The Federal Government’s plan to raise the VAT rate from 5% to 7% in 2020 is not wholly unrelated to the large growth in VAT collection over the past two years due to a significant decline in oil prices that had impacted government revenue.
The National Assembly rejected a proposal to move the collection of VAT from the concurrent to the exclusive legislative list, effectively leaving the decision to the Supreme Court, which is currently hearing the case. This put an end to the Federal Government’s plan to continue collecting VAT despite a Federal High Court ruling.
The authority for governments to collect VAT was determined by a Federal High Court last year. The Federal Government, however, disagreed with the decision and continued to collect VAT, estimating that it would raise N2.2 trillion through the Federal Inland Revenue Service in 2022.
Dr. Gabriel Idahosa, the deputy president of the Lagos Chamber of Commerce, criticized the Federal Government’s system for administering taxes. According to him, the amount generated through VAT in the country was significantly lower than what ought to be generated with proper tax administration.
Idahosa said, “We are collecting very little VAT. That N1.2tn is small compared to what can be collected in Nigeria. VAT ought to be collected from every business activity in Nigeria except for those products that are not VATable like food and healthcare. Every trader in Mushin, Oshodi or Balogun market, Onitsha market and all the markets in Nigeria are supposed to be paying VAT. Right now, it is only the structured organizations that are paying.”
Idahosa advised the government to place more emphasis on expanding the dragnet of taxable business in line with the model already being employed by a number of advanced economies.
He added, “That is why the finance people talk about the taxable income, addressable tax. The tax coverage of Nigeria is far lower than what should be covered. If we invest in expanding that dragnet of taxable businesses, then we be making more trillions of naira through VAT.
In most countries, they don’t actually tax income that much, because they see income as an inefficient form of taxing. They would rather tax VAT very high, and make income tax nil, because VAT is a tax at the point of spending money, so you cannot hide that, but aby tax on income is inefficient to the extent that if you hide your income, it cannot be taxed.”