Last week, President, Muhammadu Buhari, presented the 2020 Federal Budget proposals to the Joint Session of the National Assembly, being his first budget presentation to the 9th National Assembly.
The proposed expenditure of N10.33trillion in 2020 as against N8.92trillion in 2019, which represents an increase of 16 percent is to strengthen Nigeria’s macroeconomic environment; invest in critical infrastructure, human capital development and enabling institutions, especially in key job creating sectors; incentivise private sector investment essential to complement the Government’s development plans, policies and programmes; and enhance Nigeria’s social investment programmes to further deepen their impact on those marginalised and most vulnerable Nigerians.
The President, during his presentation stated that the projected Federal Government Revenue for 2020 is N8.15trillion against projected revenue of N7trillion in 2019 budget. The 2020 budget, according to President Buhari has five strategic objectives, in terms of achieving incremental, but necessary, changes to the nation’s fiscal laws.
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These objectives are to: promote fiscal equity by mitigating instances of regressive taxation; reform domestic tax laws to align with global best practices; introduce tax incentives for investments in infrastructure and capital markets; support Micro, Small and Medium-sized businesses in line with Nigeria’s Ease of Doing Business Reforms; and to raise Revenues for Government.
Other highlights of the Budget are: Benchmark oil price: $ 57, Budgeted production: 2.18million barrels per day, and Exchange rate: N305/$1.
Tagged “Budget of Sustaining Growth and Job Creation”, which attracted both praises and criticisms, the President said his administration remains resolutely committed to the actualisation of its vision of a bright and prosperous future for all Nigerians.
The draft Finance Bill proposes an increase of the VAT rate from 5percent to 7.5percent. As such, the 2020 Appropriation Bill is based on this new VAT rate. The additional revenues will be used to fund health, education and infrastructure programmes.
As the States and Local Governments are allocated 85percent of all VAT revenues, Federal Government expects to see greater quality and efficiency in their spending in these areas as well.
A value- added tax ( VAT) is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale.
The Budget proposals 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.
“The Bill proposes to create a threshold for VAT registration by excluding small and medium businesses with less than N25 million annual turnover from VAT registration. While this would reduce VAT compliance burden for small and medium businesses, the government will need to create a workable methodology for monitoring businesses that are actually within the threshold for registration, otherwise, it may occasion loss of revenue for government”, Andersen Tax said while looking at the implication of the proposed VAT rate hike to 7.5percent.
The proposed 2020 total expenditure of N10.33trillion comprises: non- debt recurrent expenditure of N4.88trillion, Capital expenditure of N2.46trillion and Debt service of N2.45trillion. The projected revenue for 2020 is mainly driven by other revenue and non-oil revenue of N3.7tillion and N1.8tillion, up 95.7percent and 30.6percent compared to 2019 estimate respectively. Meanwhile, oil revenue was revised downward to N2.6trillion.
Research analysts at FSDH group had noted in their 2019 macroeconomic revenue and outlook that “to meet revenue projections, the federal government will implement an increase in taxes for some key products/transactions which could also trigger inflation”.
They had noted that “Nigeria’s weak revenue growth is a short to medium term challenge. Fiscal authorities must work to enhance the country’s revenue profile to cater for the growing infrastructure/debt financing needs. The increasing cost of debt servicing in the light of slower revenue growth leaves lesser room for expenditures on critical infrastructure and payment of salaries.”
The average VAT collection in the past 6 years is about N900 billion. The revenue is shared 15percent to the Federal Government, 50percent to States and 35percent to Local Governments net of 4percent cost of collection to FIRS.
Ahead of the 2020 Budget presentation, Taiwo Oyedele, Tax Leader, PWC Nigeria had in a March 21 note said an increase in VAT rate now is bad timing and inconsistent with current economic reality. “VAT increase will lead to higher inflation, interest rate hike, more unemployment and generally make people poorer.
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“Any increase in VAT rate without a registration threshold and zero rating of basic consumption will increase burden on the poor and SMES contrary to the 2017 National Tax Policy. Trying to expand the VAT net while also increasing VAT rate at the same time is a faulty tax strategy. Nigeria can make twice as much from VAT at current rate by reforming the law, expanding the net and ensuring robust administration rather than by increasing rate,” he said.
The VAT Act already exempts pharmaceuticals, educational items, and basic commodities, which exemptions we are expanding under the Finance Bill, 2019.
Specifically, Section 46 of the Finance Bill, 2019 expands the exempt items to include the following: 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; roots such as 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.
Wole Obayomi, partner and head of Tax, Regulatory & People Service (TRPS) Practice of KPMG in Nigeria had in a September 2019 note said that increase in VAT rate has been on the fiscal agenda of the Federal Government for some time now.
“One of the arguments of the Government in support of the increase is that Nigeria’s 5percent VAT rate is the lowest in Africa. However, the argument does not acknowledge the difference between the VAT regime in the other countries and Nigeria, where the VAT regime is a variant of sales tax”, he said.
“It will be recalled that the Government once increased the VAT rate to 10percent in 2007 but had to revert to the status quo following opposition by the organised labour”, Obayomi added. He commended the current approach of engaging with relevant stakeholders before seeking amendment of the VAT Act to implement the proposed increase in the VAT rate.
Also in their September 17 note, tax experts at Deloitte said: “Nigeria has one of the lowest VAT rates in the world. However, it still practices a modified VAT system where taxpayers can only claim a limited portion of input VAT against output VAT charged. Consequently, without a corresponding adjustment to the VAT system, the increment may turn out to have a higher impact than envisaged. This is more so as entities will ultimately seek to pass the cost to end-users. This may result in increased inflation.”
Inflation rate in August 2019 reduced by 0.06 percent to 11.02 percent from 11.08 percent recorded in July. This week, the National Bureau of Statistics (NBS) releases September 2019 inflation figure.
