The new Value Added Tax (VAT) rate of 7.5 percent has come into effect following the signing into law of the Finance Bill Monday by President Muhammadu Buhari. The Bill was passed by the National Assembly on the 21st of November, 2019.
The Bill specifically amended Nigeria’s tax provisions and makes them more responsive to the tax policies of the Federal Government, and raised the VAT rate by 2 percentage points, among other things.
With the eventual signing of the Bill, it is expected to enhance the implementation and effectiveness of government’s tax policies.
The new bill, according to the President, has five strategic objectives, which include achieving incremental, but necessary, changes to the country’s fiscal laws.
“The bill is expected to Promote fiscal equity by mitigating instances of regressive taxation; Reforming domestic tax laws to align with global best practices; Introducing tax incentives for investments in infrastructure and capital markets; Supporting Micro, Small and Medium-sized businesses in line with our Ease of Doing Business Reforms; and Raising Revenues for Government.
Faced with intractable economic challenges, Buhari introduced the initiatives to reform the tax system with a proposal to modify fiscal rules around taxation, aimed at creating an enabling business environment and minimizing the tax burden for Micro, Small and Medium Enterprises (MSMEs).
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Thus the Acts amended in the Finance Bill include Companies Income Tax Act, Cap C21 2004 (as amended to date); Value Added Tax Act, Cap VI, LHN 2007 (as amended), and Customs and Excise Tariff (Consolidation) Act, Cap C49, 2004.
Others are: Personal Income Tax Cap P8, LFN 2007 (as amended); Capital Gains Tax Act Cap C1, LFN 2007; Stamp Duties Act Cap S8, LFN 2004, and the Petroleum Profit Tax Act (PPTA) 2004.
Tax experts had mulled the promotion of fiscal equity by mitigating instances of regressive taxation, as well as introduce tax incentives for investment in infrastructure and capital markets.
President Muhammadu Buhari had declared that the “2020 Appropriation Bill is based on this new VAT rate. The additional revenues will be used to fund health, education and infrastructure programmes”.
At 7.5%, Nigeria’s VAT is said to be lower than many countries in Africa, with Angola at 10%, Algeria at 19%, Botswana 12%, and Ghana at 15%.
The new law has however expanded items regarded as essential commodities to reduce the harsh effect of the increase in the VAT
Section 46 of the Finance Bill, 2019 expands the item exempted under the old law to include Brown and white bread; Cereals including maize, rice, wheat, millet, barley and sorghum; Fish of all kinds; Flour and starch meals; Fruits, nuts, pulses and vegetables of various kinds;
Others include yam, cocoyam, sweet and Irish potatoes; Meat and poultry products including eggs; Milk; Salt and herbs of various kinds; and Natural water and table water.
The President, in his remarks on his twitter handle @MBuhari, after signing the bill, said “ I am pleased to announce that this morning I signed into Law the Finance Bill, 2019.
The government had introduced the Bill alongside the 2020 Budget, to Reform Nigeria’s tax laws to align with global best practices; Support MSMEs in line with our Ease of Doing Business Reforms; Incentivise investments in infrastructure and capital markets; as well as Raise Government revenues.
According to him, “This is the first time, since the return of democracy in 1999, that a Federal Budget is being accompanied by passage of a Finance Bill specially designed to support its implementation, and to create a truly enabling environment for business and investment by the private sector”.
The President noted that the “draft Finance Bill proposes an increase of the VAT rate from 5% to 7.5%.
“States and Local Governments are allocated 85% of all VAT revenues, we expect to see greater quality and efficiency in their spending in these areas as well.
“The VAT Act already exempts pharmaceuticals, educational items, and basic commodities, which exemptions we are expanding under the Finance Bill, 2019.
“Additionally, our proposals also raise the threshold for VAT registration to N25 million in turnover per annum, such that the revenue authorities can focus their compliance efforts on larger businesses thereby bringing relief for our Micro, Small and Medium-sized businesses.
“ It is absolutely essential to intensify our revenue generation efforts. That said, this Administration remains committed to ensuring that the inconvenience associated with any fiscal policy adjustments, is moderated, such that the poor and the vulnerable, who are most at risk, do not bear the brunt of these reforms.
The law is expected to amongst others, improve the efficiency of the Nigerian VAT system taking into consideration recommendations from various stakeholder groups, expand VAT coverage by addressing some critical issues such as taxation of the digital economy, VAT registration thresholds and intangibles, subject certain imported goods to excise duties in similar manner as their local manufactured counterparts.
“It also provides clarity and efficiency in the administration of individual income taxes in Nigeria, covers the taxation of business combination and seeks to prevent abuse of provisions of the Act on group restructuring, as well as increase revenue generation from duties on Electronic Stamps Duties.
The new law, if well implemented, is expected to help government expand revenue by removing the tax exemption granted for dividends or incomes received from companies charged under Petroleum Profits Tax Act.