FEC proposes increase of VAT rate from 5 percent to 7.2 percent
Various commentators had expressed concerns about raising VAT rate in Nigeria, stating that a VAT hike would exacerbate the difficult macroeconomic conditions in the country.
Minister of Finance, Budget and National Planning, Zainab Ahmed, has announced the Federal Government's proposal to increase the rate of Value Added Tax (VAT) in Nigeria from 5 percent to 7.2 percent. She disclosed this while speaking with journalists after yesterday's Federal Executive Council (FEC) meeting in Abuja.
Earlier this year, the minister had said the government was mulling over a plan to increase VAT as part of its Strategic Revenue Growth Initiative (SRGI) introduced in January. The government had unveiled the SRGI as a sustainable revenue generation mechanism in various sectors of the economy. She said implementation of the initiative would significantly boost the government’s revenue outlook in the months and years ahead.
Former Minister of Budget and National Planning, Senator Udoma Udo Udoma, and Executive Chairman of the Federal Inland Revenue Service (FIRS), Babatunde Fowler, had also disclosed the proposal to increase VAT by 50 percent before the end of the year. The officials said the VAT increase was to enable the government fund the new minimum wage of N30,000.
The government also argued that Nigeria’s 5 percent VAT is too low, compared to many other countries, hence Nigeria’s low ratio of VAT-revenue-to-GDP. But following a public outcry, the government appeared to have suspended the idea of the VAT increase until yesterday's announcement.
The minister, however, stated that the increase will only take effect after the VAT Act is amended by the National Assembly and after concluding extensive consultations across the country at various levels.
“The Council has agreed that we start the process towards the increase of the VAT rate. We are proposing and Council has agreed to increase the VAT rate from five percent to 7.2 percent," Zainab Ahmed said. "Our projection is to finish consultations early enough so that it takes effect in 2020.”
According to Investopedia, VAT is a "consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale." In Nigeria, state governments currently receive the highest share of VAT collection – 50%. The Federal Government gets 15%, while local governments share 35%.
Based on the draft document for the 2020 budget, the projected revenue into the federation account for the year is N7.5 trillion, and N2.09 trillion of VAT is expected to add to the revenue pool to be shared by the three tiers of government. Based on the applicable revenue sharing formulas, the finance minister said the federal government will receive “proposed aggregate of N4.26 trillion from the federal account and the VAT pool."
In the wake of the earlier disclosures, various commentators had expressed concerns about raising VAT rate in Nigeria, stating that a VAT hike would exacerbate the difficult macroeconomic conditions in the country.
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