FG’s Proposed VAT Rate Increase: What You Need to Know

Introduction:
The Nigerian presidency, through its Committee on Fiscal Policy and Tax Reforms, has recently revealed a new plan to increase the value-added tax (VAT) rate in the country. This proposal comes as part of efforts to enhance revenue generation and ensure a more equitable distribution of tax revenue among the federal, state, and local governments. In this article, we will delve into the details of this fresh plan and its potential implications.

Presidency’s Committee on Fiscal Policy and Tax Reforms’ Proposal:
The Chairman of the Committee, Taiwo Oyedele, announced that there is a pressing need to raise the current VAT rate of 7.5 percent. He also disclosed that the committee is considering revising the revenue-sharing formula for VAT among the different tiers of government. Currently, the federal government receives 15 percent of the tax revenue, states share 50 percent, and local governments take the remaining 35 percent. However, Oyedele proposed reducing the federal government’s share to 10 percent while increasing the states’ share to 90 percent, which will be shared with local governments.

Reasoning Behind the Proposal:
Oyedele explained that the committee suggested these adjustments because VAT is fundamentally a tax of the states. He highlighted that the origin of VAT in Nigeria dates back to 1993 when the sales tax was replaced by VAT. The federal government was allocated 15 percent of VAT revenue as the cost of collection, a figure that the committee considers excessive. By proposing a reduction in the federal government’s share and an increase in the states’ and local governments’ share, the committee aims to ensure a fairer distribution of VAT revenue.

Impact on Consumers and Businesses:
The tax expert emphasized that the burden of VAT should fall on the ultimate consumer. To mitigate the impact on the poor and small businesses, the committee plans to exempt basic necessities such as food, education, medical services, and accommodation from VAT. Oyedele assured that businesses will not pass on the increased VAT rate to consumers, as they have agreed not to raise product prices. This collaborative approach with the private sector aims to maintain price stability while implementing the proposed VAT reforms.

Ensuring Effectiveness and Efficiency:
Oyedele also stressed the importance of a centralized collection system to prevent chaos and ensure smooth implementation of the revised VAT rate. By avoiding exclusive custodianship of VAT collections by individual states, the committee seeks to streamline the tax collection process and prevent discrepancies in revenue allocation. This consolidation of VAT collections will contribute to improved accountability and transparency in the tax system.

In conclusion, the presidency’s fresh plan to increase the VAT rate and adjust the revenue-sharing formula reflects a commitment to enhancing revenue generation and promoting equitable distribution among various levels of government. By proposing these reforms, the committee aims to create a more efficient and effective VAT system that aligns with international best practices. As these proposals are deliberated further, it will be crucial to assess their potential impact on consumers, businesses, and the overall economy.