Business Management, Entrepreneurship, SME businesses, Tax strategy

The Nigerian VAT Increase – Next Level of Pains

During the past week, there was an unexpected news from the Nigeria’s Federal Executive Council (FEC) of the increase in the Value Added Tax (VAT) rate from 5% to 7.5%. During some of my presentations in the preceding months, I already shared my expectation that the Buhari Administration will increase VAT after the elections, as they will be desperate for revenue generation. So, this is not surprising.

The spokespersons to the government and their social media “warlords” have been constantly throwing around different rates being charged as VAT in different countries, and that Nigeria has the lowest rate around. While this is true, it is not the full truth.

The government spokesmen forgot to read or mention that Ghana, Kenya and South Africa do exempt SME businesses (with annual revenues below the pre-defined threshold) from the VAT process and burden of invoicing and collecting VAT.

The government spokesmen also forgot to mention that Nigeria, unlike most of those countries that they are comparing us with (in terms of the VAT rate), does not allow taxpayers to offset their VAT liability with the VAT paid on all of their own transactions.

It was also convenient for them to forget that 5% of invoices issued by a company are required to be remitted by all companies, irrespective of whether the invoiced customer has paid or not. This is a barbaric law and it is very punitive for SME businesses as VAT remittances should be based on the amounts actually received from customers.

They also forgot to mention that many countries have simplified the tax system for SMEs. Standard tax computation requires complex computation of assessable profit, adjusted profit, tax losses, capital allowances, deferred taxes and tax payable. Several forward-looking countries require small and medium enterprises (below a certain revenue threshold) to pay business tax at a fixed percentage of their total revenue. This is one of the challenges of tax compliance by SMEs in Nigeria.

They also forgot to acknowledge that a small business in Nigeria may have up to 50 different taxes and levies to pay every year, including Education tax, PAYE, ITF, Pension, NHF, NDDC Levy, NITDA Levy, NCC charges, vehicle license, radio license, business premises permit, tinted car window permit, signage permit and to the emerging Police Trust Fund charges. These are all in addition to the company income taxes.

They also forgot that companies in Nigeria are required to pay “minimum taxes” even when they can prove that they incur losses during the relevant period. The implication is that companies are eroding their capital base to pay the taxes as taxes are now being paid from capital instead of it to have been from profits made by the business.

The truth is that our entire tax system requires an overhaul. However, the current administration appears to be focussed on only implementing those updates that can generate additional government revenue and hence the haphazard approach to tax policy.

As they say in my hometown, it appears as if this administration is “bypassing the treatment of leprosy and focusing on the treatment ringworm”. They need to focus on the real issues, instead of probable symptoms. This is what President Buhari and his team should do to redeem Nigerian citizens from this next level of pains.

2 thoughts on “The Nigerian VAT Increase – Next Level of Pains

  1. Chukwuma Gordian says:

    This reminded of Richard Branson of Virgin Corporations. When he moved his business out of Nigeria, in an interview on why he did that, he said “Nigeria policies don’t favor entrepreneurs”.

    This is quite bad

  2. Great content! Super high-quality! Keep it up! 🙂

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