KEY POINTS

• VAT revenue increased by 9.11 percent in Q2 2024, reaching N1.56 trillion ($948-million).
• Sectors such as health and agriculture saw the highest growth in VAT contributions.
• Inflation remains a critical issue, undermining the benefits of revenue growth.
• Rising costs of goods and services continue to strain households and businesses.

The Nigerian government recently declared a 9.11 percent increase in Value Added Tax (VAT) revenue, totalling N1. 56 trillion in Q2 2024 according to Businessday. This introduces both prospects and issues for the country’s economy.

Although this means a positive change in the government’s revenues from taxes, the economic realities of the average Nigerian remain bleak, especially with the rising inflation rates. 

VAT revenue increase: A positive for government, a burden for citizens 

The increase in VAT collection is mainly due to higher consumption taxes across sectors such as health, agriculture and manufacturing. NBS also showed that some of the biggest increases were observed in sectors such as human health and social work activities, which increased by 98.

An increase of VAT contributions by 44 percent for the year. The manufacturing sector alone accounted for 11. 7 percent of total VAT revenue while the information and communication sectors were the second closest with 9.02 percent.

This growth is good for the government as it means more taxes collected but it does not necessarily mean that the common man will get any reprieve. However, the consumers are the ones who bear the responsibility of paying the VAT which increases the cost of goods and services especially when there is high inflation. 

Inflation continues to erode purchasing power 

The inflation rate in Nigeria has persisted to rise even with the increase in the VAT revenue. Since inflation affects the citizens’ ability to purchase basic necessities, the rise in VAT only adds to their woes.

This means that while the government is able to generate more revenues, the costs of goods and services are high and this puts pressure on households to spend a lot on basic needs such as food and health care.  

In Q2 2024, Nigeria recorded higher consumer prices which has been attributed to the depreciated naira and the escalating fuel prices.

Most families struggle to make ends meet and meet their basic needs, while companies, especially in the retail industry, are in a dilemma whether to transfer the VAT costs to the consumers or absorb them, which would lead to a cut in their profit. 

Effect on Nigerian businesses 

The rise in VAT collection means that businesses are growing in size, but this growth is not without its consequences. The SMEs which are the life wire of the economy bear the burden of VAT collection in Nigeria.

Some of the challenges that many organizations are already experiencing include high energy costs, fluctuation in foreign exchange rates, and disruption of supply chains. Including a 9 percent increase in VAT revenue only increases their problems further. 

 Moreover, companies in sectors such as real estate and household goods, which experienced the reduced growth rate of VAT, remain under pressure as the consumers’ spending decreases.

High costs of production coupled with low purchasing power means that there are fewer people who can afford to buy the non-essential products hence slow growth in these industries. 

 Balancing tax revenue and economic growth 

To the Nigerian government, there is no better way of generating more revenues for the development of critical infrastructure and provision of public services than through the enhancement of VAT.

However, the current economic challenges that are facing most households and businesses require that the government come up with a balanced taxation system. This is because the effort to enhance tax collection without regard to inflation and economic growth may worsen the citizens’ financial plight. 

Policymakers have to seek how to bring inflation under control, enhance employment opportunities prop up weak sectors in the economy as well as enhance tax productivity.

Spending the extra VAT revenues on social welfare, development projects, and education might go a long way in addressing some of these economic issues.

When the government directs its money towards funding programs that can enhance the citizens’ access to affordable health care, transport and energy, it is able to offer the citizens tangible value.