The Secretary to the government of the federation, Boss Mustapha has explained why the country cannot reduce the rate of value added tax, VAT despite the impact of COVID-19 on businesses across the country.
Mr. Boss Mustapha while responding to questions during the press briefing of the presidential task force on COVID-19 on Friday, said the country would enter a bigger crisis if the rate of value added tax is reduced.
The implementation of 7.5% VAT from 5% began on February 1, 2020 as part of efforts to shore up tax revenue.
He said the government is reliant on tax revenue after a crash in the price of crude oil, which used to be the major source of revenue.
“We have been dependent on oil and we can see disruption that has happened with regards to our earnings in the oil and gas sector. The benchmark we had for the budget as totally be distorted.
“Now what we have is determined by market forces, how we sell what quantity we sell is totally beyond us. So there is a major decline in government revenue.
“VAT is a component of government revenue. Taxes, either income tax or company tax, are all parts of government revenue.
“The increase from 5% to 7.5% was just brought into application in February of 2020 all in an attempt to ramp up resources to meet our 2020 budget and into the future.”
Explaining the sharing formula, Mustapha said the federal government only gets 15% of the VAT revenue while states and local governments share the remaining 85%.
“So if you reduce VAT, coupled with a decrease in income that comes into the consolidated revenue fund of the federation when states at the end of the month gather to share through the federation account allocation committee there will be a crisis.
“Most of the essential items are VAT exempted like drugs, sanitary things and basic consumer goods are exempted from VAT. VAT is always related to luxurious consumptions.
“So I think as much as possible I am not sure I want to advise at this stage for us to consider a reduction in the 7.5% VAT because that will really eat into the earnings of the states and the local governments.
“Somebody alluded to the fact that salaries are not even been paid. So a major reduction who regards to our sources of earning will further deepen that crisis.”