Nigeria’s Treasury is considering ring-fencing funds generated from an increase in its value-added tax rates for spending on items such as education and health in an effort to make the higher levy more acceptable to taxpayers.
The Nigerian Budget Office has proposed to raise the VAT rate to 7.5% from 5% in the 2020 budget as part of efforts to boost revenue in a nation that’s missed annual earnings projections every year since 2016. Putting the extra taxes aside for a specific purpose could help address some of the dissatisfaction about the increase, Finance Minister Zainab Ahmed said in an interview Friday at the annual meetings of the International Monetary Fund and World Bank in Washington.
“We thought doing the ring-fencing will give people comfort and assurance, and enable a closer scrutiny on how that incremental VAT increase is used,” Ahmed said.
Africa’s largest oil producer is struggling to boost revenue and the tax base. The government had only collected 58% of the 2019 income target as of June. That’s due to shortfalls in both oil and non-oil earnings and widespread non-compliance. Nearly 60% of Nigerians don’t pay taxes, a 2018 survey of 10,000 adults by the Nigerian Economic Summit Group showed.
“A government is run by taxes, not by revenue from natural resources like oil and gas,” Ahmed said. “Over time our people have gotten used to not being pushed to pay taxes, so any move you make to improve the enforcement, too increase rate, will always meet with resistance.”
CNigeria’s VAT rate is low compared to many of its peers in the region. The proposed new levy of 7.5% will still only be half of what it is in South Africa. The ratio of VAT to gross domestic product is only 0.8%.
“It is time for this to be done,” Ahmed said. “But that’s not to say we will slow down on the effort to expand the tax base.”