Federal Government increases VAT from 5% to 7.2%
The Federal Executive Council which President Buhari presided over on Wednesday Septmber 11, approved the increment of value added tax (VAT) rate from 5 percent to 7.2% percent.
The Minister of finance, budget and national planning, Mrs Zainab Ahmed confirmed the increment at the end of the cabinet meeting. The new rate which will take effect from 2020 is however subject to an amendment of the VAT act of 1994 by the national assembly.
Zainab further said there will be immediate consultations with states, local governments and other relevant stakeholders before the new rate takes effect in 2020.
She said: “We also reported to council and council has agreed that we start the process towards the increase of the VAR rate. We are proposing and council has agreed increase the VAT rate from five percent to 7.2 per cent.
“This is important because the federal government only retains 15 per cent of the VAT, 85 per cent is actually for the states and local government and the state need additional revenue to be able to meet the obligations of the minimum wage.
“This process involves extensive consultations that need to be made across the country at various levels and also it will involve the review of the VAT Act. So, it is not going to be implemented immediately until the Act is reviewed.
“So, accordingly, following these assumptions the total revenue estimate in the sum of N7.5 trillion for the year 2020 and N2.09 trillion that will be accruing to the federation account and the VAT respectively.
“There will of course be the distribution to the three tiers of government based on the statutorily revenue sharing formula as defined in the constitution and to this effect, it means the Federal Government will be receiving proposed aggregate of N4.26 trillion from the federal account and the VAT pool, while the states and the local government are expected to receive N3.04 trillion and N2.27 trillion respectively.
“The expenditure for the year 2020 is in the total sum of N10.07 trillion. This is three percent less than the approved expenditure in the 2019 budget that has been passed into law. The total expenditure includes statutory transfers, non-debt recurrent expenditure such as salaries and pensions and also the Social Intervention Programmes (SIPs).
“The 2020 budget has a debt service estimated at N2.45 trillion and a sinking fund to retire maturing obligations issued to local contractors and other creditors in the sum of N296 billion. So, there is a total sum of N3.43 trillion that is provided for personnel and pension cost inclusive of N218 billion for the top 19 government-owned enterprises in the country.
“This represents an increase of N453 billion over the 2019 approved budgetary expenditure. This also implies a 40 percent of this recurrent expenditure to the projected revenue.
“The budget deficit is projected at N2.15 trillion in the year 2020 and this is lower than what was approved in the 2019 budget which was N2.47 trillion.
“Let me state that these projections include draw downs on project tied loans and this represent 1.51 percent of estimated gross domestic product (GDP). This is well below what is allowed by the Fiscal Responsibility Act (FRA) of 2007 which is still put at three per cent.
“I want to add that council approved our presentation and so the next phase for us is to consult with the National Assembly and then the Medium Term Expenditure Framework (MTEF) to the National Assembly for its own view and subsequent approval.”
The military government of Sani Abacha replaced the sales tax with the VAT in 1994. It was pegged at 5% at that time.
What is a Value-Added Tax (VAT)?
A value-added tax (VAT) is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. The amount of VAT that the user pays is on the cost of the product, less any of the costs of materials used in the product that have already been taxed.