Exchange rate, other factors in N172bn increase in VAT Q1 2021
If anyone is relieved now, it is those in the corridors of power because of the prospect the increase in Value Added Tax (VAT) at the end of the first quarter 2021 gives them. Nigeria’s data agency, the National Bureau of Statistics (NBS) announced that Nigeria’s VAT for Q1 2021 increased by 52.9 percent to N496.39 billion up from N324.58 billion in Q1 2020. That implies that VAT collection in the first three months of 2021 increased by N171.8billin.
Compared to the VAT realised in last quarter of 2020, the Q1 2021 VAT was better by 9.2 percent on a quarter on quarter basis. On one hand, this is good news to public office holders as they now have more revenue to carry out government functions. On the other hand, the increase may not be what to be celebrated as nothing might have changed in the real sense of it.
This is because 69.9 percent of the N171.8 billion increase in VAT came from the Non-Import(foreign) VAT and NCS-Import VAT which both accounted for N119.63 billion of the increase, implying that exchange rate depreciation could have played a role in the increase in VAT during the period.
“In the period the VAT rate increased, the naira depreciated further. Some companies remitted in dollars, thus, a conversion to naira would appear there is a real increase”, a senior analyst who did not want her name in print said.
While the official rate of the naira remained at N379.5/$, at the Bureau de Change(BDC) market which offered arbitrage to investors, the average monthly naira-dollar exchange rate depreciated from N476.62/$ in December 2020 to N481.21/$ in March 2021.
Notwithstanding, VAT as one of the sources of the monthly revenue shared among the three tiers of government-federal, states, and local governments, its increase means more money for the three arms of government, and this is coming at a time some state governments have expressed doubt about their ability to pay the recently approved minimum wage. In addition, some states presently owe their workers while some have downsized. Consequently, higher VAT collection means more money for governments at all levels to execute their basic functions.
Read Also: Tax: Edo shuts 150 businesses over tax
Another reason this is seen as a welcome development is because the VAT, in some way, could act as leading indicator and thus could signal the likely growth pattern of GDP as seen in the GDP/VAT graph in this analysis. In other words, the Nigerian economy could be said to be on the path of recovery going by the VAT growth at the end of the first quarter of 2021.
While the growth in VAT is a necessary condition, an analyst is of the view that may not be a sufficient condition for a positive growth in the expected GDP for the first quarter of this year, as there are other factors that affect GDP.
“VAT has connection with GDP, no doubt; however, we may not conclude that a rise in VAT collection will automatically translate to GDP growth. There are other factors that affect GDP growth in any country such as exchange rates, crude oil prices, among others”, Moses Ojo, an economic analyst with PAC Limited said.
VAT increased by 52.9 percent, but this noticeable growth was led by offshore operations sub sector whose VAT increased by 167.9 percent in the first quarter of 2021. Put differently, VAT collection from offshore operations rose to N1.59 billion in Q1 2021 up from N592.06 million in corresponding period in 2020.
Also, VAT collection from the oil marketing sub sector amounted to N3.02 billion in Q1 2021 as against N2.39 billion in the first three months of 2020, representing a growth of 26.5 percent. VAT from oil producing sub sector increased by 68.9 percent from N9.35 billion in Q1 2020 to N15.8 billion in the first quarter of 2021. Petro-chemical and petroleum refineries’ VAT collection increased by 65.5 percent from N1.31 billion a year ago to N2.17 billion as of the end of March 2021. In all, VAT collection from the oil and gas industry rose by 82.2 percent on the average.
This is not unexpected because in the last six months, crude oil prices at the international market have been buoyed by recoveries in major economies across the world. China and United States have seen prospect in economic growth and that led to an uptick in crude oil prices. Closing at $50.24 per barrel on December 31, 2020, crude oil prices rose by 25.6 percent to $63.07 per barrel as of the end of March 2021. The increased earnings for oil and gas industry players did reflect in the energy industry’s VAT collection during the period.
VAT collection from state ministries and parastatals surged by 152.8 percent from N10.66 billion in Q1 2020 to N26.96 billion in Q1 2021. A senior analyst who is familiar with operations of MDAs in the country attributed the increase in the VAT generated from MDAs to the task given to them by state governments to generate more revenue.
“Governors across the 36 states have mandated heads of ministries, departments and agencies to generate more revenue. That they paid more VAT in the first quarter of this year against the previous quarter shows heads of MDAs heeded their calls. If you execute more transactions, you are bond to pay more VAT”, a senior analyst who did not want his name in print said.
VAT paid by the Transport and haulage services sub sector in Q1 2021 amounted to N14.93 billion up from N7.66 billion a year ago. Chemicals, Paints and allied industries subs sector saw its VAT increase by 72.4 percent to N981.03 million from N569.03 million in Q1 2020.
The external sector performed creditably well, supporting the position of any analysts that the conversion of naira to dollar during the period could have been responsible for the increase. The non-import(foreign) VAT rose in the first quarter of 2021 by 116.42 percent contributing additional N92.34 billion to Nigeria’s VAT during the period as its VAT as of March 2020 which stood at N79.32 billion surged to N171.56 billion in Q1 2021.
NCS-import VAT for the period rose by 37.6 percent to N99.88 billion as of March 2021 against N72.59 billion same period in 2020, thus added N27.29 billion to Nigeria’s VAT during the first quarter of this year.
Consequently, both Non-Import (foreign) VAT and NCS-Import VAT added extra N119.63 billion to Nigeria’s VAT, representing 69.6 percent of the gains in VAT during the last quarter.
The laggard sub sectors during the period are automobiles and assemblies whose VAT fell by 14.5 percent; breweries, bottling and beverages, -17.3 percent; mining, -21.8 percent; banks and financial institutions, -39.5 percent, and the pioneering sub sector, -91.1 percent.