By Inwalomhe Donald
The increase in the VAT rate from 5 per cent to 7.2 per cent recently is still one of the lowest in Africa. This is important because the federal government only retains 15 per cent of the VAT; 85 per cent is actually for the states and local governments. The states need additional revenue to be able to meet the obligations of the minimum wage.
Even at 7.5%, President Buhari Value Added Tax VAT in Nigeria is still among the lowest in Africa and the world. I took a cursory look at VAT rates across major continents and discovered that even with the rate of 7.5%, Nigeria will still remain one of the lowest VAT rates in the world. We have one of the lowest VAT in Africa at 7.5%. The average is 15% in Africa. Ghana is even 17%. It is higher in many countries. Our tax is not up to 5 per cent of our GDP at this moment because the tax steak is still small. Those in the tax book, organizations and individuals still remain small.
The VAT rate in Nigeria is one of the lowest in the world, apart from the United Arab Emirates (UAE) that has just introduced five per cent rate, VAT is a consumption tax, only payable by choice. The IMF said Nigeria’s VAT rate is one of the lowest in the world. My position is to first expand the tax net. South Africa Charges 15% VAT higher than Egypt (14%) and Ghana (17%) In South Africa, VAT is now levied at the standard rate of 15% on the supply of goods and services by registered vendors. The tax rate was 14% until 31 March 2018.
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Data has revealed that Aruba charges the lowest 1.50 VAT rate in the world, followed by Andorra (4.50), Nigeria (7.5), Canada (5.0), Saudi Arabia (5.0), Taiwan (5.0) among others. In Europe, Hungary tops the highest with 27% VAT rate
South Africa Charges 15% VAT higher than Egypt (14%) and Ghana (17%)
In South Africa, VAT is now levied at the standard rate of 15% on the supply of goods and services by registered vendors. The tax rate was 14% until 31 March 2018.
The Egyptian VAT rate is 14% Standard on all other supplies of goods, services, and imports. However, the country charges 0% on exports and related services. All financial services, Financial services; medical supplies; healthcare; public broadcasting; education; domestic energy; basic foodstuffs; and the sale and leasing of real estate are exempted.
President Buhari recently signed the 2020 Finance Bill into law at the Presidential Villa in Abuja. This is coming nearly two months after the National Assembly passed the bill and forwarded it to the president for assent in November 2019. The law has paved the way for an increase of the Value Added Tax (VAT) from five per cent to 7.5 per cent.
The proposed increase to the VAT rate has been previously considered by the federal government, with one of the reasons in support of a VAT rate increase being that Nigeria’s 5% VAT rate is the lowest in Africa. However, those arguments do not acknowledge the difference between the VAT regimes in the other countries and Nigeria, where the VAT regime is a variant of a sales tax.
Previously, the VAT rate had increased to 10% in 2007, but the rate was returned to the 5% rate following opposition by certain sectors. Some believe that the government needs to consider this as an opportunity for a broader VAT reform in Nigeria, beyond merely increasing the VAT rate.
The multiplicity of Value Added Tax (VAT) systems across Africa exposes multinational companies to tax risk, errors and inconsistencies in the application of the law. Most of Africa’s 54 countries have VAT systems in place which foreign investors and businesses cannot afford to be ignorant about.
A potentially lucrative deal in Africa can easily turn sour if the parties do not take into account the potential liability for VAT registration or the basic structure of VAT in the relevant country.
The interpretation of Value-Added Tax (VAT) legislation in Africa often creates uncertainty for businesses trading in and across Africa. African countries understand the importance of having a tax base, VAT making up a large portion of revenues collected. Not being VAT compliant may lead to penalties and additional tax.
Kenya will not raise its value added tax (VAT) to match the uniform rate for the rest of the countries in the East African Community (EAC), the Treasury has said, offering relief to households and businesses.
Treasury Principal Secretary Kamau Thugge said Kenya’s VAT on consumer goods would remain at 16 per cent despite calls to align the rate with the rest of the trading bloc’s members such as Tanzania and Uganda, which charge 18 per cent.
There has been growing concern that different rates at which member countries levy domestic taxes is distorting the EAC common market. The Treasury’s decision to retain the current VAT rate has spared consumers an increase in the cost of commodities such as electricity, milk, newspapers, textbooks, fertilisers, alcohol, cigarettes, mobile phone handsets and airtime.
Global institutions, including the Washington-based Institute of International Finance (IIF) had tipped the Treasury to raise VAT to 18 per cent as a way of boosting revenues and arrest fiscal deficits that have seen the State take on huge loans.
“Improving the VAT’s collection to five per cent of GDP (gross domestic product) can further cut the deficit by 0.6 per cent of the GDP,” the institute said in its report on Kenya.
“Furthermore, the VAT rate could also be raised from the current 16 per cent to 18 per cent, similar to the rates in Uganda and Tanzania.”
The IIF, which is a global association of the financial industry, also advocates a freeze in growth of public wages and salaries as yet another measure to lower budget deficits.
Finance minister Malusi Gigaba has announced that South Africa will see its first VAT rate increase for the first time in 25 years.
As of 1 April 2018, the effective VAT rate will rise from 14% to 15% adding approximately R22,9 billion to the fiscus, Gigaba said in his budget speech on Wednesday. “In developing these tax proposals, government reviewed the potential contributions from the three major tax instruments which raise over 80% of our revenue; personal and corporate income tax and VAT,” Gigaba said. “While there have been talks of VAT increases prior to the Budget speech as presented by the Finance Minister , the across the board rise to 15 percent on all goods and services is somewhat of a surprise, but arguably the most effective way of raising revenue,” Koranteng said.
It does mean however that general inflation will increase and the average consumers’ pockets will be hit the hardest. The VAT increase has an unpopular social element given that it has a bigger impact on the lower to middle income market, while at the same time our VAT rate is below the global average, therefore the increase is somewhat justifiable in addressing the fiscal gap.
Inwalomhe Donald writes from Abuja