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Monday, October 26, 2020

Nigerian Federal Government Approves an Increase in VAT

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The Nigerian minister of finance, Zainab Ahmed, has recently announced the approval of the value-added tax (VAT) increase. This announcement was made during a briefing with journalists shortly after the FCC meeting presided over by the president of the Federal Republic of Nigeria President Muhammadu Buhari.

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Mrs Ahmed stated that the VAT had been increased from the present 5 per cent to 7.2 per cent.

“We also reported to council and council has agreed that we start the process towards the increase of the VAT rate. We are proposing, and the council has agreed to increase the VAT rate from 5 per cent to 7.2 per cent,” she stated.

During Mrs Ahmed’s statement, an increase in revenue accruable to the state governments was listed as one of the reasons for the VAT increase.

Adding that it is vital the increase happens because the Nigerian FG only retains precisely 15% of the VAT while the remaining 85% goes to the state and local governments. Adding that the state governments need additional revenues if they must meet the obligations of the minimum wage.

However, the minister pointed out that the implementation of the increase will not be immediate as the current law will need to be amended.

Mrs Hamed said that the process is one that involves extensive consultations that must be made across the country at different levels, as well as a review of the VAT act. For that reason, the new increase will not be implemented until the Act is reviewed.

She said the new increase in value-added tax was also included in the revenue projection for the year 2020.

“Following these assumptions, the total revenue estimate in the sum of N7.5 trillion for the year 2020 and N2.09 trillion that will be accruing to the federation account and the VAT, respectively.  There will, of course, be the distribution to the three tiers of government based on the statutory revenue sharing formula as defined in the constitution and to this effect, it means the federal government will be receiving proposed aggregate of N4.26 trillion from the federal account and the VAT pool, while the states and the local government are expected to receive N3.04 trillion and N2.27 trillion respectively,” the minister for finance said.

She went further to speak on the government’s planned expenditure for the coming year. Pointing out that about 2.45 trillion Naira has been proposed to service debts.

“The expenditure for the year 2020 is in the total sum of N10.07 trillion. This is three per cent less than the approved expenditure in the 2019 budget that has been passed into law.

The total expenditure includes statutory transfers, non-debt recurrent expenditure such as salaries and pensions and also the Social Intervention Programme.

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The 2020 budget has a debt service estimated at N2.45 trillion and a sinking fund to retire maturing obligations issued to local contractors and other creditors in the sum of N296 billion.

So there is a total sum of N3.43 trillion that is provided for personnel and pension cost inclusive of N218 billion for the top 19 government-owned enterprises in the country.

This represents an increase of N453 billion over the 2019 approved budgetary expenditure. This also implies a 40 per cent of this recurrent expenditure to the projected revenue.”

Mrs Hamed mentioned that the budget deficit is projected at 2.15 trillion Naira in the coming year, which is lower than what was approved for the present year budget, which was 2.47 trillion Naira.

“Let me state that these projections include drawdowns on project tied loans, and these represent 1.51 per cent of estimated gross domestic product (GDP). This is well below what is allowed by the Fiscal Responsibility Act of 2007, which is still put at 3 per cent. I want to add that council approved our presentation, and so the next phase for us is to consult with the National Assembly and then the Medium Term Expenditure Framework (MTEF) to the National Assembly for their view and subsequent approval,” The minister added.

It is expected that the 2020 budget proposal will be submitted to the National assembly later this month when they reconvene from their recess.

The Senate president, Mr Hamed Lawan, had also stated that the national assembly would pass the budget before the Year runs out if the budget is received early from the executive.

We would like to know what you think about the increase in VAT and what effect you think it would have on the Nigerian economy, please do not hesitate to comment below.

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