The executive bill forwarded to the National Assembly to revise the Value Added Tax (VAT) Rate to 7.5% scaled the second reading yesterday. We recall that earlier in September, the Federal Executive Council (FEC) approved a 50.0% increase in the VAT rate to 7.5% with effect from January 2020. The proceeds of the increase was being proposed to help the states and local government get additional revenue to be able to meet the obligations of the new minimum wage.
However, the bill was initially rejected on grounds that the VAT increase would ultimately create grave discomfort for many Nigerians as the prices of goods and services are bound to jump. In place of this, the senate proposed a 9% communication service tax to be levied on such electronic communication services like Voice Calls; SMS; MMS; Data usage both from Telecommunication Services Providers and Internet Service as well as Pay per View TV Stations. Nevertheless, the President presented the 2020 budget to the National Assembly with the Revenue projections based on the proposed VAT increase.
Thus, yesterday’s announcement came as a dramatic U-turn to the senate’s initial hard stance on non-passage of the bill. However, we believe negotiations must have held which prompted the senate to reconsider the bill. Against this backdrop, we believe the passage of the bill may come in time to begin implementation within the first quarter of 2020.
Furthermore, we think this would bring an end to the communication tax bill that was proposed by the senate as the government will be wary of introducing two new taxes considering a badly squeezed consumer wallet.
According to data sourced from the Federal Inland Revenue Service (FIRS), total VAT collection for 2018 was N1.1 trillion. Thus, assuming the same tax base, we project VAT collection would increase by N554.0 billion if implementation starts 1 January. Furthermore, based on the finance minister’s communication that 85% would be given to states and local governments, this implies states would get new revenue estimated at N470.9 billion per annum.
While the quantum of increment in the minimum wage is quite difficult to estimate, we believe the revenue increase if the VAT bill scales through may be inadequate to absorb the jump in wage bill. Thus, state governments would need to be ingenious in developing new internal revenue-earning mechanisms to manage their growing fiscal burdens.
Furthermore, we reiterate our concerns on the impact on the VAT increment on consumer wallet. Increasing VAT revenue to pay some of these consumers increased wages, is simply a case of “robbing Peter to pay Paul” and it renders the proposition of the possible positive impact of increased minimum wage on consumption spending improbable.