VAT overhaul
The presidential committee on fiscal policy and tax reforms has proposed reforms to Nigeria’s Value-Added Tax (VAT) system. These reforms…
The presidential committee on fiscal policy and tax reforms has proposed reforms to Nigeria’s Value-Added Tax (VAT) system. These reforms aim to enable businesses to claim input VAT, remove VAT from essential goods like food, education, and healthcare, and unify consumption taxes into a single VAT. Additionally, the plan suggests removing VAT on exported services and intellectual property, raising the exemption threshold for small businesses, and streamlining the VAT refund process. Notably, a proposed increase in the VAT rate on non-exempt items is proposed to prevent a substantial revenue decline.
Tax is a social contract between the government and the citizens. Citizens who trust the government will be motivated to pay more taxes. Nigeria increased its standard VAT rate from 5% to 7.5% in 2020. Currently, it is the lowest in Africa, and raising this rate presents a clear opportunity for improving Nigeria’s low tax-to-GDP ratio, which stands at 11%, compared to the 16.5% average for African Countries. Morocco and Cameroon have the highest VAT rates at 20% and 19.25%, respectively, while Ghana and South Africa share the same rate at 15%. The proposed reform in Nigeria is positive, as it helps to reduce unfair treatment. Businesses in several sectors in Nigeria lament the burden of multiple taxes, so the Taiwo Oyedele committee’s move to streamline taxes and end tax multiplicity is a move in the right direction. However, despite Nigeria’s seemingly low tax rates, there is widespread opacity, extortion, and diversion of funds into private hands, highlighting significant shortcomings in the country’s tax system. In light of the already high inflationary environment, raising the VAT rate could compound price hikes, exacerbating inflation. While acknowledging the necessity of other measures, we advocate for postponing tax rate increases until inflation is mitigated. Strategic policy coordination is required to ensure that the government’s actions are not interpreted as brash. Nigeria must address extant economic issues to meet the fundamental conditions of a sound tax system, including fairness, adequacy, simplicity, transparency, and administrative efficiency.