Uproar on VAT increase, a misplaced priority?

Uproar on VAT increase a misplaced priority?

On the 11th of September, 2019, the FEC approved the increase of the Value Added Tax rate. From the previous 5% to 7.2% (an increase of 44%). This has resulted in quite the uproar by the populace; however, a closer look at this and a better understanding of the implications will most likely incite a different reaction. So let’s examine this with an “Open Mind”.

What is VAT?

A value-added tax (VAT) is a consumption tax placed on a product. Whenever value is added at each stage of the supply chain. This includes; from production to the point of sale.

Bearing at heart that the previous rate of 5% VAT for Nigeria is one of the lowest in the world. 

For a government that has increasingly financed its fiscal deficit from borrowings, there is no doubt that it needs more innovative approaches to scaling up its revenue capacities to meet its growing funding commitments. 

So, increasing this VAT is a substantial input to offset the country’s future borrowings. as well as FG obligation of the increase in the minimum wage. The FG is making this move, however; not only to recuperate on the new minimum wage bill that was passed recently. It is important to recognize this is a means for the federal government to diversify the flow of income from the sole crude oil revenue. 

The New VAT structure:

The new VAT is structured to be divided more to the favor of the states and government. The federal government will be on the receiving end of 15% of the VAT while the other 85% will be diverted to state and local government.

In the stead of focusing on the increase of the VAT, what Nigeria and it’s citizens should focus on are:

  1. A more reliable way of collecting/retrieving tax from its citizens; hundreds of businesses find it quite easy to elude the payment tax. For instance, in a statement by Robert Omotunde, Head, Investment Research at Afrinvest. He said the country should do more at VAT collections instead of raising the VAT rate. And here’s why, If government taxes at 5% VAT, Nigeria should have earned N4.7 trillion in VAT but the country got N1.2 trillion. The implication of this is; even when the rate is increased, the “Leakages” will be persistent and continue into the new rate without any check policy in place
  2. Better use of the revenue on building the infrastructure of the country: several countries with very little natural resources but are able to survive by diversifying their revenue using taxes as the major chunk of the development of the economy. Hence; Nigeria would do well to gain more, from the development of the country’s infrastructure with the contribution of its citizens.

 



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