Doubling VAT may yield N620bn for states

An increase in the value added tax (VAT) to 10 percent from its current 5 percent would yield at least N620 billion a year for the three tiers of government, especially the states that receive 85 percent of the proceeds, a finance ministry source tells BusinessDay.

A majority of Nigerian states are facing large fiscal holes as a result of the 50 percent slide in oil prices in 2014.

BusinessDay’s analysis of the 2015 budget proposals of 10 states (Lagos, Ogun, Abia, Delta, Taraba, Imo, Kano, Niger, Cross – River, and Kogi) shows them cumulatively cutting spending plans by only 10.5 percent this year to N1.9 trillion (2015) from N2.1 trillion (2014).

Oil revenues make up 75 percent of the federal budget but account for a much higher proportion in most of Nigeria’s 36 states.

Brent crude for March settlement advanced 13 cents, or 0.3 percent, to $48.65 a barrel at 9:13 a.m., Friday New York time on the ICE Futures Europe exchange.

States will find it difficult to close the funding gap in 2015, as the traditional windows open to them, including bond issuances and bank borrowings, narrow as a result of unfavourable macro-economic conditions.

Read also: Value Added Tax, Imported Services and Issues with the Current System

Government revenues are equivalent to only 12.2 percent of Nigeria’s $424 billion economy, as 65 percent of businesses failed to file a tax return last year, according to finance ministry data. This is probably one of the best reasons to increase the VAT.

The projected VAT proceeds is equivalent to 14 percent of the Federal Government’s proposed budget of N4.357.96 trillion for the 2015 fiscal year, before the respective houses of the National Assembly.

We believe an increase in the VAT is due to help cushion the poor fiscal position of the Nigerian government and most sub national entities.

The finance ministry has proposed austerity measures for 2015, and plans to impose taxes on luxury goods, to help plug the budget.

Additional steps may include widening the fiscal deficit from 1 percent – 3 percent in the event oil prices fall below $40 per barrel for an extended period of time, reducing the cost of government, using the Excess Crude Account (ECA) to smooth spending and increasing the VAT as a final resort if necessary.

 

PATRICK ATUANYA & BALA AUGIE