In a situation whereby the government wants to control the flow of money in the economy; when there is a need to increase or reduce the money supply, there are specific policies it can use to achieve this purpose. These policies are known as Fiscal Policies.
Fiscal policies refer to the use of tools like Tax and government expenditure to control money supply in an economy. Where the government wants to increase the money supply, it will increase its spending or reduce taxes on goods and services. On the other hand, where the government seeks to reduce the money supply, it will reduce its spending or increase its taxes on products and services.
Zainab Ahmed, Nigeria’s Finance Minister, Budget and Planning, stated that the Nigerian government had approved an increase in Value Added Tax (VAT).
In the press conference, she said the Federal Government approved an increase of 2.2% increase in the initial value of VAT, taking it up from 5% to 7.2% to expand fiscal revenue for the country.
SO WHAT IS VAT AND WHY SHOULD I CARE (HOW DOES IT AFFECT ME)?
A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of charge assessed incrementally. Like an income tax, VAT is an increase in the value of a product or service at each stage of production or distribution.
In Nigeria, Value Added Tax (VAT) is payable on goods and services consumed by any person, whether government agencies, business organisation or individuals.
According to the Value Added Tax Act Cap V1 LFN 2004 (as amended), some of the items excluded from VAT include medical and pharmaceutical raw materials and products, essential food items, baby products, commercial vehicles and spare parts, fertiliser, diplomatic goods and others.
When the new VAT rates get implemented, the following effects should are likely to occur;
1. INCREASE IN GOVERNMENT REVENUE: An increased VAT means the government would have an increase in income to fund and promote economic activities. The government will have at its disposal, money to build infrastructure and achieve other targets if adequately managed. It would have a positive impact on government revenue.
2. INCREASE IN PRICES OF GOODS: As a result of the increase in Tax, the cost of raw materials will shoot up, causing the prices of goods and services to shoot up. Most times, these are goods not listed in the VAT exclusion list; which makes it prone to the harsh change in policy.
Organisations in the private business sectors and local manufacturers bear the brunt of these policies, which shrinks the purchasing power of the buyer.
3. INCREASE INFLATION RATE: General increase in prices over a long period will eventually begin to push the economy towards inflation.
4. EFFECT ON WORKERS: The problem here is simple. Now that the VAT is likely to shoot up, people who remain in constant salary gap, given existing household expenditures will suffer hits on their purchasing power. Thereby making people use their income to pay for goods and services at higher prices. When policies such as this take effect, the labour market cuts its cost on labour and tries to improve on other areas to sustain their business to survive an economic hit.
5. EFFECT ON MARKET OPERATIONS: An increase in Tax will discourage consumption due to higher prices. People will tend to buy fewer items to reduce cost. This decision will hurt businesses and employees.
It is important to note that the Federal Government only retains 15% of the VAT, 85% is actually for the states, and local government and the state need additional revenue to be able to meet the obligations of the minimum wage.
This process of VAT Rate implementation involves extensive consultations that need to be made across the country at various levels and also it will include the review of the VAT Act. So, it is not going to be implemented immediately until the Act gets reviewed.