In 2010, the Federal Government of Nigeria increased the VAT rate from 5% to 10% but was short-lived on the account that, the increase was not right for the economy at that time, the increase will increase inflation, and so many more. The proposed increase from 5% to 7.5% has been greeted with the same reasons. The question we must then ask, would there ever be a right time to increase the VAT rate in Nigeria?
There is a world of difference between ‘solving a problem right’ and ‘solving the right problem’. Solving a problem right is to design an intervention or a solution addressed to the symptoms of the problem, which results are often unintended, counterproductive or worsen the problem you are trying to solve. Solving the right problem means designing an intervention addressed to the root cause of the problem to achieve lasting and enduring solution.
Increasing the VAT rate is an attempt to solving a problem right, which result would be unintended or counterproductive to the Nigerian economy. Hence, increasing the VAT rate will not solve the revenue gap, but could increase the rate non-compliance. The right problem to solve is the Tax Policy Mix and Design.
In VAT Design, the two key factors to consider are ‘what is to be taxed’ and ‘who is to collect the tax’. Below is the snippet of the design of VAT in four countries that are comparable to Nigeria.
|VAT Threshold (N)||90,000,000||Nil||13,000,000||24,000,000||38,000,000|
Angola is comparable to Nigeria as an oil producing country in Nigeria. Ghana, a neighbouring West African country. South Africa as the second largest economy in Africa. The United Kingdom as the origin of Nigerian VAT Act.
The VAT threshold technically exempts the extreme poor people and small companies from the VAT regime, thereby increasing compliance and high revenue from VAT. Giving the poor infrastructural (no electricity, no good roads, high cost of education & healthcare, etc.) base in Nigeria, the VAT threshold should be a N100million and the VAT rate should be 10%.