Plans by the federal government to increase taxes on luxury goods is to boost its revenue as it grapples with a fall in revenue due to lower prices for its crude oil, which have contributed to it sliding into its first recession in over two decades.
Finance Minister Kemi Adeosun said the proposal was to identify some luxury items and increase the value-added tax (VAT) on them immediately. She said the government was not considering a tax hike for basic items.
Nigeria has one of the lowest VAT rates in the world at 5 percent. But the challenge that cabinet ministers have discussed in the past is tax collection, which is tough in a country where so many small business are not registered.
Taxes account for 6 percent of Nigeria’s gross domestic product, but the government is keen to boost its tax revenues.
“You drink champagne in the U.K. and VAT is 20 percent. Why should it be 5 percent in Nigeria?,” Adeosun said, making the case for a rise in sales tax.
“I believe it is only fair that when you consume luxury goods you should pay a little bit more,” she said after a cabinet meeting on Wednesday.
Adeosun said that the government will engage lawmakers on how the proposals can be implemented and that the new rate will be left for parliament to decide.
Increasing value-added tax from 5 percent and broadening the tax base were among suggestions put forward by International Monetary Fund head Christine Lagarde during a visit to Nigeria in January 2016.
Vice President Yemi Osinbajo later said the government was considering tax regime changes to raise funds.
Tunde Fowler, executive chairman of the Federal Inland Revenue Service (FIRS), has said he thought the economy was not ready for a VAT increase because the level of compliance was too low so an increase would be unfair on those who are collecting and remitting VAT.
Development banks have asked for reform plans on how Nigeria intends to grow revenues and ease the restrictions it imposed on the currency at the height of the oil price collapse.