My Perspective On Proposed Increase In VAT Rate

By Abubakar Sidiq Usman

I like to offer my opinion on the proposed Value Added Tax (VAT) increase and the controversies it has generated. I do not claim authority on this issue. It is just my opinion based on the amount of information available to me.

For those who have been conversant with our budgets, you would have noticed that there are always deficit in the budgeted amount compared to the expected revenue. This means that government has been unable to make as much money as it wants to spend.

The only way it has tried to close this gap is through borrowings, which most of us have condemned.

The fact however remains that government must spend money if we must grow our economy, but where will the money come from? Our oil revenue and the loans are not enough. So what do you do?

There are three options available to government: 1. Continue on the borrowing spree which in most cases have really not closed the gap. 2 Remove the subsidy paid on petrol which gulps a large amount of our bduget and revenue. 3 Find a means of getting us to pay more tax.

Although, borrowing will still form part of our revenue source for the 2020 fiscal year, it will be reduced compared to the previous years. So I think the government is trying to move a little bit away from this.

The other option is to remove fuel subsidy and channel the money into the provision of infrastructure, but removal of subsidy at this point in time will cause an astronomical increase in the price of petrol and that will affect virtually everything and every one.

Removal of fuel subsidy at this point means we will be paying higher for everything, from transportation to food and cost of services.

The third option is the generation of revenue through tax and here the govt decided to use VAT proposing an increase from 5% to 7.2%

None of the three options are without consequences, but it doesn’t appear like we have any option other than choosing one and to the best of my knowledge, the government has chosen the one with the least consequence which is the proposed increase in VAT.

An increase in VAT will affect everyone no doubt, but the impact will not be as much as removing fuel subsidy for instance. The impact will be based on your level of consumption. If you are a rich person, you pay more VAT than the man who is not.

Because of the peculiar nature of our system, some things that should ordinarily be VATable are not. If they do, they are in most cases least captured. Let me give one or two examples.

When NBC produces Eva water and sells to the distributor and may be the wholesaler, VAT would have been added to the cost of production. Aftewards, Shoprite and Iya Risika goes to the wholesaler to buy the water for resale to the consumer.

If you go to Shoprite to purchase a bottle of this water, shoprite would have calculated it’s own VAT on the final amount it will sell it to you. But Iya Risika who runs a buka down the road will not necessarily calculate VAT on the bottled water for you. Why?

Shoprite operates in the formal sector. They are captured in the National GDP, so they can hardly avoid paying tax. Iya Risika operates in the informal sector which are largely not captured in the GDP. Govt may not even know she exists. How will she be compelled to pay tax?

Unfortunately, the informal sector which Iya Risika belongs to is the largest sector of the economy despite the fact that it is not formally captured in our GDP. It is in this sector that you have the highest population and the poorest of the population.

So while the few rich ones can afford to buy Eva water from Shoprite at say N100 and are made to pay VAT for it, the very many poor who patronizes Iya Risika and pays N50 for the same water you buy at N100 in Shoprite May not be paying VAT for the water.

So in essence, the rich ones who will not patronize Iya Risika pay more for the bottled water than the poor ones while the poor ones who patronizes her pay less.

Same thing applies to other forms of goods we consume. The more luxurious the good are or the places you want to buy them are, the more you are made to pay for them and this “more” is what VAT has already being built into.

So while any increase in VAT cuts across everyone, the impact is felt more by the rich than would be felt by the poor.

This is why when @Ayourb said the poor are not affected by VAT, he is not completely wrong. The only thing he should have added is “significantly.” I mean he should have said that the poor are not significantly affected as much as the rich would be affected.
So again, why an increase in VAT would definitely affect everyone, whether significantly or not, I think it is the lesser of all the options available to govetnment that would not result in more hardship for the people.

I can’t imagine the impact we will have to contend with if the govt decides to remove subsidy on fuel. We will have to eventually, but this is not the time.

Let us not forget that the chunk of the money raised from VAT goes to the state and local goverments. What goes to the federal is a meager 15 percent and with the recent increase in minimum wage, money will have to be generated to be able to pay this increase. Where will it come from?

These are my perspectives. Constructive engagements are welcome.

Ok, there is a fourth option of generating revenue many contributors have identified.


I think this will go a long way too.

Usman is Special Assistant (New Media) to the President of the Senate

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