The federal government has proposed an increase in Value Added Tax (VAT), from the current 5% to 7.2%3. The increment is linked to the implementation of Nigeria’s new minimum wage which has informed the need for an increase in revenue, particularly from taxation. Although the new policy awaits approval by the National Assembly, it is expected that the additional revenue obtained would help states in meeting their wage payment obligations given the frequent difficulties in salary payment for some states. The additional tax burden has the potential to change people’s economic behaviour by making them save more. Moreover, the VAT rate of other lower middle-income African countries including Cote d’Ivoire, Senegal and Lesotho at 20%, 18% and 15% respectively is significantly higher than Nigeria’s proposed VAT rate. However, households and firms will be negatively affected as the proposed increase would reduce the disposable income of consumers, and a portion of the recent gains in minimum wage will be eroded.
