Finance

New VAT rate to be carried out in phases, says Panel

The Chairman of the Presidential Tax and Fiscal Policy Reforms Committee, Taiwo Oyedele, has said the proposed plan to increase the Value Added tax rate from 7.5 per cent to 10 per cent will be implemented in phases.
This was as he revealed that empirical data had confirmed that less than 10 per cent of affluent Nigerians fulfill their obligation to file and pay the correct amount of taxes to the government.
Speaking at a public consultation workshop for journalists and public analysts held in Abuja with the theme, ‘Proposed changes to the national tax policy, tax laws and administration,’ on Monday, Oyedele stated that the VAT revenue-sharing formula had also been reviewed to increase state collection rate from 50 to 55 per cent, local government area to 35 per cent and reduce FG rate to 10 per cent.
He asserted that implementing this measure would not only enable the government to sidestep a notable decline in revenue but also mitigate the sudden surge in prices of goods and services overnight.
He said, “The reforms will reduce Company Income Tax from 30 per cent to 25 per cent but it will be implemented in phases, so like in 2025, it may be reduced from 30 per cent to 27.5 per cent and then in 2026, reduced from 27.5 per cent to 25 per cent. The VAT as well, which is part of the items we are adjusting upwards will also be in phases, in 2025, a little increment and in 2026, another increment.
“So overall, we don’t want to drop government revenue overnight, if we adjust overnight, the impact on government revenue will be significant and if it is increased overnight, the impact is still significant, so we would see a lot of phasing in the work we are doing but we would pass the law and it would tell you what the rate would be in the future. These are some of the things we are saying should be done to prove that there is proper planning.”
VAT is a 7.5 per cent consumption tax administered by the Federal Inland Revenue Service when goods are purchased and services rendered. The final consumer bears the tax burden.
Revenue generated from VAT is usually disbursed to the three tiers of government through the Federation Accounts Allocation Committee at a current formula of 15 per cent for the central government, 50 per cent for states and 35 per cent for local governments.
Checks by our correspondents showed that the government raked in N10.1tn from the collection of Value Added Tax under former President Muhammadu Buhari and constitutes a major source of income for sub-nationals.
Despite the huge amount, the government has clamoured for increased rates. The former Minister of Finance, Zainab Ahmed, had advised the current government to increase VAT from 7.5 per cent to 10 per cent.
The tax expert added that the committee had also recommended that food, education, medical services and accommodation to carry zero per cent VAT in order to reduce the cost of products affecting headline inflation.
According to him, steps have been identified to increase the compliance rate from 30 per cent to more than 90 per cent.
“Our major contributors to inflation account for 82 per cent of why there is inflation and why we think our recommendation will reduce inflation and not increase it. If we don’t allow this to work, we will lose out on the opportunity to make things better for ourselves.
“The solution to VAT is a political solution and not legal, so we have recommended that VAT collection should be in the constitution and we have recommended to the national assembly put VAT under the exclusive legislative list so that it can collected centrally but 90 per cent goes to the state and 10 to the central government and we think that would resolve some of the problems, particularly the percentage of derivation that they would get.”
“One of our recommendations is that nobody should qualify for elective office or government appointment unless they have fully complied with their tax obligations in terms of declaration and payment. Some rich Nigerians don’t pay tax and that is correct, we have the data to support that, if you look at the rich Nigerians who pay the right amount of tax are less than 10 per cent and that is where the money is and not in the informal sector.”
In his presentation, the chairman also revealed that the proposed list of harmonised taxes and levies included income tax, property tax, Value Added Tax, customs duties, excise tax, stamp duties, special levy, and harmonised levy.
He also hinted at the social security contribution, which he said was “not a tax.”
He said the Harmonised Tax Levy, which comprised road and market taxes, was meant to cater for the local governments.
The PFPTRC chairman said under the proposed new tax regime, income tax should now comprise Company Income Tax, Withholding Tax, CPT, and capital gain tax, among others.
He said, “VAT is very sensitive because people immediately feel it when paying for goods and services. what we have today is the collection of VAT on so many things including things that should not attract VAT like food, education, and health and many of those things have what we call tax exemption.
“There is another regime that is called Zero-rated VAT, which says that if you put VAT at zero per cent all the VAT incurred to produce the items will be paid back by the government. They have a choice between expert and zero rated for food
“We are saying that we need to take a second look at our VAT rate and focus on the things our people spend the money on the most, food, transport, and accommodation, so on those items, we want to remove the VAT as much as possible.”
He added, “That is where more than 90 per cent of our population spends more than 80 per cent of their income but once we do that, government revenue will drop by at least 60 per cent and we are very practical to know that nobody will approve that recommendation. so for them to approve, we would approve the VAT rate upward on anything other than rent, food, transport and essential items. Businesses can also claim input credit on services and assets and this will enhance their ability to start new businesses and grow existing ones. And this is why we recommended higher rates and share for states.”
A breakdown of the eight taxes showed that withholding tax, Petroleum Profits Tax, and Capital Gains Tax would be merged into company income tax, collected by the Federal Inland Revenue Service and be payable by companies and individuals with a sharing formula of 52.68 per cent to FG, 26.72 per cent or 100 per cent to states, and 20.60 per cent for LGAs.
The consumption tax and entertainment tax will be merged into the VAT, which will be shouldered by consumers, collected by the FIRS, and subsequently allocated 10 per cent to the Federal Government, 55 per cent to the states, and 35 per cent to the local governments.
Property tax, including the amalgamation of land use charges, tenement rates, and ground rates, will be consolidated into a single levy. This tax will be borne by property owners, and collected by the State Internal Revenue Service, with 70 per cent allocated to the respective states and 30 per cent for LGAs.
Customs duties, encompassing import and export duties and levies, will be unified into a singular levy. Importers will be responsible for payment, with collections managed by the Nigerian Customs Service. The distribution will allocate 52.68 per cent to the Federal Government, 26.72 per cent to the states, and 20.60 per cent to LGAs.
The gaming tax, liquor license fee, and telecom tax will be consolidated into an Excise tax structure. This tax will be payable by both manufacturers and consumers, with collection overseen by the FIRS. The revenue generated will be distributed, with 52.68 per cent allocated to the Federal Government, 26.72 per cent to the states, and 20.60 per cent to local governments.
While the electronic money transfer levy will be integrated into Stamp duties, which will be payable by both companies and individuals, the collection of the duties will be jointly managed by the FIRS and state IRS, with the entirety of the revenue remitted to the respective states.
The Tertiary education tax, NITDA, NASENI, ITF, LCL, and NDDC will be consolidated into a Special levy. This levy will be payable by companies and collected by the FIRS, with the entirety of the revenue collected retained by the government.
The harmonised levy for road and market taxes will be imposed on transporters and traders. This levy will be collected by the state’s Internal Revenue Service and distributed, with 30 per cent allocated to the states and 70 per cent to the local governments.
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