Nigeria’s VAT up 72.1% in FY’23

Nigeria's Value Added Tax (VAT) registered an impressive surge of 72.1% in the fiscal year 2023, according to data released by the National Bureau of Statistics. This significant increase in VAT revenue has sparked discussions about the Nigerian government's fiscal policies and the potential for further tax hikes in the coming years. International business research group, Economist Intelligence Unit (EIU), has projected that Nigeria may raise its VAT rate from the current 7.5% to 15% by the year 2027 to bolster government revenue and address fiscal deficits and debt obligations. Theo Emuwa, a Partner at Aelex, recently shared insights on CNBC Africa regarding the performance of VAT in 2023 and the implications of a proposed VAT increase to 15%. Emuwa highlighted that while the nominal value of VAT collection has increased due to the higher tax rate, the real impact may not be as substantial. He explained that the rising prices of goods and services have offset the potential benefits of increased VAT revenue, as government expenditures have also escalated accordingly. Emuwa emphasized the importance of expanding the tax net to capture a larger portion of the population, rather than solely relying on tax rate hikes on the existing taxpayers. By broadening the tax base, the government could enhance revenue generation and reduce dependency on a limited pool of taxpayers. Discussing the EIU's recommendation to raise the VAT rate to 15% by 2027, Emuwa underscored the significance of a comprehensive tax strategy that includes not only adjusting tax rates but also improving tax collection mechanisms. He noted that while increasing VAT rates can lead to higher revenue in the short term, sustainable revenue growth requires systemic reforms that address tax compliance across all sectors of the economy. Emuwa stressed the need for a balanced approach that considers both tax policy adjustments and administrative enhancements to optimize revenue collection. Reflecting on the government's revenue performance in the past eight months, Emuwa highlighted challenges in revenue collection, particularly in informal sectors where tax compliance is more difficult to monitor. He pointed out the limitations of manual tax collection processes and emphasized the importance of adopting digital solutions to streamline tax collection processes. Emuwa suggested that leveraging technology could facilitate VAT collection in informal markets like Dumota and Alaba, where numerous transactions occur outside of traditional tax frameworks. In light of the current economic challenges facing Nigeria, including inflationary pressures and foreign exchange volatility, Emuwa acknowledged the complexity of implementing tax increases in such a difficult environment. He emphasized the need for a long-term economic plan that prioritizes local production and self-sufficiency to mitigate the impact of rising prices and currency fluctuations. Emuwa cautioned that without a clear strategy for promoting local manufacturing, Nigeria may continue to face economic challenges that erode purchasing power and constrain revenue generation. As the debate over Nigeria's VAT policies intensifies, stakeholders are closely monitoring the government's approach to tax reforms and revenue enhancement. The calls for a more inclusive tax system that encompasses a broader taxpayer base and integrates digital tax collection tools highlight the complexities of balancing fiscal needs with economic sustainability. Moving forward, Nigeria's fiscal authorities will need to navigate these challenges thoughtfully to drive sustainable revenue growth and support the country's long-term economic development.