IMF advises FG to Raise VAT to 15%, remove fuel subsidy

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The International Monetary Fund (IMF) has advised the federal government to increase the Value Added Tax (VAT) from its existing rate of 7.5 percent to 15 percent.

This was made this known in its mission statement, which was released in Washington.

Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrowed from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

It also recommended a total removal of fuel subsidies, which it argued favoured the rich at the expense of ordinary Nigerians and address oil thefts head-on.

The mission recommended: “Adopt tax policy reforms. The mission advised the authorities to consider adjusting tax rates to levels comparable to the average in the Economic Community of West African States (ECOWAS) as compliance improves.

“This includes further increasing the VAT rate to 15 percent by 2027 in steps, while streamlining numerous VAT exemptions based on systemic reviews, increasing excise rates on alcoholic and tobacco products while broadening the base, and rationalizing tax incentives by streamlining tax expenditures based on comprehensive periodic

“Remove fuel subsidies and address oil theft.

“As a near-term priority, the mission highlighted the urgent need to remove fuel subsidies fully and permanently, which disproportionately benefit the well-off, by mid-2023 as planned.

“The government should also prioritize addressing oil thefts and governance issues in the oil sector to restore production to pre-pandemic levels.

“Increase well-targeted social assistance. To mitigate food insecurity and cushion the impact of high inflation and fuel subsidy removal on the poor, the mission recommended increasing social spending by up to 1.7 percentage points of GDP during 2023-27 in well-targeted programs in coordination with the World Bank and other development partners

“Fiscal transparency is critical for a sound fiscal policy. Notwithstanding recent improvements, some gaps remain.

“While the authorities have published the annual financial reports of the state-owned Nigerian National Petroleum Company (NNPC) since 2019, uncertainties remain regarding the nature of tax write offs and fuel consumption volumes.

“The mission recommended a closer look at the nature of NNPC’s financial commitments to the government and the costing details of the fuel subsidy, including through a financial audit.

“Stronger cash management and better coordination among key public institutions is needed to increase the realism of budgetary forecasts and reduce reliance on central bank overdrafts.”

The mission welcomed measures taken by the Central Bank of Nigeria (CBN) to tighten liquidity and curb inflationary pressures through increasing the monetary policy rate (MPR) by a cumulative 400 basis points and raising the cash reserve ratio (CRR).

 




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