT increase.

To the Government: While VAT is simple to maintain, it is costly to implement. In Nigeria currently, the government is losing millions in evasion already. Statistics show that currently out of every 10 SMEs, only 2 comply with tax laws. Therefore, an increase will most likely have an even more adverse effect on this statistic.

Even with the notable adverse effects of the increment, unfortunately, the tax system is a “necessary evil that has come to stay”.

Therefore below are some of the possible ways to alleviate these effects:

For the Consumers: Burden of tax can be reduced to an extent if the government excludes certain necessary household goods or foodstuffs from the Value added tax(VAT), or provides rebates or credits to low income citizens to offset the tax’s effects.

For the Government: Increased government transparency on projects executed using public funds. This may incentivize companies and business owners to comply with the VAT laws.

For the Companies and Business owners: Businesses currently evading VAT, should introduce VAT to their prices and begin remittance as soon as possible at the current percentage rate. So as to cushion the effect that the 2.2% increase in VAT will have on their prices.

Written by

Nnenna Ugwu (Junior Account Manager) MASAL Consultants

We offer boutique financial services, such as: book-keeping,costing/pricing strategies & business/financial workshops etc...to entrepreneurs & SMEs.

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