The proposed VAT reform in Nigeria could actually reduce manufacturing costs, contrary to what many are likely thinking. While the suggestion of a VAT increase usually triggers panic and concerns about rising prices, the Chairman of the Presidential Tax Reform Committee, Taiwo Oyedele, has clarified that, in reality, manufacturers will benefit from this change. According to Oyedele, once implemented, this reform will cut the cost of manufacturing by about 3.3 percent.
What They Are saying
In a recent post titled, ‘Impact of Proposed VAT Reform on Cost Budget,’ Oyedele took the time to clear up confusion that arose after a meeting with the Organised Private Sector of Nigeria (OPSN), hosted by the Manufacturers Association of Nigeria (MAN). During this session, a participant working for a manufacturing company asked if the company should expect to see higher costs due to the VAT rate increase and whether that should be accounted for in the company’s 2025 budget. This question reflected a broader misunderstanding, but Oyedele was quick to correct the record.
He explained, “We had a very productive session with the OPSN hosted by the Manufacturers Association of Nigeria (MAN). A participant who works for a manufacturing company asked to know when the reforms are likely to take effect and whether to include higher costs due to the proposed VAT rate increase in the company’s 2025 budget. This question reflects the general perception of the VAT reforms, whereas the overall impact is actually a cost reduction.”
You might be confused at first, after all, isn’t an increase in VAT supposed to make things more expensive? But Oyedele’s analysis makes it clear that the shift will have a positive impact. The reform essentially allows manufacturers to claim VAT on more of their expenses, which reduces overall costs. His breakdown of the typical manufacturer’s budget, with a comparison between the old and new VAT laws, shows how different categories will be affected.
For raw materials, there’s no impact, as VAT is already claimable under the current law, and it remains claimable under the proposed changes. When it comes to manufacturing overheads, the new law allows VAT on absorbed manufacturing assets to be claimed. Training and development costs, too, will see VAT become claimable, further lowering costs for companies. Salaries and wages, however, won’t be impacted, as VAT doesn’t apply to those.
Why It Matters
The proposed reforms will also benefit areas like professional fees, communications, marketing, and distribution, where VAT will now be claimable. Even finance costs will see negligible effects, as most of this item isn’t VATable. Perhaps most importantly, plant and equipment costs will also become eligible for VAT claims under the new law. Oyedele summed it up by saying, “The comparative analysis is based on the difference between the Company Income Tax (CIT) deduction or capital allowance for non-claimable VAT under the current law versus input claim under the proposed VAT reform, including the rate increase.”
This means that, in total, the cost borne by a company would reduce from 1000 to 967, representing a 3.3 percent decline in overall manufacturing costs. What we should all note here is that despite the VAT rate increase, manufacturers will have the chance to offset some of the new tax burden by claiming VAT on a broader range of expenses. If you know how to navigate the system, this won’t be a tax hike to you.
Bottom Line
So, while some may have feared that the VAT reform would drive up prices, the reality is that it could lead to a significant reduction in the cost of doing business for manufacturers. You can see that the VAT increase might not be as disastrous as it first seemed, especially for the country’s manufacturing sector.
