Recently, there’s been concern that the government’s proposed Value Added Tax (VAT) increase could push prices higher and make life harder for everyday Nigerians. On the surface, this worry makes sense.
After all, when VAT goes up, businesses often pass the cost on to consumers, leading to price hikes. But experts are saying this time, the situation is different.
“According to the government, while the VAT rate on some goods and services will rise, the package includes several measures aimed at lowering costs across the board.”
To understand why, we need to look at the full picture, not just the VAT increase. “The proposed reforms are part of a broader strategy designed to lower costs for consumers, not increase them,” explains Taiwo Oyedele, Chairman of the Presidential Fiscal Policy and Tax Reforms Committee.
According to the government, while the VAT rate on some goods and services will rise, the package includes several measures aimed at lowering costs across the board.
Read also: How Nigeria’s VAT reforms will reduce inflation
One of the key measures is the reduction of VAT on essential items, including food, healthcare, education, and fuel. In fact, experts suggest that up to 82 percent of the average household’s consumption will be exempt from VAT under these reforms.
“Essential goods for the masses will either be VAT-free or heavily discounted,” says Oyedele. “This is a huge win for the majority of Nigerians who spend most of their income on these basics.”
Moreover, businesses will no longer have to carry the full burden of VAT on the goods and services they sell. They’ll be able to claim tax credits for VAT paid on their production costs, reducing the cost of doing business and, in theory, preventing them from passing those costs on to consumers.
“This ensures that the increase in VAT won’t result in higher prices,” Oyedele adds. “It makes businesses VAT-neutral, meaning they don’t bear any extra tax burden.
But what about small businesses? Under the new rules, small companies with a turnover of up to N50 million (compared to the previous N25 million threshold) will be exempt from charging VAT. This move, say experts, will reduce the financial burden on small enterprises that typically serve low-income Nigerians.
“This change is crucial for supporting small businesses and ensuring they stay affordable for the general public,” says Ayozie Kingsley, KJW, a tax expert and principal partner at Ayozie & Co (Chartered Accountants).
Despite these positive changes, some critics argue that increasing VAT on non-essential goods, such as luxury items, could lead to inflation. However, experts believe this limited increase is necessary to offset the decline in government revenue caused by the other tax cuts.
Read also: Will Nigeria’s proposed VAT model make sharing fairer?
“Without some increase in VAT on higher-end goods, the government would struggle to meet its funding needs,” Oyedele explains. “It’s a balancing act, and the increase affects only 18 percent of consumption items that are mainly bought by wealthier individuals.”
At the end of the day, experts agree that context matters. “It’s essential to view the reforms as a package,” says Abayomi Fashina, a tax expert at Password Professionals. “While some prices may rise on luxury items, the overall effect of these reforms is likely to be positive for the majority of Nigerians.”
The proposed VAT reforms, while not without their critics, aim to create a fairer tax system. They protect the poorest by lowering VAT on most essential goods while making sure that wealthier Nigerians contribute a little more.
The government, say experts, has designed these changes to boost economic fairness and help Nigerians cope with the rising cost of living without triggering a damaging wave of inflation.
Oluwatobi Ojabello, senior economic analyst at BusinessDay, holds a BSc and an MSc in Economics as well as a PhD (in view) in Economics (Covenant, Ota).
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