On 11 September 2019, the Federal Executive Council (FEC) approved an increase in Value Added Tax (VAT) rate from 5% to 7.2%. This was communicated via a twitter update by the Federal Ministry of Finance and the Special Assistant to the President on Digital and New Media.
According to the twitter update, the increased rate will not be implemented immediately as effecting the increase would involve extensive consultations. Furthermore, the VAT Act Cap V1 LFN 2004 would have to be reviewed before the increased rate would become effective.
Implications
The approval of the new rate is not surprising given that the intention of the government has been to bring Nigeria's VAT rate in line with other comparable economies with higher rates. In addition to this, VAT is an indirect form of tax, which is relatively easier to collect when compared to other direct income taxes and is a good avenue for generating high revenue for the government because of its potential to capture large number of persons who consume goods and services.
However, it is important for the government to address current issues that surround the administration of VAT in Nigeria in order to encourage voluntary compliance of taxpayers before increasing the VAT rate. For example, the government has to put in place structures to plug revenue leakages and ensure transparency in the appropriation of VAT funds as this would largely help boost taxpayers' confidence in the system. In addition to this, other issues such as the full recoverability of input VAT on services and VAT-exempt items should be adequately addressed as a number of Nigerian businesses are currently unable to recover their input VAT on services and such exempt items. Thus, an increase in VAT rate without adequate recoverability mechanism may simply increase the VAT burden of already compliant taxpayers.
Furthermore, the government should ensure a smooth transition between the current 5% VAT regime and the proposed 7.2% VAT regime so that businesses would not be disrupted by varying VAT rates on input and output VAT. To this end, the government should communicate the commencement date of the new rate well ahead of its implementation date for businesses to have sufficient time to tidy their affairs and manage possible negative impacts that may arise from the operation of the new rate effectively.
We expect the proposed amendment to the VAT rate to be transmitted to the National Assembly for deliberation and approval in the coming months after which the new rate should become fully effective.
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