lAs VAT revenue jumps 83%lConsumers expenditure forecast at N120trnlThere’s need to close tax compliance gap – PwC Partner lNigerian tax net grossly inadequate – Tax Institute
By Yinka Kolawole
The Federal Government is ramping up its tax collection process with a plan to raise about N9 trillion from Value Added Tax (VAT) between 2023 and 2025.
This comes at the backdrop of an 83.4 percent jump in its VAT collections to N600.15 billion in Q2’22 from N327.2 billion in Q2’20.
Recall that a 50 percent increase in VAT rate from 5 percent to 7.5 percent commenced in February 2020, midway into the first quarter (Q1’20), as part of the tax reforms included in the 2019 Finance Act meant to help the government achieve its revenue projections for the 2020 budget and beyond.
The government’s revenue projection was based on the assumption that the consumption expenditure on which VAT is charged will average N35 trillion in 2023, N40 trillion in 2024 and N45 trillion in 2025.
This means that over the three year period, the government expects N120 trillion as total consumption expenditure of Nigerians. The government expects that at the VAT rate of 7.5 percent, this will translate into total VAT collections of N9 trillion from Nigerian consumers over the period.
The projections were made in the final draft of the 2023 – 2025 Medium Term Expenditure Framework and Fiscal Strategy Paper (MTEF & FSP) prepared by the Budget Office of the Federation.
The MTEF & FSP document stated: “Consumption expenditure on which VAT is charged is assumed to increase from an average of N35 trillion in 2023, to N40 trillion in 2024 and N45 trillion in 2025 after adjusting for exemptions, zero rated items and companies whose turnover falls below N25 million threshold.”
The government premised its projections on the expectation that more VAT payers would be brought into the tax net with administrative and operational improvements.
It stated: “Like the CIT (Company Income Tax), more VAT payers are expected to be brought into the tax net with the effective implementation of the provisions of the Finance Acts 2020 and 2021. The VAT projections over the medium-term are based on holding the rate at 7.5%.
“In the medium term, government will intensify efforts aimed at improving VAT coverage and collection efficiency. Wider coverage and improved collection efficiency will be achieved through nationwide VAT registration and monitoring, and deployment of ICT (auto-collect) platforms in more sectors of the economy. In addition, the solution for deduction and remittance of VAT and withholding tax (WHT) from state government contract payments is to be deployed in all the 36 states.”
Meanwhile, analysis of data from the Federal Inland Revenue Service (FIRS) and National Bureau of Statistics (NBS) shows a steady upward trend in VAT collections since the commencement of the VAT rate increase in 2020.
VAT collections in 2021 amounted to N2.073 trillion; N1.531 trillion in 2020; N1.19 trillion in 2019; and N1.11 trillion in 2018. And already in the first half of 2022 (H1’22), Nigeria generated N1.19 trillion from VAT, with a projection of about N2.5 trillion collection for the full year.
A disaggregated quarterly analysis of the available VAT data shows that in Q2 2020, consumers paid N327.2 billion as VAT, N424.71 billion in Q3 2020, and N454.69 billion in Q4 2020. In 2021, in the first quarter (Q1 2021), VAT paid by consumers amounted to N496.39 billion, N512.25 billion in Q2 2021, N500.49 billion in Q3 2021, while N563.72 billion was collected as VAT revenue in Q4 2021.
In Q1 2022, VAT paid was N588.59 billion while N600.15 billion was collected in Q2 2022.
The N600.15 billion collected in Q2’22 represents 83.4 percent QoQ increase over the N327.2 billion recorded in Q2’20 when the full implementation of the VAT rate increase commenced.
Within the period under review, the highest quarterly VAT collection was the N600.15 billion generated in Q2 2022, which is also the highest VAT revenue in Nigeria at any quarter thus far.
Commenting on the tax regime, Taiwo Oyedele, Fiscal Policy Partner & Africa Tax Leader at PwC, enumerated the contributory factors to the rise in VAT collections, while noting that the major factor is the 50 percent increase in the rate.
Oyedele said: “The sustained increases that we have seen year on year in VAT revenue generation is attributable to a number of factors, chief among which is the increase in the rate from 5% to 7.5%.
“Also the tax authority has improved in its administration of the tax including audits, taxpayer education and automation, in addition to changes introduced to bring foreign service providers especially digital companies into the VAT net.
“This is despite the exemptions granted to small businesses from charging VAT and the expansion of items which are exempted from VAT such as lease of property, shared passenger transportation, air fares and more basic food items.
“To some extent, the devaluation of the Naira has also contributed to the increase in VAT collection as foreign currency denominated VAT liabilities yielded more Naira revenue.”
Oyedele further stated: “Overall, while some progress have been made regarding VAT administration, it is not yet ‘uhuru’ as more still needs to be done especially in terms of improving the collection efficiency and closing the compliance gap including ensuring full compliance by government at all levels and their MDAs.
“The current VAT revenue sharing formula among states is not equitable. This inequity should be addressed by allocating any domestic VAT collected from each state entirely to the respective state. Only VAT collected on imports, international services and inter-state transactions should be paid into the VAT pool and shared based on derivation. This will address the current controversy without creating new problems.
“In addition, some reforms are needed to expand the scope of eligible input VAT claims to cover capital items and all production overheads as well as services other than those relating to the final consumers as is the case in many climes.
“It is instructive to note that the controversy regarding the level of government empowered to administer the tax remains unresolved while the National Assembly made an unsuccessful attempt to include VAT on the Exclusive Legislative List. More recently the governors in their advisory are seeking to abolish states personal income tax in favour of a 10 percent states sales tax, and an increase in VAT rate from the current 7.5% to between 15% and 20%.
“However, policymakers must be mindful that consumption taxes are generally regressive in nature and likely to hurt the poor more than the rich and it is capable of further fueling inflation.”
In the meantime, the Chartered Institute of Taxation of Nigeria (CITN) has lamented the seeming inability of the government to expand the tax net in the country.
President, CITN, Adesina Adedayo, speaking at a conference on taxation, stated: “It is saddening that as of today, Nigeria’s tax revenue mobilisation performance remains below her capacity as the largest economy in Africa with one of the world’s largest population.
“The current number of people captured in the Nigerian tax net is grossly inadequate for a nation that desires to achieve development in the foreseeable future,” Adedayo said.