How Nigeria’s VAT reforms will reduce inflation

Taiwo Oyedele, chairman of the Presidential Tax Reform and Fiscal Policy, says the proposed increment in Value Added Tax (VAT) will reduce inflationary pressures contrary to the views that it would stoke prices.

The tax chief said in a statement on Friday that the series of policies aimed at overhauling Nigeria’s tax system would bring the needed relief for the over 200 million citizens that are reeling from a cost-of-living crisis fuelled by the twin reforms implemented mid last year.

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“The VAT reform, including the proposed increase in VAT rate, is part of a package involving several measures designed to reduce, NOT increase prices and therefore will not lead to inflation,” Oyedele explained in a question-and-answer-like tweet on X.

Nigeria is seeking to raise its VAT rate in a gradual progression from 7.5 percent up to 15 percent by 2027, a move that was equally proposed in 2019 but sparked heavy criticism and was jettisoned on the account that it would fuel hardship.

Oyedele however clarified that unlike the 2019 proposed tax reforms that were not accompanied by cost cutting measures, the current proposal involves measures to minimize production cost, reduce the incidence of VAT on most essential consumptions, and exempt more small businesses from charging VAT.

He argued that inflation occurs when there is a general increase in the prices of goods and services, emphasizing that an increase in VAT rate may lead to an increase in prices thereby causing inflation.

“However, the proposed VAT reform is not just about increase in rate, it contains several proposals to eliminate VAT or reduce rate which altogether is unlikely to cause inflation”.

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The proposed VAT reforms will see to the reduction of VAT rate to 0% and exemption for essential items accounting for 82% (about 4 out of 5 items) consumed by the masses including food, medical services and pharmaceutical products, tuition and other educational expenses, transportation, fuel products, and rent.

With the reforms, businesses will be granted tax credits for VAT paid on their assets and all expenses incurred to produce ‘VATable’ goods and services.

This will cut the cost of production by 7.5% compared to the 2019 proposal where companies were not allowed to claim tax credit for their VAT costs which they then passed on to customers by way of higher prices.

“This proposed measure will eliminate the VAT cost currently borne by businesses and should therefore lead to lower prices. Going forward, this measure will ensure that businesses in Nigeria no longer bear VAT cost regardless of the rate,” the tax expert assured.

He argued that an increase in the VAT exemption threshold for small businesses from N25 million to N50 million will remove the VAT burden on the margin of goods and services sold which in turn will lower prices for the masses.

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However, the proposed reform would lead to an increase in VAT rate of a limited number of goods and services constituting only 18% (about 1 in 5 items) of average consumption items in the inflation basket such as beverages, entertainment, cars as these items are consumed more by the middle and high income earners than the poor.

The tax chief maintained that it’s necessary to increase VAT rate for some non-essential items to partly offset the reduction in revenue, emphasising that states and local governments may face financial difficulties.

“The various rate reductions and VAT credits will result in significant decline in government revenue from VAT which is a major source of government funding particularly for the states and local governments who share 85% of VAT (proposed to increase to 90%).

“So, rather than generalising that the proposed VAT rate increase will lead to inflation, we need to check the details of the reforms before drawing such conclusions,” Oyedele said.