The Federal Government's decision to hold off on increasing the Value Added Tax (VAT) rate could result in a revenue loss of up to 0.5% of Nigeria's Gross Domestic Product (GDP), according to a new report by the International Monetary Fund (IMF).
In its latest Article IV Consultation Report, the IMF commended recent tax reforms initiated by the National Assembly and approved by President Bola Tinubu, but noted that the choice to maintain the current VAT rate—despite the ongoing economic pressures—comes at a fiscal cost.
> "The decision not to raise the VAT rate now is reasonable, given high poverty and food insecurity... However, this will reduce consolidated government revenue by up to ½ per cent of GDP in the authorities' estimates," the IMF report stated.
Why It Matters for Small Businesses
While the Federal Government may absorb part of the impact through improved Company Income Tax (CIT) compliance, the real pressure could fall on state and local governments, which rely heavily on VAT allocations. These subnational governments may be forced to either cut public services or ramp up efforts to increase internally generated revenue (IGR)—a move that could bring small businesses under closer tax scrutiny.
The delay in raising VAT, however, aligns with the current reality on the ground: only 5.5 million out of the targeted 15 million vulnerable households have been reached under the national cash transfer programme. Increasing VAT at this stage, the IMF cautioned, could worsen hardship for low-income Nigerians.
Reforms Underway, but More Needed
Despite the risks, the IMF praised the government's ongoing fiscal reform agenda, including efforts led by the Presidential Committee on Fiscal Policy and Tax Reforms, calling it essential for reversing Nigeria's low revenue-to-GDP ratio—one of the lowest in the world.
The reforms aim to:
Modernise VAT and CIT frameworks
Reduce tax exemptions
Introduce digital tools to boost compliance
These changes helped push Nigeria's total revenue and grants from 9.8% of GDP in 2023 to 14.4% in 2024. However, public debt has also surged, reaching 52.9% of GDP, with interest payments eating up 41.1% of Federal Government revenue.
The IMF urged Nigerian authorities to lay out a clear, medium-term revenue strategy, including timelines for further tax reforms, to provide certainty to businesses and investors.
> "Pre-committing to an implementation timeline... would support fiscal sustainability and provide guidance on available fiscal space for development spending and support for the most vulnerable," the IMF said.
Industry Voices Weigh In
Backing the IMF's concerns, the Nigeria Economic Summit Group (NESG) also warned that failure to adjust the VAT rate could weaken government revenues. NESG CEO, Dr. Tayo Aduloju, emphasized the need for a balanced tax reform strategy that combines simplification with realistic rate adjustments.
> "Without those rate hikes, it means that the government might lose some revenue," Aduloju said at a recent media briefing in Abuja.
He added that simply reducing the number of taxes without improving the VAT yield would be a missed opportunity to strengthen Nigeria's revenue base.
Bottom Line for SMEs
The government's delay in increasing VAT is a double-edged sword for small businesses. On one hand, it avoids placing immediate pressure on already strained operations and households. On the other, state governments may look to small businesses to fill the revenue gap through stricter tax enforcement or new levies.
For Nigerian entrepreneurs and SMEs, staying compliant and digitally visible to tax authorities may soon move from a best practice to a necessity.
