VAT
VAT increase. Photo credit: BBC

FG May Increase VAT To 15% Before 2025- EIU

5 mins read

There is indication that the Nigerian Government might effect a 100% increase in the Value Added Tax (VAT) from the current 7.5% to 15% before 2025 in order to raise revenue.

The implication is that Nigerians will have to pay more for goods and services at a time there is already a public outcry over high cost of goods and services.

The government’s plan to raise VAT was exposed in a report by the Economist Intelligence Unit (EIU) titled “Country Report Nigeria”.

The EIU stated that the anticipated increase in VAT was inevitable given the rising public debt burden and the likelihood that the Petroleum Industry Bill (PIB) might not be able to deliver considerable increase in government’s revenue.

The report from the research body of The Economist Magazine said that “we expect three equal VAT rate increases, taking the rate to 15% by 2025”.

The report also said that the first increase is expected in 2022, which is prior to 2023 elections but seemingly inevitable given a rising debt burden, with further rises in 2024 and 2025.

“Even then we expect fiscal revenue to peak at just 5% of the GDP in 2024, which also assumes no fuel subsidies beyond 2022.”

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The report further said that “The federal government’s tax take is among the world’s lowest by widespread evasion and a large informal sector. The PIB is likely to be balanced between the interests of the treasury and investors, and so not deliver a considerable increase in revenue”.

“Consequently, the VAT, currently at 7.5%, is likely to be used as a means of repairing public finances.”

The report also foresee that public finance would remain in deficit between 2021 and 2025, because of an average global crude oil price of $63.8/barrel in 2021-2025, which makes up for more than 50% of the federal government’s retained income would equal a budget insufficiency, adding that the percentage of public debt to the GDP would be 35.4% of the GDP in 2025.

“Overall, we expect the fiscal deficit to narrow to 3.3% of the GDP in 2021 from 3.7% of the GDP in 2020 as international oil prices rise.”

The report further stated “Also, the VAT rate increases and rising oil prices will push down the deficit to 2.6 per cent of the GDP in 2023-24, but a decline in average global oil prices in 2025 will cause the shortfall to widen to 3.0 per cent of the GDP in that year”.

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“The government has raised its public debt limit to 40 per cent of GDP to incorporate higher budget shortfalls over the medium term and to accommodate securitisation of the Central Bank of Nigeria’s deficit-financing as long-term debt. We expect public debt to reach only 35.4 per cent of the GDP in 2025,” the report added.

A further projection that large public wage bill, high debt servicing costs and COVID-19 vaccine purchase will increase the nation’s expenditure. And capital investment will compensate for the disappearance of petrol subsidies once the PIB is enacted in 2021.

“The government will justify price deregulation by promising to invest the savings in infrastructure and will face pressure to match rhetoric action.”

The report which added petroleum price control and electricity tariffs as one other important area of focus, also hinged the hope of market-determined petrol price on the Dangote Refinery, a new 650,00 barrel per day refinery near Lagos which is expected in 2022.

Nigeria’s economic policy choices will experience a sudden change towards protectionism. Despite being the major player in Africa.

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It also added that “Land borders that were closed to goods since 2019 have reopened, but Nigeria’s approach to encouraging regional trade will be minimal, beyond its obligations under the African Continental Free Trade Agreement (AfCTFA).

“The trade pact compels Nigeria to eliminate 97% of tariff lines over the next five to 10 years. This deadline will not be met zealously, given high prices in Nigeria and declining external competitiveness for industries that could otherwise benefit from regional market access.”

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