• Nigerian government approves 2.2% increase in VAT
  • Zainab Ahmed, Nigeria's Finance Minister, says the decision will be communicated to the National Assembly for consideration.
  • Business Insider SSA looks at how the new VAT regime will affect you

The Nigerian government has approved an increase in Value Added Tax (VAT) rate from 5% to 7.2% to expand fiscal revenue in the country. 

Zainab Ahmed, Nigeria's Finance Minister, Budget & National Planning stated this at the end of the weekly Federal Executive Council (FEC) on Wednesday, September 11th.

This is important because the federal government only retains 15% of the VAT, 85% is actually for the states and local government and the state need additional revenue to be able to meet the obligations of the minimum wage.

“This process involves extensive consultations that need to be made across the country at various levels and also it will involve the review of the VAT Act. So, it is not going to be implemented immediately until the Act is reviewed,” the Minister said.

Ahmed said the decision will be communicated to the National Assembly for consideration alongside the 2020 Appropriation Bill.

What’s VAT

In Nigeria, Value Added Tax (VAT) is payable on goods and services consumed by any person, whether government agencies, business organisation or individuals. 

According to the Value Added Tax Act Cap V1 LFN 2004 (as amended), some of the items excluded from VAT include medical and pharmaceutical raw materials and products, basic food items, baby products, commercial vehicles and spare parts, fertiliser, diplomatic goods and others.

Here's how the new VAT regime will affect you

  • This will have a large effect on the price of goods and services not included in the VAT exception list. This, in turn, affects Nigeria’s inflation rate.
  • VAT helps to expand government's revenue and take care of certain infrastructure and economic development programmes, if utilised effectively.
  • It will hurt workers – if take-home pay remains constant. This will affect the purchasing power and impoverished person’s income, mostly the poor.
  • It will affect market operations, mostly the formal sector, an increase will discourage consumption (People will tend to buy fewer items to save cost). This will hurt businesses and affect employees.

Robert Omotunde, Head, Investment Research at Afrinvest, said the country should do more at VAT collections instead of raising the VAT rate.

“Nigerian economy is consumption-driven and as at 2018, 73% of Nigeria's GDP was made up of consumption expenditure.

"If government tax this at 5% VAT, Nigeria should have earned N4.7 trillion in VAT but the country got N1.2 trillion instead, he said during a radio programme on Thursday.

International organisations such as the World Bank and IMF have consistently advised Nigeria to expand its tax net and channel the funds to developmental projects and budget funding.

In its last report, Moody's Investors Service said the Nigerian economy will continue to expose to shocks because the government has been unable to expand its tax net and non-oil revenue base.