The Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, Taiwo Oyedele has reinstated his intention that the collection of VAT should be harmonized.
Nigeria’s VAT rate was increased in February 2020 from 5 percent to 7.5 percent which it is currently at.
Mr Taiwo had recommended some changes to the current VAT rate, including increasing the state and local share of the VAT revenue to 90% combined which will reduce the federal government’s share.
According to section 40 of the VAT Act, the federal government gets 15 percent of the tax revenue, states share 50 percent, and local governments share the balance of 35 percent
The committee proposed full input VAT credit for businesses to reduce their cost of doing business and minimise the strain on their cash flows.
The committee proposed removing VAT on an expanded list of basic food, educational, and healthcare items to protect the poor among others.
According to Taiwo, Nigeria‘s VAT system places a huge burden on businesses as they are not allowed to claim the input VAT incurred on services and assets. In fact, Some items, which constitute basic consumptions (food, education, and healthcare) are liable to VAT rather than being exempt or zero-rated.
In Nigeria, many small businesses have to contend with VAT compliance in view of the existing low VAT exemption threshold for small businesses. Many States charge other forms of consumption taxes in addition to VAT thereby creating multiplicity of taxes. Export of services and intellectual property bear VAT rather than being zero-rated to promote exports.
The committee proposed certain reforms:
A full input VAT credit for businesses to reduce their cost of doing business and minimise the strain on their cash flows, remove VAT on an expanded list of basic food, educational and healthcare items to protect the poor.
They also proposed the harmonisation of all consumption taxes into one (VAT only) which will bring about reduced administrative burden and Increased efficiency in the collection of tax. There is also the recommendation for the adjustment in the revenue sharing formula in favour of states to address multiplicity of taxes. Also remove VAT on export of service and intellectual property to promote non-oil exports.
On the table before the federal government is to Increase the threshold for VAT exemption for small businesses which will reduce compliance burden and also enhance the VAT refund process to reduce the strain on working capital of businesses, introduce VAT fiscalisation and electronic invoicing to curb evasion which makes honest businesses uncompetitive.
There should be consequential upward adjustment to the VAT rate on items not exempted to avoid a significant drop in revenue.
The proposed adjustments are designed to protect the poor while asking more from those who can afford to contribute more.
These reforms, if implemented, could bolster consumer spending on basic necessities while ensuring that the tax burden is shared more equitably across different income groups by consolidating these taxes into a single, more efficient VAT system.
This committee’s proposal is not yet a government policy but is a recommendation to the Nigerian government.
This proposal will likely undergo further review and discussion among policymakers before any legislative action is taken.
