The Federal Government recently announced a proposed increase in Value Added Tax (VAT) from 5% to 7.5%. Minister of Finance, Budget and National Planning, Zainab Ahmed, who announced the decision at the end of the Federal Executive Council (FEC) meeting said the sub-national governments in particular would need to fund the new minimum wage with the extra income from VAT. She emphasised that the increment was important because the federal government only retains 15 per cent of the VAT while 85 per cent is actually for the states and local governments, adding that the states need additional revenue to be able to meet the obligations of the minimum wage.
Beyond this, the government rationalised the proposed increase on the basis that it needs to raise revenue and also be at par with continental standards as Nigeria currently charges the lowest VAT in the whole of Africa. According to the minister, VAT revenue will increase to N2.09 trillion in 2020 when the new regime comes into force. “The Federal Government will be receiving proposed aggregate of N4.26 trillion from the Federation Account and the VAT pool. The states and local governments are expected to receive N3.04 trillion and N2.27 trillion respectively,” the minister stated.While we agree with the government that it needs money to run its business and tax is one way it can generate such funds, like governments all over the world, increasing VAT is definitely not the way to go.
What Nigeria needs at this time, as we have stated before on this page is holistic tax reforms, not a VAT increase that puts pressure on Nigerians who are already battling the effects of low income.As it stands, the implementation of the new N30,000 minimum wage, which many of the states that were unable to pay the N18,000 minimum wage have expressed unwillingness and or inability to pay, is yet to begin. Understandably, this money will come in handy for the government as it grapples with the increase in personnel cost occasioned by the minimum wage increase.Be that as it may, in all of these, the government has failed to take into consideration the impact of tax increase on consumer behaviour as shown by a world bank report which showed that more than any other form of indirect tax, VAT potentially distorts behaviour patterns of consumers and may not be very efficient in generating income.
While the government is quick to draw comparison from other countries where Vat is higher, it has failed to observe that in those countries, there are existing social services which are also efficient. An increase in VAT at this time will increase inflation which was 11.37 per cent in 2019 Q1 and erode whatever benefits to be accrued from the minimum wage increase, as VAT affects consumer goods, including food. Rather than a blanket tax increase that affects all of the 94 million poor people in the country, the government may consider increasing tax on luxury goods as proposed by former finance minister, Kemi Adeosun.
It is instructive that the increase in VAT would not take effect until the Act is amended by the National Assembly. While we await National Assembly’s action on the matter, we propose that the federal government widens the tax net to ensure that more people pay tax.
A situation where only 14 million of the 69 million taxable Nigerians pay their taxes is unacceptable returns annually. Tax evasion, which Nigeria’s wealthy people are guilty of is a serious crime and offenders must be punished in accordance with extant laws. Also, the government needs to work on reducing the cost of governance as we have often observed that there is a lot of wastage and duplication in government.