How increase in VAT can impact your pay

With the economy in recession and government spending power drastically deflated, the desperation to shore up revenue is causing officials to look towards the citizens to bail the economy again. This is not the first time since the recession saga began that the government is dipping its hands into your pocket to take something. The last time was the N50 stamp duty. After all, we are in the  “Change begins with me” era.

From late 2015, experts from the International Monetary Fund (IMF) advised that for the Nigerian economy to survive and pull through the difficult times it must look towards increasing its internal generated revenue (IGR). During her visit, Christine Lagarde, managing director of the Fund noted that the current value added tax (VAT) Nigeria has is among the lowest in the world. She was right but Nigeria does not have the lowest tax rate. Countries like Gibralta and Hong Kong have 0 percent. But the VAT paid in Nigeria is low compared to 14 percent Cameroonians pay.

VAT is defined as the type of consumption tax that is placed on a product whenever value is added at a stage of production and at final sale. It is mostly based on a taxpayer’s consumption of goods rather than his income. There are over 160 countries around the world that use value added taxation. In Nigeria, VAT is levied at a flat rate of 5 percent and it is collected on behalf of the government businesses and organisations that are registered with the Federal Inland Revenue Service (FIRS).

As earlier mentioned, an increase in VAT benefits the government. In an address in April, Yemi Osinbanjo, Nigeria’s Vice President maintained the tune set by IMF chief in noting that the country’s VAT was too low as well as the tax base. Following that development, in July, the Revenue Mobilisation Allocation and Fiscal Commission (RMAFC) advocated a 50 percent increase, from 5 percent to 7.5 or 10 percent at least.

Should that eventually be the case, the implication on your monthly income is considerable. At 5 percent currently, many people are really struggling to buy the basic things they need. At 10 percent, it means prices of commodities which are currently at the rooftop, will fall off the roof. Since VAT is tax on consumer spending, the retailers do not bear the effect, they just pass it on to the consumers.

In a 2011 report examining the economic impact of VAT increase, PricewaterhouseCoopers (PwC) stated that an increase of VAT, to say 20 percent, implies an increase of around 2.1 percent in the prices of goods and services that are subject to standard VAT rate. Divide that by 10 percent being proposed, it is still a significant increase when you consider the added recession on prices of commodity.

A standard loaf of bread in the market at the moment is N300; a bag of rice is fluctuating between N17, 500 to N19, 000; transportation on land, water and air has increased among other things.

Although the increase may still be long in coming, the way out remains in looking for alternative sources of income to shore up what you have presently. Your daily 9-5 may be a lifeline but it is hardly sustainable in the long term.