Let’s talk about VAT increase

The federal government recently increased the Value Added Tax (VAT) from 5 per cent to 7.5 per cent. The increase in VAT has continued to generate uproar and mixed reactions in the country. The organised labour and some economic experts have condemned the move in strong terms and described the increase as untimely aimed at inflicting more pains to the lives of poverty ravaged Nigerians. The NLC stated that the increase in VAT while government is still negotiating the minimum wage will not augur well for the welfare of Nigerian workers. The VAT will end up eating the much talked minimum wage and erode the expected gains that might arise from the implementation. If the VAT is adjusted and assented to by the National Assembly, Nigerians next year are going to pay more for the goods and services they will consume. The Nigerian rent-seeking economy has continued to nosedive due to the uncertainty or volatility in the global oil market. The market price of crude oil which constitutes 90 per cent of the country’s revenue has continued to hover around 60 dollars per barrel, affecting the successful implementation of our national budget.

  This is the main reason why government is exploring other avenues to generate revenue and complement the earning from the crude oil sale. Government has resorted to VAT increase because it’s the quickest way to generate funds. What is Value added Tax (VAT)? A Value Added Tax is a consumption tax levied on products at every point of sale where value has been added, starting from raw materials and going all the way to the final retail purchase.VAT is commonly expressed as a percentage of the total cost. For example, if a product costs N100 and there is a 7.2 per cent VAT, the consumers pays N107.2 to the merchants. The merchant keeps N100 and remits N7.2 to government.

  The proponents of Value Added Tax make the argument that a VAT system encourages payment of taxes and discourages attempt to avoid them. The fact that VAT is charged at each stage of production rewards tax compliance and acts as a disincentive from operating in the black market. It also helps to generate revenue to the government. The opponents of VAT claim that it unfairly burdens people with lower income. Unlike a progressive tax, a VAT is like a flat tax where all consumers of all income level pay the same percentage, regardless of earning whether your annual income is N50,000 or N500,000 you are levied the identical 7.2 per cent VAT on products and services. Obviously, that 7.5 per cent increase will cut deeper into the budget of low earners than the high earners.

  The proposed VAT increase will fetch more resources or revenues to the government. I have learnt that based on the agreed sharing formula, state governments would get the bulk of resources. State governments are expected to get 50 per cent, local governments 35 per cent and the federal government 15 per cent. However, the hue and cries that greeted the news of hike in VAT cannot be unconnected with high rate of poverty in the country and lack of financial prudence among the state governments. Evidence is the inability of some state governors to meet up with the salary obligation of their states in spite of the bailout dished to them by the federal government.

Ibrahim Mustapha,

Pambegua, Kaduna state


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