The National Assembly is currently considering a new bill proposing a significant increase in the Value-Added Tax (VAT) rate from 7.5% to 10% by 2025.
The bill, an executive initiative, has already been seen by several stakeholders, and it outlines a phased plan to increase the VAT rate, with further hikes set for the following years. According to the The Cable which first reported the story, the VAT will rise to 12.5% by 2026 and remain at that level through 2029. By 2030 and beyond, the VAT is expected to jump to 15%.
This proposed increase is generating significant debate among economic experts, political leaders, and the general public, as many believe it could have profound consequences for the Nigerian economy.
Understanding VAT: How It Affects Everyday Life
Value-Added Tax (VAT) is a consumption tax levied on goods and services at each stage of the production and distribution process. It is collected at the point where value is added to a product, whether during manufacturing, distribution, or retail.
Currently, Nigerians pay a 7.5% VAT rate on most goods and services, which was itself an increase from the previous 5% rate, implemented by the government in early 2020. The VAT increase, while providing the government with additional revenue, also raised the cost of living for many Nigerians.
If the National Assembly’s bill is passed, VAT will rise to 10% in 2025, leading to further price increases across a wide range of products and services. In a country where many already struggle with high inflation and economic challenges, this increase could have a considerable impact.
Mixed Reactions to the Proposed VAT Increase
The proposal to raise VAT has triggered mixed reactions across the country.
Some, like Taiwo Oyedele, Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, have been vocal in their support. In a statement earlier this year, Oyedele argued that Nigeria needs to increase VAT to match the rates of other countries in the region. According to him, raising VAT is necessary to provide the government with the revenue it needs to invest in infrastructure and social services.
However, the proposed tax hike has also faced strong opposition. Former Vice-President Atiku Abubakar expressed concern over the impact of the VAT increase on ordinary Nigerians. In a statement on September 8, 2024, Atiku described the proposed hike as “regressive and punitive,” arguing that it will disproportionately affect the poor, who already bear the brunt of inflation and economic hardship.
“The government should focus on policies that uplift the masses, not those that impose more financial burden,” Atiku said, urging the National Assembly to reconsider the proposal.
Wale Edun, the Minister of Finance, sought to clarify the government’s position, stating that the VAT rate had remained unchanged for several months, and the proposed increases are part of long-term fiscal reforms aimed at boosting the country’s economic sustainability. Edun stressed that the government is exploring ways to balance its revenue needs while minimizing the impact on citizens.
IMF Recommendations and Global Comparisons
The proposal to raise VAT in Nigeria also aligns with recommendations from international bodies like the International Monetary Fund (IMF). In February 2021, the IMF advised the Nigerian government to increase the VAT rate to 10% by 2022 to help stabilize public finances.
Many countries in sub-Saharan Africa have higher VAT rates compared to Nigeria. In Ghana, the VAT rate is 12.5%, while in South Africa, it stands at 15%. Nigeria’s 7.5% VAT rate is relatively low, and the government argues that raising it would bring the country more in line with its regional counterparts.
However, critics argue that comparing Nigeria’s VAT rate to those of other countries ignores the specific challenges that Nigerians face, including higher poverty levels and lower purchasing power.
Relief for Businesses: Corporate Income Tax to Be Reduced
Alongside the proposed VAT increase, the bill also introduces provisions to reduce the Corporate Income Tax (CIT), a move aimed at encouraging business growth and attracting investment.
According to the bill, the CIT will be reduced from the current 30% to 27.5% by 2025, with a further cut to 25% by 2026. This reduction is seen as a way to create a more business-friendly environment in Nigeria, particularly for large corporations and multinational companies.
Small companies with a turnover of less than N20 million will continue to be exempted from paying CIT, according to the bill, providing relief to smaller businesses.
Oyedele, the Chairman of the Presidential Fiscal Policy Committee, had earlier this year recommended reducing the CIT rate by 5% to encourage businesses and stimulate economic growth. He emphasized that a lower tax burden on companies would allow them to reinvest in their businesses, hire more workers, and contribute to the country’s economic development.
Concerns About the Impact on Low-Income Nigerians
While businesses may benefit from the CIT reduction, many ordinary Nigerians remain concerned about the potential impact of the VAT hike.
With the cost of living already high, the prospect of an additional increase in the price of goods and services is worrying for many households. Food prices, transport fares, and even basic services like electricity and water bills could see a significant increase if the VAT rate goes up to 10%, let alone the projected 15% by 2030.
Many economists also point out that increasing VAT during a time of economic uncertainty could dampen consumer spending, which would have a ripple effect on businesses and the broader economy.