VAT Collection Edges Higher But Indicates Weaker Economy

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Tuesday, July 28, 2020 1:11 PM / By CSL Research / Header Image Credit: Financial Tribune


Yesterday, the Nigerian Bureau of Statistics (NBS) published data on Value Added Tax Collection (VAT) collection for the first half of 2020. According to the data, VAT collection increased by a modest 8.5% y/y to N651.8bn in H1 2020 from N601.0bn in H1 2019. Suprisingly, VAT collection for Q2 2020 climbed higher by 0.8% q/q and 4.9% y/y to N327.2bn. The biggest contributing sectors to VAT collection, Professional services (up 40.9% y/y) and Other manufacturing (up 2.7% y/y) remained resilient during H1 2020. In addition, VAT collections on Breweries, Bottles and Beverages increased 12.0% y/y in H1 2020 although on a q/q basis, we observed a deep contraction of 27.3% in Q2 2020.


Further analysis of the data provided some indication on how weak economic activities were in H1 2020 given the disruptions brought by the global pandemic particularly in Q2 2020 when there was full lockdown in Lagos, Ogun and FCT in April. We recall the VAT rate which was increased by 50% from 5.0% to 7.5% kicked off in February 2020 and must have provided a significant buffer for VAT collections in H1 2020. If we adjust for the increase in the VAT rate, we think economic activities must have slowed heavily given that the impact of a 50% increase in rate translated to a relatively meagre 8.5% y/y increase in absolute collections.


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The numbers confirm our view that the steep rise in prices of goods and services nationwide occasioned by high inflation and a steep currency depreciation in the face of stagnant wages and a pandemic has tightened the squeeze on consumer spending and as such raising taxes in this setting would only do little to improve government revenues.Thus, the Federal government needs to do more from a policy perspective to improve business operating environment as well as consumer conditions post the pandemic. In our opinion, this would have a multiplier effect on companies' revenue as well as consumer demand which would not only boost VAT collections but also other taxes such as Company Income Tax.


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