Effect of the new vat rate in nigeria

The Value Added Tax (VAT) rate in Nigeria was increased from 5% to 7.5% in February 2020. The effect of this increase on the economy and various sectors is still being felt. Here are some of the key effects:

Positive effects:

  1. Increased government revenue: The VAT increase is expected to generate additional revenue for the government, which can be used to fund infrastructure development, social programs, and other public expenditures.
  2. Boost to manufacturing sector: The increased VAT rate may encourage local manufacturing and production, as imported goods become more expensive. This could lead to a growth in the manufacturing sector and job creation.
  3. Improved tax compliance: The VAT increase may lead to improved tax compliance, as businesses and individuals are more likely to pay taxes to avoid penalties and fines.

Negative effects:

  1. Increased cost of living: The VAT increase is likely to lead to an increase in the cost of living, as businesses pass on the increased cost to consumers. This could lead to a reduction in consumer spending and a decrease in economic activity.
  2. Job losses: The increased cost of doing business may lead to job losses, particularly in the informal sector, where small businesses and entrepreneurs may struggle to absorb the increased costs.
  3. Reduced competitiveness: The increased VAT rate may make Nigerian businesses less competitive in the global market, as imported goods become more expensive. This could lead to a decline in exports and a reduction in foreign exchange earnings.
  4. Inflation: The VAT increase may lead to an increase in inflation, as businesses pass on the increased cost to consumers. This could lead to a reduction in the purchasing power of Nigerians and a decrease in economic activity.
  5. Disproportionate impact on the poor: The VAT increase may have a disproportionate impact on the poor, who spend a larger proportion of their income on basic goods and services. This could lead to a reduction in their standard of living and an increase in poverty.

Sector-specific effects:

  1. Healthcare: The VAT increase may lead to an increase in the cost of healthcare services, as hospitals and healthcare providers pass on the increased cost to patients.
  2. Education: The VAT increase may lead to an increase in the cost of education, as schools and educational institutions pass on the increased cost to students and parents.
  3. Transportation: The VAT increase may lead to an increase in the cost of transportation, as transportation companies pass on the increased cost to passengers.
  4. Food and beverages: The VAT increase may lead to an increase in the cost of food and beverages, as restaurants and food vendors pass on the increased cost to consumers.

Overall, the effect of the VAT increase in Nigeria will depend on various factors, including the government's ability to manage the increased revenue, the resilience of the economy, and the ability of businesses and individuals to adapt to the new tax regime.