Nigeria’s revenue authority denies plans to increase Value Added Tax (VAT) despite the Finance Ministry’s intentions to raise VAT and other taxes

The Senate recently recommended that the Federal Government consider increasing taxes on luxury goods in a bid to boost revenues. It did so while approving the Federal Government’s medium term expenditure plans for 2019-2021. In the proposed expenditure plan for 2019, the Senate approved a total expenditure of ₦8.83 trillion (US$24.5 billion) which is in line with what is contained in the 2019 budget.

The expenditure is expected to be financed by ₦6.97 trillion (US$19.4 billion) of proposed revenue and assumes a deficit of ₦1.86 trillion (US$5.2 billion). Revenues are based on the assumption that the government will be able to sell 2.3 million b/d of crude oil at an average price of US$60 a barrel in 2019 as well as taxes on non-oil activities.

The government’s challenge is the very low tax base and resultant collection rate. Oil revenues or oil based taxes account for as much as 70% of revenues and whenever oil prices or production fall below the projected rate the government suffers disproportionally greatly. In 2018, the government was only able to collect about 55% of its projected revenues.

In the last three years, government revenues have always fallen significantly below its projections. The IMF recently noted that Nigeria’s tax-to-GDP ratio remains one of the world’s lowest at just about 6% of GDP. Finance Minister Zainab Ahmed has proposed an increase in Value Added Tax (VAT) on the consumption of goods and services but the Federal Inland Revenue Service (FIRS) issued a statement on 21 March denying any plans to increase VAT. Nigeria’s 5% VAT rate is one of the lowest globally: by contrast it is 12.5% in Ghana, 15% in South Africa and 16% in Kenya. The proposal to increase taxes on luxury goods is nothing new and has been around since the Goodluck Jonathan 2010-2015 administration when then finance minister, Ngozi Okonjo-Iweala, put forward a similar proposal. No move has been made on it since then.

Fear of a political backlash is preventing the government from making these difficult but necessary decisions even as it is obvious that its earnings need a significant boost from new sources of taxable income.

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