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The 7.5% implementation of Value Added Tax by the Nigerian Government

Chuks Wesley on Tue, 18 Jan 2022
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META, formerly known as Facebook, recently announced the addition of 7.5% VAT on paid ads, for Nigerians and anybody providing digital service to Nigeria as well. This is a sequel to the newly implemented social media VAT tax issued by the federal government.

This new development is causing uproar by business owners and advertisers who use social media ads as a medium for reaching their target audience.

This seems to be an overload on Nigerian small businesses and advertising agencies. With the increment of standard VAT rate.

But are there any positive results from this decision?

In this article, we’ll be looking at a brief history of tax, the effect of the new social media tax bill on Nigerian digital businesses, and the benefits of this new law to Nigeria.


Brief History of Tax in Nigeria

Chartered Institution of Taxation of Nigeria (2002) defined tax as a contribution issued by the government and backed by authorized legislation.

Tax is a percentage of capital required from eligible individuals and businesses by the government for upholding socio-economic development in the country.

Currently, there are several types of taxes implemented by the government. This includes Value Added Tax (VAT), tariffs, corporate tax, Company Income Tax(CIT), Personal Income Tax(PIT), withholding tax, education tax, and more. Failure to pay taxes may attract penalties like huge fines.

The government uses these taxes for the development and maintenance of certain systems and structures to create a more conducive environment for businesses to thrive.


Value Added Tax (VAT)


Value Added Tax is the tax attached to a product or service at every point of production, distribution, and trade. This tax fee is automatically added to the price of the product. It was introduced into Nigeria tax system in 1994 as a revenue-generating stream for the nation.

In September 2019, the federal government announced the plan to review and amend the VAT law, this intention was implemented in February 2020 where the standard VAT rate was increased from an initial 5% to 7.5%.

How does the newly implemented tax affect businesses and advertising agencies in Nigeria?

A typical business with a physical store is already conditioned to pay VAT on rent, maintenance, and security, coupled with other corporate taxes. The increase in VAT means a total increase in the cost of doing business, without an assured ROI.

This is upsetting for most Small and Medium-Sized Enterprises (SMEs)

The use of social media by individuals and businesses increased exponentially in 2020 and 2021. Part of this mass adoption was caused by lockdown imposed by the government to reduce the widespread of the covid-19 virus. Many businesses had no choice but to leverage social media marketing as their primary medium for reaching a new audience, building and maintaining relationships with old customers.

The new 7.5% tax on paid ads is yet another drawback to the positive growth of businesses in Nigeria.

Some other ways businesses are getting affected by the VAT rate are:


Increased Cost of Advertising

Meta and probably other social companies are charging an additional 7.5% of the cost of any paid ad on their social platforms. The tax collected is being remitted to the Nigerian government. This means Nigerian business owners and other non-residential businesses interacting digitally with Nigerian audiences will have to pay an extra fee for every ad. Nigerians will have to invest more money in paid ads to maintain the same social status and ROI.


Multiple Tax Bills to Cover

Corporate Businesses are already subjected to numerous taxes from the revenue they generate, with the increase of tax rates from 5-7.5% in 2020, Nigerian business owners are challenged with the responsibility of covering several corporate and personal taxes. The addition of social tax is an overload for most digital businesses.


Reduction in Businesses After-Tax Real Rate of Return

The after-tax real rate of return is the remaining capital and net profit of a company after accounting for all the necessary tax and inflation effects. This is an absolute measure of a business's ROI and profit. With the increment of the tax rate, most businesses will be experiencing a reduction in their NET earnings after upsetting tax bills.


Increased Cost of Goods and Services

Final consumers are not left out from the effect of VAT taxes on businesses. With the increase in tax rate and the adoption of social media taxes, most businesses based in Nigeria will increase the cost of their product and service in order to maintain the cost of production and NET profit while paying taxes.


Benefits of the 7.5% Tax Rate Implemented by The Government

On the bright side, the increment of the tax rate is beneficial to the economic and social growth of the nation at large. Every country needs to generate revenue to maintain law and order, protect its citizens against internal and external aggression, provide a conducive environment for business to thrive, and more. One of the most lucrative ways of generating revenue is tax collection.

Some of the major benefits of the 7.5% taxation :

Positive Economic Growth: Environment Economic growth could be negative or positive. Positive economic growth can be measured from the percentile increase in Gross Domestic Product (GDP), negative growth can be measured in nominal terms like inflation.

With the increase in the VAT rate and adoption of social media VAT for paid ads, the government now has more expenditure to invest in technologies and systems that will facilitate production, thereby increasing the goods and services produced in Nigeria, resulting in positive economic growth.

Faster Decline in Inflation Rate.: Nigeria has one of the longest enduring inflation rates amongst other Sub-Saharan countries in Africa. This is because of the high volatility of the economy and increase in population (Nigeria is one of the countries with the most population worldwide). Inflation causes poverty, unemployment, social vices, devaluation of the currency, out-of-control product and service hikes, and more.

The increase of the VAT rate will help fasten the decline of the inflation rate, currently 13.25%, by providing a more stable economy. The increased revenue generated will enable the tackle economic challenges like unemployment and poverty, by creating more job opportunities and supporting small businesses in the country.

Encourage Savings and Investment: Another benefit of the increased VAT rate is that it encourages Nigerians to save and invest their money rather than consuming excess taxable products. Basic food products, educational materials, locally made agricultural equipment, baby products, and public transport services are exempted from VAT.

Other procured benefits may include Infrastructural Development and Foreign Direct Investment.


Conclusion

One of the main reasons why we pay tax is to increase the national revenue and government expenditure. VAT has played an important role in the development of Nigeria’s economy. Hence, the increment of tax rate and the new social media tax are, directly and indirectly, beneficial to every business in Nigeria.

The success or failure of tax depends on the execution and maintenance of the system put in place by the government. People will willingly pay tasks when there is concrete proof of the benefits generated from the tax. This will cause a decline in the rate of tax evaders in the country and bring them to repentance.


Chuks Wesley
Author

Chuks Wesley is a Website Content/Copywriter with over 2 years of writing experience. He creates simple, clear and SEO driven contents in the Digital Marketing, Real Estate and Crypto Currency Market.

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