National Assembly Proposes VAT Increase to 10% by 2025: New Tax Reforms Under Review

By DAYO ADESULU

Bill Also Suggests Reductions in Corporate Income Tax to Boost Economic Growth

The National Assembly of Nigeria is currently reviewing a bill that proposes an increase in the Value-Added Tax (VAT) from the current rate of 7.5% to 10% by 2025. The executive bill, recently examined by TheCable, outlines a gradual increment in the VAT rate, aiming to reach 12.5% by the years 2026 through 2029, and potentially increasing it to 15% by 2030.

Rationale Behind the VAT Increase

On May 8, 2024, Mr. Taiwo Oyedele, chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, emphasized the necessity of raising the VAT rate to enhance government revenue. This proposed increase is part of broader fiscal reforms aimed at strengthening Nigeria’s economic framework.

Corporate Income Tax Adjustments

In addition to the VAT increase, the bill includes provisions to reduce the Corporate Income Tax (CIT) from 30% to 27.5% by 2025, with a further cut to 25% scheduled for 2026. Notably, companies with a turnover of less than N20 million will be exempt from paying corporate income tax, aiming to alleviate the tax burden on smaller businesses.

Details of the Proposed Tax Structure

The bill specifies the following tax rates:

• VAT Rates:
• 10% for the year of assessment in 2025
• 12.5% for the years of assessment from 2026 to 2029
• 15% from the year of assessment in 2030 and beyond
• Corporate Income Tax Rates:
• 0% for small companies
• 27.5% for larger companies in 2025
• 25% for larger companies from 2026 onward

The bill further stipulates that if a company’s effective tax rate falls below 15%, it must recompute and pay an additional tax to ensure compliance with the minimum rate.

Application of Additional Tax Regulations

The provisions for the additional tax will apply to companies that are part of a multinational enterprise (MNE) group or those with an aggregate turnover of N20 billion or more in the relevant assessment year. The determination of any additional tax payable will adhere to regulations issued by the relevant tax authority.

As the National Assembly deliberates on this significant tax reform bill, the proposed changes aim to balance the need for increased government revenue through VAT hikes while simultaneously fostering a more favorable environment for businesses through reductions in corporate income tax. The outcome of this bill could have substantial implications for Nigeria’s economic landscape in the coming years.

The proposed changes to Nigeria’s tax system through the National Assembly’s consideration of the Value-Added Tax (VAT) increase and Corporate Income Tax (CIT) reductions are significant steps towards addressing the country’s fiscal challenges. Here’s a deeper look into the implications and context of these reforms:

1. Economic Context and Necessity for Tax Reform

Nigeria has been grappling with various economic challenges, including high inflation rates, fluctuating oil prices, and a growing need for infrastructure investment. The government’s revenue generation capabilities have been severely tested, necessitating a re-evaluation of the existing tax framework. Increasing the VAT is seen as a way to enhance government revenue, particularly as the country seeks to diversify its economy away from heavy reliance on oil.

2. VAT Increase Rationale

The increase in VAT from 7.5% to 10% is intended to provide the government with additional funds to invest in public services, infrastructure, and social programs. The gradual increase to 12.5% and eventually 15% is designed to spread the impact over several years, allowing consumers and businesses to adjust to the changes. This move aligns with global trends where VAT rates have been utilized as a significant source of government revenue.

3. Impact on Businesses and Consumers

While the VAT increase aims to bolster government revenue, it may also lead to higher prices for goods and services, affecting consumers directly. Businesses may face increased operational costs due to the higher tax burden, which could lead to price adjustments. However, the proposed reduction in CIT for larger companies could help offset some of these impacts, encouraging investment and growth within the private sector.

4. Support for Small Businesses

The exemption for companies with a turnover of less than N20 million from CIT is a strategic move to support small and medium-sized enterprises (SMEs). By relieving smaller businesses from corporate taxes, the government aims to foster entrepreneurship, job creation, and economic diversification. This approach is critical, as SMEs play a vital role in Nigeria’s economy, contributing significantly to employment and economic growth.

5. Compliance and Regulatory Framework

The bill outlines specific compliance measures, including the requirement for companies with an effective tax rate below 15% to recompute and pay an additional tax. This move is intended to ensure that large corporations contribute their fair share to government revenues, especially those with significant turnover. The regulatory framework will need to be robust to ensure effectiveness and minimize tax evasion.

6. Potential Challenges and Public Sentiment

While these reforms aim to strengthen the economy, they may encounter resistance from the public and businesses concerned about the rising cost of living and operational expenses. Public sentiment is crucial, as tax reforms often require buy-in from citizens and businesses alike. The government will need to communicate the benefits of these changes effectively, emphasizing how the increased revenue will be allocated to improve public services and infrastructure.

7. Long-term Vision and Sustainability

Ultimately, these proposed tax reforms are part of a broader vision to create a sustainable economic environment in Nigeria. By increasing VAT and adjusting corporate taxes, the government is positioning itself to generate the necessary funds to invest in critical areas such as education, healthcare, and infrastructure. The long-term success of these reforms will depend on effective implementation, transparency, and accountability in how the generated revenue is utilized.

Conclusion

The ongoing discussions in the National Assembly regarding VAT and CIT reforms represent a pivotal moment for Nigeria’s fiscal policy. As the government seeks to enhance its revenue generation capabilities while supporting economic growth, the outcomes of these proposals will significantly impact the country’s economic landscape in the years to come. Balancing the interests of the government, businesses, and consumers will be key to the successful implementation of these reforms.