What the increase in VAT should mean to you

Value Added Tax (VAT) is definitely the best-known tax in Nigeria. Apart from the fact that we find VAT on receipts given to us almost everywhere e.g at the mall, the cinemas, etc, the Federal Government has practically made Nigerians memorise everything about the proposed increase in VAT like some form of national anthem.  

We are thus very certain you know that almost everyone in your family knows, that people at the owambes you’ve been attending know and that all your connections on social media also know that the Federal Executive Council (FEC), has approved an increase in VAT rate from 5% to 7.5%. It is yet to be ratified by the National Assembly, but we should keep our fingers crossed however. Besides, the VAT Act has to be amended for the increase to take effect.

Do you know what this increase will mean for you and how it will impact your day to day activities?

WHAT IS VAT ALL ABOUT?

VAT is an indirect tax that you pay when you purchase goods and services. It is levied when there is Supply.

We all know from school that in a basic chain of Supply, there is the manufacturer, the wholesaler, the retailer and the final consumer. As VAT is levied on supply, the actual tax burden is shifted from one party to the next until the final consumer. Thus, when the manufacturer is supplied raw materials, manufacturer pays VAT. When manufacturer supplies finished goods to the wholesaler, wholesaler pays VAT. When the wholesaler supplies the goods to the retailer, retailer pays VAT. When the retailer supplies to the final consumer, the final consumer (aka you) pays VAT.

The only issue is that the law allows the manufacturer, wholesaler and the retailer to transfer their VAT burden to the final consumer so that the final consumer actually ends up paying the VAT of everyone in the chain of supply. (To understand how this happens, please see our Tax Video on how value added tax works – and our article on Value Added Tax)

RATE OF VAT VAT is currently levied at a flat rate of 5% and is administered by the Federal Inland Revenue Service (FIRS). The FEC has however approved a VAT increase to 7.5% and the proposed rate is not to take effect until the VAT Act is amended.