Increase in Value Added Tax VAT, A Blessing or A Burden?

Effective February 1, we would have crossed over from the so-called ‘longest month of the year’ into the ‘shortest month of the year’. Of course, January is not just seen as the longest month of the year by virtue of its 31 days (March, May, July, August, October and December also have the same number of days) but because of how time seems to run slowly in January due to the ‘recovery process’ from the high level of expenditure occasioned by the Christmas and New Year festivities.

In view of recent economic realities in the Nigerian space, it marks a much more significant point in the year. February 1, 2020 marks the implementation date of the 7.5 percent increase in value added taxes (VAT) as stated by the Finance Minister which springs from the Finance Act, 2019 signed by the President on January 13, 2020. One of the key reasons attributed to the 50 percent increase in VAT from 5 percent to 7.5 percent was the need for government to increase the amount of revenue generated through taxes in order to fund its projected expenditure as captured in the 2020 budget. Personally, if I could increase my revenue by any legal means possible, trust me I would.

Therefore, I have no argument against the government trying to increase revenue through taxes. However, I am of the school of thought of increasing the tax net rather than increasing the rate of taxes.

From a simple economic standpoint, an increase in the VAT will lead to an increase in the price of goods and services which will further increase the inflation rate (which already stands at over 11%). The rise in inflation rate will further lead to a reduction in the consumer purchasing power as VAT is borne by the final consumer. This reduction in consumption levels will have a negative effect on the standard of living of the average Nigerian. However, in a bid to cushion the burden of the VAT increase on low-income individuals and companies, the Finance Act 2019 has extended the list of goods and services exempted from VAT to include basic food items, locally manufactured sanitary towels, pads or tampons, services rendered by microfinance banks, tuition relating to nursery, primary, secondary and tertiary education. This is a positive initiative as it is a proactive measure in the Act.

In the medium or long term, the VAT increase could have a positive multiplier effect if the generated revenue is expended on capital projects which have future economic potential, job creation, increased economic output, increased food production etc. However, given the political situation and economic instability accompanied with corruption and mismanagement at various levels of government, it is not far-fetched to think that the generated revenue could be grossly mismanaged, thereby, leaving the average Nigerian to bear not only the burden of the VAT but also the economic implications of t implications of the VAT increase.

In conclusion, the implementation of the 7.5 percent increase in VAT is like a two-sided coin. If properly implemented and harnessed it could help to make funds available for developmental purposes that will accelerate economic growth. On the other hand, if mismanaged and loosely implemented it could be another one of many reforms whose potential to provide substantial economic drive is not maximized.

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1 Comment

  1. I agree with your submission regarding the increase in VAT. The bane of our problems in Nigeria is largely corruption and mismanagement. In all sane standards and in all other economies in world over, an increase in any tax class is seen as an harbinger of great developmental and capital projects. With such increase, the citizenry know with almost certainty the dividends that await them.

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