Could VAT Be on the up in Nigeria?

As of 1^st January 2020, it is likely that Nigeria will see an increase in the Value Added Tax (VAT) they pay as standard.

New proposals from the Nigerian government would see VAT rise from 5% to 7.5% in the new year, however this needs to be approved by the National Assembly, states and local government before the changes can be confirmed (source: Avalara).

The reason for this increase is because Nigeria is currently heavily reliant on the oil sector. Therefore, the country is in a vulnerable position as oil prices change frequently, so the increase is needed. According to news aggregator website allafrica.com, ‘Nigeria’s revenue base is heavily reliant on oil earnings with direct taxation, VAT and excise duties currently making up a small part’.

There is some question around whether or not this will go ahead, as back in 2015, the Nigerian government suggested raising VAT from 5% to 10%, although this never went ahead. It did however rise to 10% in 2010 for a short period, before returning to 5%.

 

What else is going on ?

The volatility in oil prices is one driving factor for sure, but on the other end of the spectrum of all things tax-esque, the Nigerian Government is facing renewed warnings from authorities that it could be on the cusp of a major fiscal crisis if it fails to improve its ability to collect taxes.

According to the Beeb, ‘Government expenditure has doubled and debt servicing costs have grown, but revenues have missed their targets by at least 45% a year since 2015‘. Despite being quite far off the mark, the Presidency has remained quite buoyant:

It is noteworthy and highly commendable that under this administration, the number of taxable adults has increased from 10 million to 20 million with concerted efforts still on-going to bring a lot more into the tax net. //

— Presidency Nigeria (@NGRPresident) August 19, 2019

Although related to personal taxation, the issues facing the Government could be the catalyst for the crack down on indirect tax, prompting a rate increase in VAT to offset the shortfalls elsewhere. When you factor in the fact that in 2018, according to a UN Economic Commission report, Nigeria had an estimated VAT gap – the difference between what could be collected and what actually was – of 71.2% (the fourth highest gap on the continent) much emphasis is now being placed on tightening up collections in this area.

 

A bit of background

Nigeria first introduced VAT in 1993. Even if this increase goes ahead, Nigeria will still have one of the lowest VAT rates worldwide and the lowest in Africa, with other African countries such as Kenya, Ghana and Zambia paying between 12.5% and 16% as standard. Countries with lower VAT than Nigeria include Saudi Arabia (5%) and Singapore (7%).

As mentioned, in a UN report into Value-Added Tax gaps for 24 African Countries in 2018, Nigeria had a VAT gap of 71.2%, behind Uganda (71.4%), Eswatini (86.1%) and Central African Republic (92.2%).