Increasing VAT Rate from 5 to 7.2%: Is Nigerian Economy ready for the Consequences?

Value-added Tax (VAT) is a flat-tax based on the increase in value of a product or service at each stage of production or distribution. It is paid by the final consumers and collected by the end retailer. As its name implies, value-added tax refers to fees placed on value-additions for goods and services at each stage of the production or distribution chain. VAT is passed down the supply chain by being included in sales prices until it reaches the final consumer. At each stage of the production or service, the seller collects a tax on behalf of the government from the buyer by adding the VAT fee above the price. If the buyer is not the final consumer, the tax can be transferred to the consumer by selling the value-added product at a higher price to the next buyer or consumer. VAT was first introduced in Nigeria through Decree No.102 of 1993 and became effective on 1 January 1994. It replaced the Sales Tax, which was primarily a source of internally generated revenue for state governments. The Federal Inland Revenue Service was given the responsibility to administer it in all the 36 states in Nigeria and the FCT. This approach was criticised by state governments, as they argued that the centralisation of VAT administration usurped resources meant for States. In trying to address this, there have been continuous amendments in VAT revenue sharing formula between the three tiers of government in Nigeria