Nigeria: VAT Reform to Lower Manufacturing Costs by 3.3% – Oyedele

The Chairman of the Presidential Tax Reform Committee, Taiwo Oyedele, has revealed that the proposed Value Added Tax (VAT) reform is projected to reduce manufacturing costs by approximately 3.3% when fully implemented.

Oyedele shared this insight in a post titled, Impact of Proposed VAT Reform on Cost Budget, emphasizing the positive implications the VAT reform will have on the manufacturing sector.

Addressing Industry Concerns

In response to queries raised during a recent meeting with the Organised Private Sector of Nigeria (OPSN), hosted by the Manufacturers Association of Nigeria (MAN), Oyedele clarified the perceived effects of the VAT reform.

“A participant from a manufacturing company asked when the reforms would take effect and whether the company should account for higher costs due to the proposed VAT rate increase in its 2025 budget,” Oyedele stated. “This question reflects the general perception of VAT reforms. However, the overall impact is actually a cost reduction.”

Breakdown of Impact on Manufacturing Costs

Providing a detailed analysis, Oyedele outlined the impact of the VAT reform on key budget components for manufacturers:

• Raw Materials: No impact, as VAT on raw materials remains claimable under the proposed law.
• Manufacturing Overheads: VAT on absorbed manufacturing assets will be claimable.
• Training and Development: VAT incurred will qualify as input VAT.
• Salaries and Wages: No impact, as these are outside the scope of VAT.
• Professional Fees: VAT will become claimable.
• Communications: VAT will be eligible for input claims.
• Marketing and Distribution: VAT will also become claimable.
• Finance Costs: Minimal impact, as most finance-related expenses are not VATable.
• Plant and Equipment: VAT will become claimable.
• Right of Use Assets: VAT incurred will be claimable.

According to Oyedele, the overall impact will result in a reduction in total costs from 1000 to 967, representing a 3.3% decline despite the proposed VAT rate increase.

Comparing Current and Proposed Systems

Oyedele explained that the analysis compares the current system, where non-claimable VAT results in higher costs, to the proposed reform, which allows for input VAT claims. This change, combined with the rate increase, will lead to cost efficiencies for manufacturers.

“The comparative analysis is based on the difference between Company Income Tax (CIT) deductions or capital allowances for non-claimable VAT under the current law and input VAT claims under the proposed reform,” he noted.

The reform, aimed at fostering a more efficient tax system, is expected to enhance the competitiveness of Nigeria’s manufacturing sector while alleviating cost burdens for companies.