Tinubu Encounters Fiscal Hurdle as House of Reps Rejects Proposed VAT Hike
President Bola Tinubu’s effort to drive economic reform through a proposed increase in the Value-Added Tax (VAT) has suffered a major blow following rejection by the House of Representatives. The development not only exposes long-standing geopolitical tensions but also poses a threat to Nigeria’s fiscal outlook in 2025. The rejected plan sought to raise VAT from 7.5% to 10% in 2025 and further to 15% by 2030. Lawmakers pushed back over proposed adjustments to the VAT-sharing formula, fearing that the new revenue allocation would disproportionately favor the more industrialized southern states. Currently, VAT is distributed 50% equally among the 36 states, 30% by population and 20% by contribution to the pool. Tinubu’s plan sought to revise this to 20% equally, 20% by population and 60% by contribution. Northern lawmakers opposed this formula citing a potential loss in revenue, given the higher contribution from states like Lagos and Rivers. This fiscal pushback comes at a time when Nigeria’s budget is under increasing pressure and oil prices are dropping below the government’s benchmark of $75 per barrel due to global market disruptions tied to the US trade war, revenue shortfalls are imminent. Oil accounts for nearly half of government spending and is the main source of foreign exchange for the country. The VAT hike was the third pillar in Tinubu’s reform strategy following the removal of fuel subsidies and the floating of the naira. Nigeria’s tax-to-GDP ratio stands at approximately 11%, one of the lowest globally. The proposed increase was designed to bolster non-oil revenue. Experts say the rejection of the VAT increase highlights the persistent divide between the north and south on revenue allocation and governance. The northern region, more populous but less industrialized, relies heavily on federal allocations and opposes reforms that appear to benefit the south. Vice President Kashim Shettima defended the broader economic reforms in a recent statement, asserting that “governance must deliver water, electricity, schools, roads and hospitals” rather than focus solely on federalism theory. He emphasised the government’s commitment to a bold but necessary path of reform. Despite the legislative hurdle, the government plans to intensify income tax reforms. The National Assembly has already approved measures to close loopholes and improve compliance. New rules target tax evaders and high-income earners while initiatives like rewarding renters for reporting landlords are expected to improve property tax collection. Abiodun Kayode-Alli, a senior manager in PwC’s tax and strategy unit, noted that “there’s a lot of wealthy Nigerians literally not paying taxes.” He said increasing enforcement and closing gaps in compliance could help offset VAT shortfalls. Analysts believe that while the VAT rejection represents a temporary fiscal obstacle, successful implementation of income tax reforms and enhanced enforcement may provide alternative revenue streams. However, with Brent crude trading at about $65 per barrel, $10 short of budget expectations, Nigeria’s fiscal space remains constrained. The Senate is expected to deliberate on the VAT proposal after Easter. Analysts anticipate a similar rejection unless major compromises are introduced. Meanwhile, Tinubu’s economic team must reassess its strategies to sustain fiscal stability amid weakening oil revenues and geopolitical pushback from within the National Assembly. 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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