Nigeria May Adjust VAT Rate To 15% In Next Three Years ~EIU

In a bid to raise its revenue profile, Nigeria may hike its Value Added Tax (VAT) rate to 15 percent from the current 7.5 percent, according to a projection by the Economist Intelligence Unit (EIU), London.

According to the EIU report titled, “Country Report Nigeria,” an increase in the consumption tax becomes inevitable given the rising public debt burden and the likelihood that the Petroleum Industry Bill (PIB) might not be able to deliver a considerable increase in the government’s revenue.

The Unit also projected that increase in VAT rate would be implemented in installment in the next three years to 2025.

“We expect three equal VAT rate increases, taking the rate to 15 percent 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 percent 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 percent, is likely to be used as a means of repairing the public finances,” the report stated.

The report also projected that public finances would remain in deficit till the year 2025, because an average global crude oil price of $63.8/barrel in 2021-25, which makes up for more than 50 percent 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 percent of the GDP in 2025.

“Overall, we expect the fiscal deficit to narrow to 3.3 percent of GDP in 2021 (from 3.7 percent 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 percent 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 percent of the GDP in that year.

“The government has raised its public debt limit to 40 percent 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 percent 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,” it said.

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.