Nigeria VAT collections to triple on improved compliance

Nigeria could be getting three times as much as it does now from its value added tax (VAT), simply by closing loopholes rather than by raising the current rate.

“If you look at Nigeria’s GDP for example according to the world bank figure, it is $570bn for 2015 and 80% of that represents consumption and even if you assume that only 50% is taxed for VAT purposes, we should be talking about $10bn but what we have today is between $2-3bn collected as VAT,” Taiwo Oyede, Head, Tax, at consulting firm PwC said in a television interview monitored by BusinessDay.

“It means there is a huge level of non-compliance and so we should not increase vat now until we can be more effective in collecting the 5% and until we raise the level of compliance across the board.”

Nigeria’s VAT rate at 5 percent is one of the lowest in the world with a number of analysts calling for an increase to the rate.

The average for the West African economic group ECOWAS is about 15 percent and about 18 percent for the continent.

“The first step is to broaden the tax base and reduce leakages by improving compliance and enhancing collection efficiency. At the same time, public finances can be bolstered further to meet the huge expenditure needs. For example, the current VAT rate is among the lowest in the world and well below the rates in other ECOWAS members—so some increase should be considered,” Christine Lagarde, Managing Director of the International Monetary Fund (IMF) said in a speech to the Nigerian National Assembly.

Analysts say loopholes that need to be closed include getting importers to pay the right amount of VAT, getting service providers to register to charge and pay the right amount of VAT, and getting government to use the tax collected to provide social services.

“To widen the vat base, there are a lot of things we need to do. First is to get intelligence and data. If you look at telecommunications and you look at entertainment, combine that and you have a GDP of more than N10trn. All these services are liable to VAT but not all of them are paying. That is a low hanging fruit because it is easier to get all of them to start paying,” Oyede of PwC said.

“You need to get to a point where you begin to get everybody to start paying because if you raise the rate when a lot of people are not compliant, you punish those who are compliant because they become less competitive and make it even more difficult for those not paying to start paying.”

Nigeria’s Medium Term Economic Framework used as a guide for the budget over a rolling three year period, envisages a movement in the VAT rate to 10 percent in the near future.

“Government may not be able to do that now because that will be insensitive because you have people struggling with the economy, financial difficulties and it will all be coming at the same time,” Oyede said.

But I think it is something that we have to do at some point. Nigeria imports a lot of goods and services. If we get the VAT on the imports alone that should be more than the size of our non oil tax revenue budgeted for in 2016.”

PATRICK ATUANYA