Postponed VAT Hike May Cost Nigeria 0.5% of GDP, Raise Pressure on SMEs – IMF Warns
The Federal Government’s decision to postpone an increase in the Value Added Tax (VAT) rate could lead to a revenue shortfall of up to 0.5% of Nigeria’s Gross Domestic Product (GDP), according to a new report by the International Monetary Fund (IMF). In its latest Article IV Consultation Report, the IMF acknowledged recent tax reforms endorsed by the National Assembly and approved by President Bola Tinubu, but highlighted that maintaining the current VAT rate amid economic strain comes at a fiscal cost. The IMF stated that while holding off on a VAT hike is understandable given widespread poverty and food insecurity, it is estimated to reduce consolidated government revenue by as much as half a percent of GDP. The report noted that although the Federal Government may partly offset this loss through improved Company Income Tax (CIT) compliance, subnational governments—who depend heavily on VAT allocations—could face tighter budgets. These states and local governments might have to cut back on public services or intensify efforts to boost internally generated revenue, which may result in increased tax pressure on small businesses. The decision to delay the VAT rate hike also reflects the slow progress in reaching vulnerable households. So far, only 5.5 million of the intended 15 million beneficiaries have been reached through the national cash transfer programme. The IMF cautioned that raising VAT at this point could worsen the financial burden on low-income Nigerians. Despite these concerns, the IMF praised the government’s broader fiscal reform agenda, led by the Presidential Committee on Fiscal Policy and Tax Reforms, as critical to improving Nigeria’s low revenue-to-GDP ratio. Key elements of the reforms include modernising VAT and CIT frameworks, reducing tax exemptions, and introducing digital tools to enhance compliance. These efforts helped increase Nigeria’s total revenue and grants from 9.8% of GDP in 2023 to 14.4% in 2024. However, public debt has also risen sharply, reaching 52.9% of GDP, with interest payments consuming over 41% of Federal Government revenue. To address fiscal sustainability, the IMF urged Nigerian authorities to present a clear, medium-term revenue strategy, complete with timelines for future reforms. This, the report stated, would provide businesses and investors with the certainty needed to plan and invest, while clarifying how much fiscal space is available for development and support for vulnerable groups. Echoing the IMF’s concerns, the Nigeria Economic Summit Group (NESG) also warned that avoiding a VAT rate increase could hamper government revenue. NESG CEO, Dr. Tayo Aduloju, stressed the need for a comprehensive and balanced tax reform approach that combines simplification with realistic rate adjustments. He noted that reducing the number of taxes alone, without improving VAT efficiency, could mean missing an opportunity to strengthen the nation’s revenue base. For small and medium enterprises (SMEs), the delay in raising VAT presents a mixed outcome. On one hand, it spares them from immediate cost increases and consumer backlash. On the other, the likelihood of stricter tax enforcement at the state level could grow, as governments seek alternative ways to plug revenue gaps. For Nigerian entrepreneurs, being tax-compliant and digitally visible to the authorities may soon become not just advisable, but essential. For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Sunmola David & CO (Chartered Accountants & Tax Practitioners) at Lagos, Ogun state Nigeria offices, www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.
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