How Nigeria’s 7.5% VAT Could Affect Startups and Businesses After The Signing of Finance Bill

January 15, 2020
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President Muhammadu Buhari recently signed the Finance Bill into law. One major provision of the law is that Nigerians will now have to pay 7.5% as Value Added Tax (VAT) for products and services.

The president also explained that the finance bill will reform Nigeria’s tax laws to align with global best practices, support MSMEs, incentivize investments in infrastructure and capital markets, raise government revenues.

The 7.5% VAT increase was initially opposed by the Senate very much like it was when initially proposed in 2007. However, the Senate would later succumb and the bill was passed in November, 2019.

However, an increase in VAT, while buffering the government coffers will also increase financial burden on taxpayers.

A 50% increase in VAT will invariably lead to an in increase in the cost of goods and services. This means ordinary Nigerians will either have to pay more for goods and affected services or abandon them completely.

Nigerians have decried the insensitivity of the VAT increase. Some pointed out that the government shouldn’t have taken such a step when it clearly hasn’t been able to implement the new N30,000 minimum wage.

Others have predicted more suffering for the Nigerian masses because while taxes were meant for the rich, it always impoverishes the poor.

But a look at the VAT of other African countries suggests Nigeria has one of the lowest. In Ghana for example, VAT is 12.5%. In South Africa it’s 15%. Kenya has a VAT rate of 16% while Cameroon has a whopping 19.25%.

However, standard of living and ease of doing business in many of these other African countries are quite favourable which more or less makes such high rates reasonable. Thus, with the 7.5% VAT, the FG is expected to at least put proper infrastructure in place to make the country more business friendly. Many Nigerians however don’t trust that will be the case.

Nonetheless, the Finance Bill seeks to cushion the harsh effects of the 7.5% VAT by introducing other palliative measures. For example, stamp duty on receipts became ₦50 for every transaction worth ₦10,000 and above, instead of the ₦1,000 threshold earlier used by banks.

Also, for Company Income Tax (CIT), businesses with a turnover of less than N25 million will be exempted. CIT for businesses with sales of between 25 to 100 million falls from 30% to 20%. And businesses which pay their taxes on time will get a reprieve of 2%

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