Nigeria’s VAT is growing, but here is why it’s still not enough

Africa’s biggest economy may have raked in the most revenue from value added tax (VAT) in the last five years in 2020. However, the VAT collected in 2020 still falls below projection.

Nigeria is looking to increase VAT collection to help provide a quality standard of living for its citizens, many of who live below $1 a day.

The country generated a total of N1.53 trillion from VAT in 2020, up by 29.3 percent when compared to N1.18 trillion generated in 2019, 8.2 percent increase as against N1.11 trillion generated in 2018, and 57 percent increase as against N972 billion generated in 2017, according to BusinessDay analysis of National Bureau of Statistics (NBS) data.

Nigeria introduced a Finance Act in 2020, raising VAT from 5 percent to 7.5 percent. The 50 percent increase in VAT was expected to translate into higher revenue generation, but whether or not the actual increase will be enough to meet the budget’s non-oil revenue projection has been of concern to economists.

It would appear that at the current level of remittance, a 50 percent increase in the VAT rate could generate at least an additional N590 billion annually for the Nigerian government, using 2019 VAT of N1.18 trillion.

But that didn’t come as planned after all as NBS data showed a shortfall by about 24.6 percent between what Nigeria projected it would generate from VAT and what it got.

For most tax experts, an increase in the VAT rate does not automatically mean increased tax revenue for the government if the VAT system as a whole is not properly structured to be more efficient.

“This efficiency depends on the tax base, as well as evasion and avoidance rates,” a tax expert told BusinessDay.

The 2020 VAT shortfall of about 24.6 percent also gives a clue as to why the 2020 budget deficit widened further to an actual N6 trillion from N4 trillion, as the discrepancy between actual and budget VAT further compounded the woes of falling oil and non-oil revenues.

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“When revenues are lower than expected, the government will have to borrow to meet budgetary obligations,” a Lagos-based analyst told BusinessDay.

“The decline in actual VAT amid declining oil revenues necessitated the borrowing to plug in the deficit,” the person said.

A breakdown of the figure shows that 24 of a total of 28 sectors recorded positive growth in VAT remittance, while only four sectors recorded a decline in the period.

In 2020, professional services generated the highest amount of VAT with N162.32 billion remittances, overtaking other manufacturing which raked in the highest VAT of N124.14 billion in 2019.

In 2020, VAT remittance from other manufacturing sectors came second at N154.15 billion.

Non-import VAT generated locally grew by 30.5 percent in 2020 to stand at N763.01 billion as against N584.6 billion received in 2019.

Non-import foreign VAT also stood at N420.4 billion. This indicates an increase of 17 percent when compared to N359.5 billion generated in the previous year.

Import VAT generated by Nigeria Customs Service jumped by 44.6 percent to stand at N347.7 billion as against N240.5 billion recorded in 2019.

VAT remittance by the transport and haulage services sector grew significantly by 78.8 percent to stand at N43.5 billion, closely followed by agricultural and plantation sector with 65.4 percent increase to stand at N4.34 billion.