— Oke Abosede, discusses the role of Value Added Tax plays in developing economies of the world in this article
Value Added Tax, or VAT, is applied to the net sale price for every item a consumer purchases from a retailer, and this is noted on the receipt that is provided. Similar to a turnover tax, value-added taxation (VAT) is levied on sales to final customers as well as on previous business-to-business transactions within the supply chain.
VAT is seen as a flat tax that is applied to a product. In several aspects, it is comparable to a sales tax, with the exception that in a sales tax, the customer pays the full amount due to the government at the time of sale. A transaction’s participants each pay a different percentage of the tax amount with a VAT.
The first schedule of the VAT Act states that certain products are specifically exempt from paying VAT in Nigeria. These products include medical and pharmaceutical items, basic food items, books and educational materials, newspapers and magazines, baby products, commercial vehicles and their spare parts, agricultural equipment and products, and veterinary medicine.
All products and services sold in Nigeria are subject to a flat rate of 7.5% VAT unless they are zero-rated or on the VAT exempt list, as detailed in Section 4 of the VAT Act. One example would be exported items; all exported goods are zero-rated, meaning that the VAT on them is applicable, but at a zero percent rate. This implies that while input tax is repaid, VAT is collected from the foreign buyer.
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FIRS VAT-Collect is a platform that the Federal Inland Revenue Service has put in place for the automated tracking and remittance of VAT. Among the users of the system are other shops and domestic airlines (for the immediate remittance of VAT on ticket sales).
When offering services to Nigerian clients, non-resident businesses are required to charge, collect, and send VAT to the FIRS in the amount of the transaction.
According to the National Bureau of Statistics, “On the aggregate, Value Added Tax (VAT) for Q2 2023 was reported at N781.35 billion, showing a growth rate of 10.11% on a quarter-on-quarter basis from N709.59 billion in Q1 2023.
“Local payments recorded were N512.03 billion, Foreign VAT Payments were N142.63 billion, while import VAT contributed N126.69 billion in Q2 2023. On a quarter-on-quarter basis, the activities of extraterritorial organizations and bodies recorded the highest growth rate with 212.06%, followed by real estate activities with 123.09%.
“On the other hand, activities of households as employers, undifferentiated goods- and services-producing activities of households for own use had the lowest growth rate with –57.06%, followed by agriculture, forestry, and fishing with –32.86%. In terms of sectoral contributions, the top three largest shares in Q2 2023 were manufacturing with 29.64%; information and communication with 21.19%; and financial and insurance activities with 11.18%.”
Lower-income customers would pay a far larger percentage of their income in taxes under a value-added tax (VAT) system. The net economic cost of VAT is comparable to sales tax, even though it taxes products and services at every stage of production and sale. Between what the seller really receives and what the buyer eventually pays, sales taxes create a wedge. The tax may result in a drop in the amount that companies must pay their investors and employees, or it may raise the final price that consumers pay. Data and theory suggest that VAT is passed on to customers in the form of higher pricing. Real household income declines in the same way regardless of whether nominal incomes increase or decrease.
When expressed as a percentage of current income, the tax burden of a value-added tax (VAT) is regressive because households with lower incomes tend to spend a bigger fraction of their income on consumption than do households with higher incomes. For low-income households, the tax burden as a percentage of income is largest and decreases significantly as household income increases. When expressed as a percentage, the burden of a VAT is more commensurate with income since revenue saved now is usually spent later.
The VAT has several advantages, such as being neutral because it would apply to all kinds of businesses, based on consumption to provide a consistent revenue base, encouraging or at least not discouraging businesses to control costs, having the potential to raise large amounts of money at a low tax rate, being simple to administer, potentially eliminating export barriers under certain circumstances, and supporting the development of a more equitable tax system.
Among the negative aspects that have been criticized are that it is regressive, promotes excessive spending, lacks a countercyclical balance, damages new and marginal business ventures, complicates administrative processes, encourages inflationary tendencies, functions as a “hidden tax,” conflicts with the way state and local sales taxes are currently structured, and fails.
According to Ogidiaka Ovie, a finance analyst, raising the VAT will benefit the economy and bring in more money for the federal government.
He said, “An increase in VAT which translates into increased revenue for the FG helps to boost the economy, creates jobs, helps the government in its basic function of security, infrastructural development and social contribution for the welfare of the general public.”
A study claims that poor countries have major challenges when trying to put up efficient tax systems. First off, small, unofficial companies or agriculture employ the majority of people in these countries. Because they are rarely given a regular, fixed wage, their earnings vary, and many are paid in cash, off the books, it is challenging to establish the foundation for an income tax. Furthermore, employees in these nations are less inclined to spend their earnings at big-box stores that maintain accurate records of their inventories and sales. Because of this, contemporary revenue-generating strategies such as income taxes and consumer taxes have less of an effect on these economies, and the government finds it extremely difficult to enforce high tax rates.
Establishing an efficient tax administration is difficult in the absence of a skilled and educated workforce, in situations where money is tight and cannot be used to pay tax officials fairly, computerize the process, or even to provide efficient phone and mail services, and in situations where taxpayers have limited access to resources for account-keeping. Hence, governments usually take the easy road and design tax structures that allow them to exploit whatever alternatives are available, rather than designing rational, modern, and efficient tax systems.
In addition to their financial limitations, statistical and tax offices find it challenging to generate accurate statistics due to the informal character of the economy in many developing countries. Due to a lack of data, policymakers are unable to assess the possible outcomes of major tax system reforms. Consequently, marginal modifications are often chosen over large structural changes, even when the former are obviously better. This keeps tax systems that are ineffective in place.
In developing nations, income distribution is typically not equal. The wealthy should ideally pay more in taxes than the poor in order to produce large tax revenues, but wealthy taxpayers often have the political and financial power to thwart fiscal measures that would increase their tax rates.
Furthermore, tax policy in underdeveloped countries often concentrates on the art of the possible rather than the ideal. It is therefore not unexpected that economic theory, in particular the literature on optimal taxation, has had comparatively little influence on the design of the tax systems in these countries.
Although most developing countries have introduced value-added taxation (VAT), as per an IMF study, it often lacks certain essential components. Services, the wholesale and retail industries, and other major businesses have been left out of the VAT net. In addition, the credit system is unduly restrictive, which causes delays or denials in the provision of sufficient credits for VAT on inputs, especially when it comes to capital items.
numerous developing countries have two or more VAT rates, including numerous members of the Organization for Economic Cooperation and Development. The administrative cost of tackling equity issues through different VAT rates may be higher in developing countries than in industrialized ones, despite the fact that numerous rates are politically appealing because they ostensibly—though not always—serve an equity aim. The expense of a multiple-rate system must be carefully considered.
VAT now makes up an average of more than 30% of the total tax revenue for the more than 160 countries that levy it, making it a major source of money. The US is unique in that it does not impose a value-added tax. In developed economies, its contribution to GDP ranges from 4% to 7%, but in developing countries with low incomes, it exceeds 7%. Because it is such a significant source of revenue, the VAT has drawn a lot of criticism, some of which is warranted and some of which is not.
