The increase in Value Added Tax (VAT) from the 5 per cent it stood as at January 1, 1994 to 7.2 per cent last week is expected to generate additional N479.7 billion in revenues based on the N1.1 trillion collected in 2018.
Based on the sharing formula, the Federal Government (FG) is to receive additional N72.0 billion (15.0 per cent), states to receive N239.8 billion (50.0 per cent) and local governments to get N167.9 billion (35.0 per cent) upon implementation. While the states would receive a significant boost, the increase is unlikely to make a dent on FG’s fiscal deficit which we estimate at N3.4 trillion in 2019.
Analysts at Afrinvest believe the FG requires a significant revenue boost, which would come from elsewhere.
“Our analysis shows that removing petrol subsidies and adopting a market reflective exchange rate of N360/$ for the computation of oil receipts would increase FG’s revenue by N880.0 billion.
“While we align with the age-long call to boost non-oil revenue, we believe the FG has chosen an easy but less impactful route with the proposed increment in VAT. The increase should be part of a comprehensive fiscal reform package that would seek to boost collection efficiency, rein in recurrent spending, remove subsidies and widen the tax net.” Said Afrinvest.
According to the former minister of finance, Kemi Adeosun, Lagos and Abuja account for 55.0 per cent and 20.0 per cent of VAT revenues respectively, meaning more pressure on consumers in both cities. Analysts believe, this is due to the large size of the informal economy which governments have been unable to integrate with the formal economy due to issues such as multiplicity of taxes.
In the broader economy, it is expected that the adjustment to VAT to lead to higher consumer prices and in turn inflation. The attendant weakness to consumer spending would also impact growth negatively.