The proposed increase of Value Added Tax (VAT) rate from 5 to 7.5 percent (50 percent increase) by the federal government is subject to review and approval of the National Assembly, Minister of Finance, Budget and National Planning, Mr Zainab Ahmed, has said.
Also, the minister clarified that the increment will be to 7.5 per cent and not 7.2 percent (44% increase) she announced on Wednesday at the end of the meeting of Executive Council of the Federation in Abuja.
The minister said in a statement on Friday by her spokesperson, Mr Yunus Abdullahi, that the proposed increase followed the recommendation of the presidential technical advisory committee.
Abdulahi said early this year the federal government constituted the committee comprising competent and leading economists from both the public and private sectors chaired by Lagos-based Economist and Managing Director/ Chief Executive Officer of Financial Derivatives Company Limited, Bismack Rewane.
The committee, inaugurated on January 9 this year, was mandated to profer advice on ways to realise alternative sources of raising funds for the implementation of the new minimum wage by the government.
The committee submitted its report on March 21 with the increase in the VAT rate from 5 per cent to 7.5 per cent as one of its key recommendations to government to handle the issue.
The committee based its recommendation on observation that the prevailing VAT rate in Nigeria was still about half the African average and amongst the lowest in the world.
Also, the committee said the benefit of an increase in the VAT rate will be more beneficial to state governments and local government areas, many of which are already facing difficult fiscal conditions.
About 85 per cent of the revenue collections expected from the VAT rate increase will go to the subnational governments.
“The proposed increase is subject to legislative intervention by National Assembly who will have to amend the Revenue Act to reflect the proposed increase,” the minister said.
“Existing VAT Act exempts the basic necessities such as food, medicines and education, which therefore minimises the impact on the poor and vulnerable segments of the Nigerian society from the burden thereof.
It is expected that the exemptions will be maintained in the amended Act.
“The VAT increase, if correctly implemented, could bring in huge revenues, which would actually reduce the fiscal deficit burden,” the minister added.
She said the government’s borrowing programme could then ease.
She said the policy will reduce the financial burden of the states and local governments, to allow them focus on issues like poverty reduction, healthcare and power generation and transmission.