Finance

EIU Report: FG May Raise VAT to 15% Before 2025

*Govt’s tax take among world’s lowest, undermined by widespread evasion, large informal sector

A report by the Economist Intelligence Unit (EIU), London, has predicted that the federal government might effect a 100 per cent rate increase in the Value Added Tax (VAT) from the current rate of 7.5 per cent to 15 per cent before 2025 in order to raise government’s revenue.

The report titled, “Country Report Nigeria,” stated that the anticipated increase in VAT was inevitable given the rising public debt burden and the likelihood that the Petroleum Industry Bill (PIB) might not be able to deliver considerable increase in government’s revenue.

It also stated that the predicted VAT increase would be implemented instalmentally in 2022, 2024 and 2025.

The report from the research arm of The Economist magazine explained: “We expect three equal VAT rate increases, taking the rate to 15 per cent by 2025. The first is expected in 2022, prior to the next elections but seemingly inevitable given a rising debt burden, with further rises in 2024 and 2025. Even then we expect fiscal revenue to peak at just five per cent of the GDP in 2024, which also assumes no fuel subsidies beyond 2022.

“The federal government’s tax take is among the world’s lowest, undermined by widespread evasion and a large informal sector. The PIB is likely to be balanced between the interests of the treasury and investors, and so not deliver a considerable increase in revenue.

“Consequently, the VAT, currently at 7.5 per cent, is likely to be used as a means of repairing the public finances.”

The report also projected that public finances would remain in deficit between 2021 and 2025, because an average global crude oil price of $63.8/barrel in 2021-25, which makes up for more than 50 per cent of the federal government’s retained income, would be insufficient to balance the budget.

It added that the percentage of public debt to the GDP would stand at 35.4 per cent of the GDP in 2025.

“Overall, we expect the fiscal deficit to narrow to 3.3 per cent of GDP in 2021 (from 3.7 per cent of the GDP in 2020) as international oil prices rise.

“Also, the VAT rate increases and rising oil prices will push down the deficit to 2.6 per cent of the GDP in 2023-24, but a decline in average global oil prices in 2025 will cause the shortfall to widen to 3.0 per cent of the GDP in that year.

“The government has raised its public debt limit to 40 per cent of GDP to incorporate higher budget shortfalls over the medium term and to accommodate securitisation of the Central Bank of Nigeria’s deficit-financing as long-term debt. We expect public debt to reach only 35.4 per cent of the GDP in 2025,” the report added.

It further projected that, “high debt-servicing costs, a large public wage bill, and the purchase of COVID-19 vaccines will elevate expenditure. Capital investment will be emphasised to compensate for the disappearance of petrol subsidies once the PIB is enacted (which is expected in late 2021).

“The government will justify price deregulation by promising to invest the savings in infrastructure and will face pressure to match rhetoric with action.”

The report also identified price controls on petrol prices and electricity tariffs as another important area of focus, stressing that in spite of the astonishing is lacking.”

It, however, hinged the hope of market-determined petrol pump price on the Dangote Refinery, a new 650,000-barrel/day refinery near Lagos expected to come on-stream in 2022.

It, therefore, opined that Nigeria’s economic policy choices would be skewed, “towards protectionism and, for reasons of incompatibility will lean away from internationalism,” even though the country would remain a major player in Africa, given its size.

It added: “Land borders that were closed to goods since late 2019 have reopened, but Nigeria’s approach to encouraging regional trade will be minimalist, beyond its obligations under the African Continental Free Trade Agreement (AfCTFA).

“The trade pact compels Nigeria to eliminate 97 per cent of tariff lines over the next five to 10 years. This deadline will not be met zealously, given high prices in Nigeria and declining external competitiveness for industries that could otherwise benefit from regional market access.”

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