6 Questions You Were Too Embarrassed to Ask About the New Nigerian 7.5% VAT

solving taxes

On the 13th of January, President Muhammadu Buhari signed a new Finance Bill (now an Act) into law. Although the bill has put in place several new guidelines for the financial sector, the part that most Nigerians are concerned about is the increase of the value-added tax (VAT) from 5% to 7.5%.

Unsurprisingly, many people have a lot to say about it; some good, some bad, others downright confusing.

Here, we’d try to answer some of the questions you might have been too embarrassed to ask about the new VAT regime.

What is VAT?

A value-added tax, known in some countries as a goods and services tax (GST), is a tax levied on the “value added” to products throughout its production process.  An example of a 10% VAT in practice from Investopedia is something like this:

“A manufacturer of electronic components purchases raw materials from a dealer. The metal dealer charges the manufacturer N1 plus a 10-kobo VAT and then pays the 10% VAT to the government.

The manufacturer adds value through its manufacturing process of creating the electronic components, which it then sells to a cellphone manufacturing company for N2 plus a 20-kobo VAT. The manufacturer gives 10-kobo of the 20-kobo VAT it collected to the government, the 10-kobo reimbursing it for the VAT it previously paid to the metals dealer.

The cellphone manufacturer adds value by making its phones which it then sells to a cellphone retailer for N3 plus a 30-kobo VAT. It pays 10-kobo of this VAT to the government; the other 20-kobo reimburse the cellphone manufacturer for the previous VAT it paid to the electronic component company.

Finally, the retailer sells a phone to a consumer for N5 plus a 50-kobo VAT, 20-kobo of which is paid to the government.”

The VAT paid at each sale point along the way represents 10% of the value added by the seller. The burden of paying VAT therefore rests on the final consumer.

How does Nigeria’s VAT system compare with the rest of the world?

Nigeria has one of the lowest VAT rates in the world (average VAT rate in most European countries is around 20-25%) even when compared with other African countries. For example, in Ghana and South Africa, VAT is set at 15% .

What are the arguments in support of VAT?

People that favour value-added taxation say it encourages tax payment and discourages attempts to avoid them. Apart from that, VAT is considered an effective way to improve the growth of a nation’s GDP, raise tax revenues and eliminate government budget deficits.

What are the arguments against VAT?

Critics of VAT claim it limits the purchasing power of low-income earners as it unfairly burdens them, since VAT is in effect a flat tax (a tax system that applies the same tax rate to every taxpayer).

Do all goods in Nigerian have VAT imposed on them?

No. The VAT Act specifically exempts some goods from paying VAT. They include: basic food items, books and educational materials, newspapers and magazines, baby products, commercial vehicles and their spare parts, agricultural equipment and products, and veterinary medicine. VAT should only be paid on processed goods and services. So be on the lookout for people who might want to cheat you.

When does the new VAT system start?

We don’t know. The senior special assistant to the President on Media and publicity, Garba Shehu, has said the Financial Act would take effect as soon as the President signed it into the law. On the other hand, the Minister of Finance, Budget and National Planning, Zainab Ahmed, stated the date for the implementation of the law would be communicated later.

LEAVE A REPLY

Please enter your comment!
Please enter your name here