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Understanding Value Added Tax (VAT)

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The history of VAT in Nigeria is a checkered one. Initially introduced in 1993, by the federal military government of Sani Abacha; it served to replace the pre-existing sales tax which military fiscal planners felt was levied on too narrow a base of corporate establishments.

The new tax laws were much more comprehensive, cutting across all consumables.

However, even after the fall of the junta, despite popular appeal, subsequent governments were in favour of its reenactment.

Last November, the FG announced an increase in Vat from 5 to 7.7%.

This takes a heavy toll on the significant number of Nigerians living on minimum wages and has led to a 12% increase in the final cost price picked up by the customer.

Proponents have spoken in favour of it generating more revenue and lowering the national debt, but just what kind of tax is vat, and how beneficial is it to the commoner?

There are three types of taxation that we’ll be examining below;

  • Progressive tax – this system of taxation levies heavier dues on the richest section of society. So a millionaire gets taxed about 15%, and a layman gets about 4% tax dues. Most developed countries employ this system of taxation.
  • Flat tax – a flat tax is a tax that puts the same tax rates on all members of society regardless of income. So both the poor and rich will be taxed at the same rate, eg. 15%.
  • Regressive tax – a regressive tax is a tax in which all consumers regardless of income bracket pay the same exact amount. For instance, #500 tax is levied on each person regardless of cash flow rates.

Vat is a highly regressive tax which comes from the government taxing all stages of production of goods and services; and benefits only the wealthy in society.

Being an indirect tax, the full cost of the tax is borne by the customer, while the seller remits the lump sum to the FIRS.

This is a highly inequitable system of levying.

Economists and political theorists point to the low tax to GDP ratio and suggest that Nigeria is undertaxed.

In reality, Nigerians are overtaxed for a country with an HDI index as low as ours.

Taxation is a strategic fiscal tool to trigger economic development, it’s not a national fundraising tool.

Our most expensive budgets go into education and healthcare.

A capable state would subsidize those two sectors and pay for the subsidies with tax generated, but the national policymakers are oblivious to this.

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