President Muhammadu Buhari Major General(RTD) signed the Finance Bill 2019  into law on 13th January, 2020. Amongst other reforms, the Bill amended the extant VAT Act with the effect that the VAT rate has been increased from 5% to 7.5%.

On the one hand, there has been a public outcry about the resultant inflation which will be caused by the increase. The hike in the cost of goods and services will mostly be suffered by consumers and small businesses. On the other hand, the Federal government requires increased revenue to finance the 2020 budget which has an aggregate expenditure of N10.59 Trillion. The non-oil tax revenue has been projected at N1.8 trillion and it therefore means that the government will pursue aggressive collection of tax income principally VAT, stamp duties and Company income Tax. This article will consider the relevant provisions of the Finance Act 2019 as to how the law and government policy seeks to balance the divergent interest of the government and businesses and their consumers.

Section 34 of The Finance Act provides as follows:

“Section 4 of the Value Added Tax Act is amended in Line 1, by substituting for the  expression “5%” , the expression “7.5%”

This provision amended the VAT Act and increased the tax rate by 50 per cent. The Minister of Finance, Budget and National Planning Mrs. Zainab Ahmed has announced that the effective date for the new VAT rate is 1st February, 2020 thereby clearing the existing controversy as to the commencement date. The increase in the VAT rate may be justified considering the fact that Nigeria remains the country with one of the lowest VAT rate even with the recent hike. It will be recalled that one of the objectives of the Finance was to raise and improve government revenue. The adjustments made by the bill on the existing Fiscal laws were made to enable the Federal government increase its revenue generation capacity.  The Minister of Finance, Budget and National Planning Mrs. Zainab Ahmed stated that annual budget would henceforth be always accompanied with Finance Bills to enable realization of revenue projections. It is expected that that the additional revenue generated from VAT will help to finance the new minimum wage and also reduce the budget deficit. Considering the country’s swelling debt service and government’s low revenue profile, the VAT hike may prove useful by being a significant boost to the government income.

However, the increase in the VAT rate has received major backlash from the citizen given the perceived hardship it could cause in an already dwindling economy. Considering that the federal government recently approved a new minimum wage, those who opposed the policy wondered if the plan to increase VAT was not a strategy to “rob Peter to pay Paul,” as the increase in minimum wage would be eroded by price increases of key household items, offsetting the expected improvement in purchasing power. One of the expected downsides would be higher inflation and a decrease in disposable income which would further shrink the economy. it is predicted that businesses selling directly to the final customers especially the consumer goods and services sector would make efforts to remain competitive and may have to absorb part or all the VAT increase so that the price of goods and services are not affected. Also businesses whose goods or services are VAT exempt may experience an increase in cost as they are not able to claim input VAT incurred since their products are exempt.

It is important to note that the Finance Act has also taken palliatives to support medium, small and micro enterprises and mitigate the impact of the Value Added tax rate increase on the most vulnerable businesses and the economy. Some of these measures include;

  1. Introduction of VAT registration threshold: Section 39 of the Finance Act amended Section 15 of the VAT Act by an Introduction of ₦25million revenue threshold for taxable persons required to register for VAT and file returns. The effect of this provision is that any taxable person who does not fall within the threshold above would be exempted from registering, remitting, issuing tax invoice and collecting VAT. The threshold of ₦25million within the calendar year will certainly reduce the tax burden for small companies and will also have a positive effect on the Nigerian Economy. It is also suggested that this registration threshold will cushion the effect of the VAT increase on businesses, consumers and tax payers. It is therefore very helpful that small businesses would not have to worry about compliance.
  2. Expansion of VAT exemption list: Section 47 of the Finance Act amended Section 46 of the VAT Act (the Interpretation section) thereby expanding the VAT exemption List to include:
  3. Basic food items (agro and aqua based staple foods)such as additives, cereals, cooking oils, culinary herbs, fish of all kinds (other than ornamented), flour and starch, fruits, live or raw meat and poultry, milk, nuts, pulses, roots, salt, vegetables and water;
  1. Locally manufactured sanitary towels, tuition (primary, secondary and tertiary education);and
  2. Services rendered by Microfinance Banks[1]

VAT is a regressive tax which has a disproportional effect on poorer people who usually spend a larger chunk of their income than the rich. It can be seen that these exemptions especially the ones relating to food and microfinance banks were intended to protect poorer members of the society.

  1. Incentive for Early Payment: The Finance Act provides for 2% and 1% bonus for early payment of company Income Tax Act for medium companies and Large Companies respectively.
  2. Reduction Of Company Income Tax Rate: There was a reduction of company income tax rate from 30% to 20% for medium companies with annual turnover of between 25 million naira and 100 million naira. Small companies with annual turnover of less than 25 million were granted a general exemption from company income Tax.

MSME’s has been globally recognized as the catalyst to significant economic growth. However, business Owners have challenges bordering tax, ranging from tax multiplicity to high tax rates which significantly diminish their profits. These measures were put in place to support MSME’s in line with the ease of doing business reforms and ease them of some tax burdens so as to allow them flourish.

It cannot be overemphasized that the government is in real need of increased revenue and that has led to the increase of the VAT rate. However, the federal government has weighed the effect of the increase on businesses and consumers who feel the impact of VAT payment and made definite provisions that will ease the burden of tax payers thereby mitigating the negative impact of the VAT increase. It is suggested that the Federal Inland Revenue Service (FIRS) and state revenue bodies should redouble efforts to widen the VAT net and ensure that the number of tax payers increase so that more none oil tax revenue can be generated to prevent budget deficit and government borrowings. The TIN project will be quite helpful such that every Nigerian business and individual that owns and operates a bank account will be included in the Tax net thereby generating increased revenue for the government to fund its various developmental projects. Also there should be enforcement of appropriate sanctions on any agent who defaults in VAT collections and remittances as well as deploy technology to boost tax revenue.

Ebube Godwin Onyejekwum(ACIArb UK) is  an Associate Counsel with Synergy Attornies, a Top Law firm in Lagos and can be reached via Ebubeonyejekwulum@yahoo.com

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