The Dividend from Raising the Rate of VAT

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Thursday, August 12, 2021 / 10:38 AM / by FBNQuest Research / Header Image Credit: Pexels

 

Drawing upon data from the Federal Inland Revenue Service (FIRS), the NBS distributes a quarterly update on the collection of VAT. The most recent (for Q2 '21) shows that the total collected  breached the NGN500bn threshold for the first time and increased by 3.2% q/q. This is a reasonable rate for an economy that is barely growing. We suspect that it was largely the result of efficiency gains.

 

The y/y rise in total collections was 56.6% but we should remember that cash transactions predominate in Nigeria and that the country was under lockdown in Q2 '20. The broader trend is positive, with the full-year total rising by 8% in 2019 and 29% last year.  The acceleration reflects the hike in the standard rate of VAT from 5.0% to 7.5% with effect from February 2020. The new rate still lags the standard 15% levied by Nigeria's fellow members of the Economic Community of West African States (ECOWAS).

 

The NBS only provides sector analysis for VAT that is local and is not related to imports. Our chart covers this sub-total, which accounted for about half of all VAT collected last year.

 

Professional services topped the table in Q2 '20 and was second this year. We assume that it includes telecoms, the fastest growing sector of the economy before and during the COVID-19 pandemic. Tax collected from lawyers, accountants and other professional operations (outside the financial sector) woud also be part of this category.

 

Commercial and trading was third in the table in Q2. It covers smaller operations and some SMEs, we assume. This is an area where there is scope for improvement in compliance, ie widening the tax net.

 

Other manufacturing tops the table. The Q2 reporting season has produced strong results from a range of listed manufacturers.

 

The wider macro picture is not good. Total federally collected tax revenue (before distribution to the three tiers) represented 6.7% of GDP in 2019 and 5.9% last year according to CBN data. A recent World Bank research note concluded that Nigeria's ratios were the lowest anywhere. The ratios for the non-oil revenue element were 3.0% and 2.9% respectively.

 

An oil producer and economy on Nigeria's scale should be generating at least 15% from its total tax take, and closer to 20%. The numbers we have cited show that another hike in the standard rate of VAT would be a decent step in the right direction. Improving compliance and the culture of taxpaying is essential but produces less rapid results.

 


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