7.5% Vat Rate: A Blessing Or A Curse On The Nigerian Economy?

The effect of Vat increment on the economy

A Value Added Tax (VAT) is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. The amount of VAT that the user pays is on the cost of the product, less any of the costs of materials used in the product that has already been taxed.

It has been recorded that Nigeria has one of the lowest rates for VAT in the whole world. Nigeria’s Value-added-tax was 5% before the Nigerian Senate approved the increase to 7.5% Countries in Africa like Zambia collects 16%, Kenya 16%, South Africa 15%, Ghana 12.5% and many more. Nevertheless, there are some other countries that charge a lesser VAT rate.

 

The big question is what will be the effect of VAT increment on the Nigeria Economy

The Minister of Finance Zainab Ahmed made a disclosure at the PWC executive session of finance bill and tax strategy that the intent of the new tax regime was not to hurt businesses but to grow the country’s non-oil sector contribution.

She explained that the Nigerian economy is characterized by structural challenges that limit the country’s ability to sustain economic growth, create more jobs and achieve significant poverty reduction.

It is true that the increased rate would certainly lead to increasing collection for the government which can even help to reduce the National budget deficit and can be used to fund other sectors including the payment of minimum wage. However, there are disadvantages to this, some of which are

Inflation:

Inflation being the continuous increase in the prices of goods and services is likely to set it, as the increase in Vat is likely to cause an increment in prices.

Reduction in disposable Income:

Obviously the disposable income reduces because of the increase in the tax deducted from one’s income leaving consumers with little to spend which in turn shrinks the economy.

Competitive Market:

Business selling directly to the final consumers especially a fast-moving market like Lagos and fast-moving consumer goods would experience pressure to remain competitive and some may have to bear part or the entire Vat so that the prices of goods would not be affected.

Looking at the good side, if the increment of VAT would fix and grow the country’s non-oil sector making it very productive and encouraging for business, then we can give it a try

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