Experts Warn Ahead of Another VAT Rate Increase

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After amassing a total of N3. 64 trillion in 2023 from value added tax, the government was emboldened to project that it can actually increase the amount to N5 trillion in 2024 at the current rate of 7.5 percent, and even daring to dream that that figure could be tripped if it increases the rate above 7.5 percent.

However experts are warning that the government needs to tread with caution as further increase could be counter-productive.

The Fiscal Policy and Tax Reform Committee led by Mr. Taiwo Oyedele, in its 2024 National Tax Policy  (NTP) proposal submitted 

to the government, proposed among other things, an increase in the rate charged as value added tax to generate more revenue for the government.

Earlier in March this year, an International business research firm, Economist Intelligence Unit (EIU), in its Country Report, predicted that the federal government could raise the Value Added Tax (VAT) to 15 per cent from the current 7.5 percent by 2027 to enable it fund its fiscal deficit and debt service obligations.

Nigeria is currently weighed down by high debt burden amounting to 

N97. 34 trillion which is even expected to rise to over N107.38 trillion by the end of 2024 following the approval of fresh borrowings for the Federal Government and new securitisation of the Central Bank of Nigeria’s N7.3 trillion Ways and Means advances.

The country is also facing a heavy debt service obligations which the international Monetary Fund  (IMF) says is gulping 56 percent of  Nigeria’s tax revenue.

All these considered, makes it imperative for the government to generate as much revenue as it can. However, some economists believe that the proposed increase could be an additional burden on investors and businesses already grappling with the challenge of multiple taxation and  impact adversely on profit margins, investments growth, consumer purchasing power and competitiveness. 

According to them, whilst it is ostensibly aimed at increasing the revenue portfolio of government, it will impose significant burden on the private sector and on the average Nigerian, noting that the effect on market operations, especially the informal sector, will also be high.

Professor Godwin Oyedokun of Lead City University,  Ibadan, in an interview said raising the VAT rate in Nigeria’s new national tax policy is a complex issue with both potential benefits and drawbacks, especially considering the current inflationary environment.

According to him, “Though a higher VAT rate would generate more tax revenue for the government which could be used to fund social programmes, infrastructure development, and other public services,

businesses are likely to pass on the increased VAT costs to consumers through higher prices, potentially fueling inflation. This would disproportionately hurt low-income earners who spend a larger portion of their income on basic necessities.”

He said that rather than increasing the rate, the government could 

focus on improving VAT collection efficiency to capture a larger share of the existing tax base. 

“The government can also  expand the range of goods and services subject to VAT. That could generate additional revenue without necessarily increasing the rate,” he said, adding that the government could identify areas where spending can be reduced, freeing up resources for essential services.

“The Nigerian government needs to carefully weigh the potential benefits and drawbacks, particularly the impact on inflation, before making a final decision,” he noted.

In her contribution,  Dr. (Mrs.) Titilayo Fowokan, a council member of the Chartered Institute of Taxation of Nigeria  (CITN), said the increase in VAT is long overdue, but there will always be resistance in the midst of economic instability, which has worsened with the exchange rate volatility and removal of fuel subsidy. 

In her words, “These two  economic issues have translated into the ripple effect of the increase in the cost of goods and services and escalated inflation in all areas, including food inflation.  

“Though the increase has been proposed in the 2024 National Tax Policy, government needs to look at other fiscal policy interventions to cushion the effect of the increase in VAT that finds itself into the cost of consumption and doing business in Nigeria. Ease of doing business index could be impacted by this proposed increase unless the economic situation of the country improves.”

For Comrade Tommy Okon, National Vice President, Trade Union Congress  (TUC), no sane government will continue to introduce economic policies that are impoverishing the masses. 

“As we speak, we are yet to come out of the fuel subsidy removal and electricity tariff,” he said. 

“Today, the government is planning to raise the Vat rate. This amounts to economic and policy enslavement. Nigerian problems cannot be solved overnight. The government should know that the people must survive first, else there’s no moral justification for governance!”

 

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