Insights from the sectoral distribution of value added tax (VAT)

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Nigeria’s five per cent Value-Added Tax (VAT) rate is beyond doubt one of the lowest in the world. Although, rumours have it that it might be increased, with the current rate of poverty in the country, an increase in VAT would pose a huge financial burden on average Nigerian. Hence, the way in which government raises and eventually utilises the revenue will have a substantial impact on the economic and social development of the nation.

Some decades ago the VAT was rarely heard of outside of France and a few dry specialist texts. Now, it accounts for about 20 percent of the world’s tax revenue, affecting billions of people. Widely adopted in sub-Saharan Africa and elsewhere, it has been the centrepiece of tax reforms in many developing countries. By any standard, the rise of the VAT has been the most significant development in tax policy and administration of recent decades.

As of 2018, about 166 of the 193 countries with full UN membership employ VAT, including all members of the Organisation for Economic Co-operation and Development (OECD) except the United States, which uses a sales tax system instead. While taxation is not the only source of government revenue, it is by and large the most important source in nearly all the aforementioned countries.

A key claim made by proponents of VAT, especially for developing countries, has been that it would enhance efforts to mobilize the much needed tax revenue, not only directly but through wider improvements in tax administration and compliance. The same argument is sometimes turned around, however, by those distrustful of the uses to which government would put additional revenue.

Nigeria’s Value Added Tax (VAT)—an indirect form of taxation that is based on the consumption pattern of individuals and companieson goods and services—declined in the first quarter (Q1) of 2019. It is eventually borne by the final consumer, however sometimes, multiple layers do bear part of the burden like VAT on tax on services and fixed assets.

According to the Q1 2019 data released by the National Bureau of Statistics (NBS)on the sectoral distribution of VAT, it shows coverage of 28 sectors of the economy which can be aggregated into primary sector (extraction of raw materials), secondary (concerned with producing finished goods) and the tertiary (concerned with offering intangible goods and services to consumers).

VAT, the consumption tax placed on products whenever value is added at each stage of the supply chain, was down by 3.01 per cent Quarter-on-Quarter (QoQ) from N298.01billion earned in Q4 2018 to N289.04billion reflected in Q1 2019. On a Year-on-Year (YoY) basis, the accumulated sectoral distribution of VAT increased by 7.13 per cent from N269.79 billion generated in Q12018.

Of the 28 sectors covered in Q1 2019, the “Other manufacturing” generated the highest VAT which amounted to N31.42bn. Closely followed are other double digit billions: “Professional Services” generated N24.31bn;“Commercial and Trading”, N14.92bn; and “Breweries, Bottling and Beverages” which generated N10.8bn; the oil producing sector recorded N8.5bn as the 5th highest VAT accruable in the same quarter.

Source: NBS, BRIU

In contrast, the mining sector generated the least amount within the quarter under review with N59.9 million VAT. Closely followed is the“Pharmaceutical, Soaps & Toiletries” withcirca N202 million, “Textile and Garment Industry”, N201.58 million; “Publishing,Printing, Paper Packaging”, N365 million, while the Automobiles and Assemblies sector generated the 5th least VAT of N421 million in the same period.

The low turnout in these sectors indicates that economic productivity and supply of goods and services within the sector may be relatively poor compared to other sectors, their consumer base may not be as large as other leading sectors since VAT is based on taxpayers’ consumption rather than their income or the sectors may not be large when disaggregated to sub-sectors.

Disaggregating further the total VAT generated in Q1 2019, the federal government through the Federal Inland Revenue Service (FIRS) recorded N137.06 billion as localNon-Import VAT; N98.97 billion was earned as foreignNon-Import VAT and N53 billion was generated from the Nigeria Customs Service (NCS) Import VAT.

Between Q4 2018 and Q1 2019, records show that 8 out of the 28 sectors recorded decline in their VAT: “Commercial and Trading” with 6.84 per cent decline, “Conglomerates”, 8.28 per cent; “Gas”, 5.48 per cent; “Hotels and Catering”, 10.83 per cent; “Offshore Operation”, 20.84 per cent; “Oil Producing”, 43-03 per cent; “Petro-Chemical and Petroleum Refineries”, 17.06 per cent and the pharmaceutical,soaps and toiletries sector recorded a decline of 3.70 percent QoQ.

Similarly, the analysis of the data also showed that 8 sectors recorded decreases YoY from Q1 2018 to Q1 2019: “Automobiles and Assemblies” was down by 4.58 per cent; “Banks & Financial Institutions”, 20.74 per cent; “Commercial and Trading”, 0.07 per cent; “Offshore Operations”, 33.65 per cent; “Oil Marketing”, 6.80 per cent; “Petro-Chemical and Petroleum Refineries”, 13.37 per cent; “Pharmaceutical,Soaps and Toiletries”, 17.20 per cent and the State Ministries &Parastatals sector recorded 32.25 per cent decrease YoY from Q1 2018.

Source: NBS, BRIU

The chart above shows the Year-on-Year (YoY) increase in the last 6 years. The VAT continued to be on the rise YoY except for a sharp drop in Q1 2016 where it declined by 5.22 per cent from N196.7 billion in Q1 2015 while the growth rate reached its climax in Q1 2015 at 54.83 per cent from Q1 2014 and then in Q1 2018within the same period.

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