The Federal Government is embarking on a bold tax reform aimed at curbing inflation and bolstering public finances, a move that has ignited a fierce debate among policymakers and economists. President Bola Tinubu, who has already implemented fuel subsidy removal, amongst other and currency devaluation measures, believes this tax reform is crucial for sustainable economic growth.
“On the majority of consumption by the majority of households, they will see a decline in their prices because the VAT is being taken out,” Oyedele stated in a recent interview.
The government aims to exempt essential goods like food and medicine from VAT, acknowledging that these items constitute a significant portion of household spending. Oyedele claims that only 18% of goods will experience price increases due to the VAT hike.
Nigeria’s current tax-to-GDP ratio is among the lowest globally, hindering government revenue and forcing excessive reliance on borrowing. The proposed reform seeks to address this by streamlining tax collection and enhancing compliance.
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“The fact is that people are paying less. It cannot be that they are paying more and VAT revenue is going down,” Oyedele emphasised, highlighting the potential for a significant drop in VAT revenue despite the rate increase due to expanded exemptions.
However, scepticism abounds. Adewunmi Emoruwa, CEO of public strategy firm Gatefield, warns that the VAT increase could stifle consumption and hinder industrial growth, echoing concerns raised after a similar VAT hike in 2019.
“The government is putting pressure on people’s ability to spend,” Emoruwa cautioned.
Furthermore, the proposed revenue-sharing formula, which allocates a larger share of VAT revenues to revenue-generating states, has sparked controversy. While the government has shown a willingness to compromise, addressing the concerns of northern governors who fear regional inequality remains a critical challenge.
This tax reform presents a delicate balancing act. The government must navigate the competing demands of revenue generation and inflation control while ensuring that the burden of taxation does not disproportionately fall on the most vulnerable members of society. The success of this reform hinges on careful implementation, effective communication, and a willingness to address the legitimate concerns of stakeholders.
