The federal executive council (FEC) has approved an increase in value added tax (VAT) rate from 5 percent to 7.2% percent.
Zainab Ahmed, minister of finance, budget and national planning, disclosed this to state house correspondents at the end of the cabinet meeting on Wednesday.
This is however subject to an amendment of the VAT act of 1994 by the national assembly, with the new rate to take effect in 2020.
VAT replaced the sales tax in 1994 and was pegged at 5% by the military government of Sani Abacha.
In 2007, former president Olusegun Obasanjo increased VAT to 10% on the eve of his departure from office but it was reversed by his successor, Umaru Musa Yar’Adua, following opposition from labour.
Wednesday’s FEC meeting, which started at 11am and ended at 6:12pm, was presided over by President Muhammadu Buhari.
Ahmed said FEC directed immediate consultations with states, local governments and other relevant stakeholders before the new rate takes effect in 2020.
She said: “We also reported to council and council has agreed that we start the process towards the increase of the VAT rate. We are proposing and council has agreed increase the VAT rate from five percent to 7.2 percent. This is important because the federal government only retains 15 percent of the VAT — 85 percent is actually for the states and local governments and the states need additional revenue to be able to meet the obligations of the minimum wage.
“This process involves extensive consultations that need to be made across the country at various levels and also it will involve the review of the VAT act. So, it is not going to be implemented immediately until the act is reviewed.”
According to her, the states need the revenue to be able to pay the new minimum wage.
“Following these assumptions, the total revenue estimate is the sum of N7.5 trillion for the year 2020 and N2.09 trillion that will be accruing to the federation account and VAT respectively,” she said.
“There will, of course, be the distribution to the three tiers of government based on the statutorily revenue sharing formula as defined in the constitution and to this effect, it means the federal government will be receiving proposed aggregate of N4.26 trillion from the federal account and the VAT pool, while the states and the local governments are expected to receive N3.04 trillion and N2.27 trillion respectively.”