The implementation of the 7.5 percent Value Added Tax ( VAT) rate under the new Finance Act has commenced since February 1, 2020. The VAT increase to 7.5percent is one of the few changes made to the country’s 2019 Finance Act to help the Federal Government raise additional revenues to meet its 2020 budget targets.
The Federal Government’s share of the VAT pool is 15percent, while the balance goes to the 36 states. Currently, some states are in need of the additional revenue to be able to meet the obligations of the minimum wage.
Like other Vatable goods and services, the Value Added Tax charged on commissions related to capital market transactions has increased from 5percent to 7.5percent.
This change in VAT charged impacts commissions applicable to the capital market transactions – such as those earned by Dealing Members on the traded value of shares, payable to the Nigerian Stock Exchange, and payable to the Central Securities Clearing Systems Plc.
While the upward review of the VAT could help the government reduce deficit spending and fund the new minimum wage, it will result in higher production costs which will be passed on to consumers.
To reduce the tax burden on vulnerable segments, the VAT exemptions have been expanded to include more items under the basic food items, pharmaceuticals and education categories. Basic food items generally refer to unprocessed and aqua-based staple foods and include bread, cereals, fruits & vegetables among other items.
In addition locally manufactured sanitary items and services provided by microfinance banks have been included in the exemption list. Tuition paid for nursery, primary and secondary education have also been classified as VAT exempt. Consumers will unfortunately have to pay more in power charges due to higher VAT charges on meter costs and electricity tariffs. Investors in the stock market will also have to bear the increase in transaction costs as VAT charged on commissions applicable to capital market transactions will increase.
Under the current law, companies with a turnover below the N25 million threshold are not liable to file VAT returns. However, this also disqualifies them from reclaiming input VAT incurred on their purchases especially those involved in the supply of products that attract VAT.
