The Federal Executive Council (FEC) of the Federal Government of Nigeria (FGN) on Wednesday, 11 September 2019, approved a 50% increase in the Value Added Tax (VAT) rate applicable on supply of goods and services in Nigeria, from 5% to 7.5%. The new rate is expected to take effect in 2020 after due consultations with relevant stakeholders.
It would be recalled that FGN attempted to increase the VAT rate to 10% in 2007, but this was faced with stiff opposition resulting in the suspension of the proposed increase. However, recently, there have been discussions and sensitisations by the tax authorities on the need for an increase in the current VAT rate. FEC's approval of the proposal for an increased VAT rate is the latest of this development and we have provided a high-level assessment of issues for consideration below:
- Modality for amendment: there are speculations that the amendment to VAT Act could be through an Act of the National Assembly or an Executive Order.
In this regard, it is imperative to note that Section 38 of the VAT Act empowers the Minister of Finance to amend VAT rate as well as the list of exempt and zero-rated goods and services in its First Schedule. Thus, the FGN could make the amendment through an Executive Order, on the ground that Section 5 of the Nigerian constitution empowers it to implement an Act of the National Assembly.
The above notwithstanding, making the amendment through an Executive Order is arguably contrary to the express provisions of the Nigerian constitution which vests legislative powers (to enact and amend laws) in the National Assembly. The supremacy provision of the constitution also implies that any conflict between the constitution and any other law should be resolved in favour of the constitution to the extent of the inconsistency.
In view of these strong arguments, it would be interesting to see the amendment route FGN seeks to take. FEC has nevertheless stated that due consultations with relevant stakeholders would be carried out prior to increasing the VAT rate.
- Implications for business: Nigeria has one of the lowest VAT rates in the world. However, it still practices a modified VAT system where taxpayers can only claim a limited portion of input VAT against output VAT charged. Consequently, without a corresponding adjustment to the VAT system, the increment may turn out to have a higher impact than envisaged. This is more so as entities will ultimately seek to pass the cost to end-users. This may result in increased inflation.
In view of the above, is important for the proposed changes to the VAT Act to include changes to Nigerian VAT system such that taxpayers can be allowed to claim all input VAT incurred against output VAT charged. Also, minimum VAT registration thresholds should be set to encourage small businesses in Nigeria. Hopefully, these matters will be considered during the stakeholders’ consultations and subsequently included in the amendment to the VAT Act.
Companies and other stakeholders are urged to review the proposed amendments in more details to ensure that all relevant and crucial issues are raised before the new VAT rate is effected. Companies are also advised to use the proposed amendments as a guide in planning their business operations and strategies in the near future.