The Nigerian Federal Executive council states in a press briefing that the Value Added Tax (VAT) will increase by 7.5 percent from the current 5 percent. The 2.2 percent increase in this consumption tax will have increased government revenue. But, what effect will it be for small businesses?
The effect of VAT on small businesses will be in three ways. Those businesses exempted from remitting VAT will not be affected at all. The second will have to adjust its profit, thereby suffer the consequence. While the third business will pass the payment of VAT to the final consumer. In general, the effect of value-added tax depends on the nature of the goods and services the business deals in.
How increased VAT affects Small Business
The following are ways VAT affects small businesses and these defects on the nature of the goods and services.
Business whose products are Exempted from Nigeria’s VAT.
If your business belongs to those products and services the VAT law of Nigeria Exempts from tax, then you are the fortunate one. According to the ICAN study pack on Taxation; the goods exempted from tax are:
- All medical and pharmaceutical goods.B
- Basic food items, for example, rice, beans, plantains, and other fruits.
- Books and educational materials.
- Goods made for babies. Such as Pampers, baby clothes.
- All goods that are exported.
- Fertilizers locally produced.
- Veterinary medicine.
- Plants, machinery, and goods imported for use in Export Free Trade Zones. 100 percent of the goods produced must be exported, and
- Gigantic machinery purchased for use in agriculture.
On the other hand, the services exempt from VAT include:
- Medical services
- Services rendered by Microfinance banks and Mortgage institutions
- Plays and performances conducted by educational institutions as part of learning.
- All services that are exported.
Do your business among the aforementioned products and services? If YES, you are totally free from VAT payments.
Businesses whose products or services are elastic in demand
Elastic demand products mean people will buy more of the goods when the price is reduced while they will pay less quantity when the price is increased.
How does this apply to VAT in Nigeria? If the increased VAT is added to the product by the business owner, this will increase the price of the product, and consumers will seek an alternative product. Therefore, the burden of tax may be on the business person. So, in such a case, the entrepreneur can not easily increase the price of its product or service so as to include the increased VAT. He will have to lose part of his or her profit to ensure that the consumption tax is added to the product.
The exemption to this is if the product belongs to a cartel or oligopoly businessmen. That means they will jointly decide the price of the product. The consumer will not have a choice than buying the goods or paying for the service. Products that are elastic in demand are cars, smartphones, home television sets, Shoes, Clothes, among others.
Businesses whose products or services are inelastic in demand
Here, the final consumer has no choice but to buy the goods. So, adding the increased VAT rate will not affect the entrepreneur’s profit. He can manipulate its cost add more profit mark up to it. Consumers of such products cannot do without it. An example is Apple iPhones.
The increase in VAT is very much expected before the second half of 2020. It is expected that the federal legislature will also look into the new VAT rate and make an amendment to the law. In any case, the way this tax will affect producers depends on the price elasticity of demand.