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Nigeria has Low VAT rate, says EU/ECOWAS

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By Abiodun Okunloye

Non VAT compliance is attributed to corruption and ineffective execution.

The delegation from the European Union and the Economic Community of West African States have noted that Nigeria’s current value-added tax (VAT) system falls below expectations. In Abuja, Massimo De Luca, the Head of Cooperation for the EU and ECOWAS Smith Delegation in Nigeria, made this statement during the 4th session meeting for the Support Programme for Fiscal Transition in West Africa. De Luca attributed Nigeria’s VAT non-compliance to corruption and ineffective execution. He observed that certain companies are eager to fulfil their tax obligations, but the existing tax system in the country prevents them from doing so.

Zacch Adedeji, the Chairman of the Federal Inland Revenue Service, announced plans to transform the national tax system into one that focuses on customer satisfaction, making it easier for individuals and businesses to fulfil their tax obligations promptly. He mentioned the plan for FIRS to implement a one-stop shop for handling all tax matters nationwide. VAT is a tax added to the cost of goods and services at each stage of production and sales. The ultimate burden of VAT falls on the end consumer.

A low VAT in Nigeria limits govt revenue generation capabilities.

Also, the VAT Act outlines specific exemptions for certain goods and services, but generally, all transactions are subject to this tax. He mentioned that the country’s current VAT system is ineffective. Fraud creates instability in the business environment, which hinders long-term investments. The reason behind the inefficiency of the system lies in the restriction that prevents companies from charging it on goods and recovering it from their purchases. He mentioned that numerous businesses in Nigeria, particularly those classified as small and medium enterprises, might not be able to recoup their tax expenses from customers.

Furthermore, the lack of collaboration between tax authorities and businesses in Nigeria has been identified as a critical factor contributing to the country’s poor VAT performance. Due to the complexity of its regulations, its recovery is a significant concern for numerous businesses in Nigeria, particularly small and medium-sized enterprises. Collaboration between authorities and companies is crucial for the tax system to function effectively, yet regrettably, this partnership is lacking. The low VAT rate of five percent in Nigeria hinders the government’s ability to generate sufficient revenue.

Tax experts advise people and businesses to fulfil tax obligations.

Andrew Onyenakwe, a tax specialist, stated that all individuals misunderstand the tax system in Nigeria. He urged people and businesses to uphold their duty to pay taxes but pointed to systemic corruption as a significant cause of taxpayers’ lack of compliance. He stated that Nigeria has many laws promoting taxation; however, improvement in compliance is required. When discussing tax evasion, the focus is often misdirected. The results must be more accurate if a small sample of ten companies is examined to determine how many are fulfilling their tax obligations.

However, the real issue lies in the number of businesses registered in Nigeria versus those paying taxes. The effectiveness of tax administration agencies plays a significant role in this complex problem. It’s not the laws that are the issue but rather the lack of adherence. Although they currently have a state of compliance, they genuinely seek voluntary cooperation. Certain taxpayers have critical concerns about transparency and accountability, which can make them hesitant about fulfilling their tax obligations.

Related Article: Nigeria has a very low tax to GDP ratio

Value Added Tax is a consumption tax that is added at each stage of the production and distribution process. One of the main advantages of VAT is its ability to generate significant revenue for the country. Taxing the purchase of goods and services at each stage ensures that the government collects a portion of the value added at every production level. This leads to a steady income stream for the government, which can then be used to fund public services and infrastructure projects. VAT is crucial in bolstering the country’s revenue and driving economic growth.

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ECOWAS: Website

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