The Central Bank of Nigeria published a Working Paper that applies optimal tax theory to estimate Nigeria’s revenue-maximising value added tax (VAT) rate and concludes it is 6.4%, below the current standard VAT rate of 7.5%. On this basis, the paper argues the prevailing rate sits in the prohibitive range of a VAT Laffer curve, implying that further increases could reduce VAT revenue rather than raise it, and that lowering the rate towards 6.4% would maximise VAT receipts. The study estimates a quadratic VAT revenue function using quarterly data for 2010Q1–2023Q4 sourced from the Central Bank of Nigeria’s Quarterly Statistical Bulletin, controlling for inflation, the shares of industry, services and trade in gross domestic product, public debt-to-GDP, and a shadow-economy proxy based on agriculture’s share of GDP, alongside lagged VAT revenue. In the reported regression, the VAT rate and its squared term are both statistically significant with the expected positive and negative signs, while inflation is insignificant; trade share and lagged VAT revenue are positive, and public debt, industry, services and the shadow-economy proxy are negative. The paper is published as research in progress in the Central Bank of Nigeria Working Paper Series and is presented as not representing the Central Bank’s views or policies.
Central Bank of Nigeria 2025-12-29
Central Bank of Nigeria working paper estimates Nigeria’s revenue-maximising VAT rate at 6.4%
The Central Bank of Nigeria's Working Paper estimates Nigeria's revenue-maximising VAT rate at 6.4%, below the current 7.5% rate, suggesting the latter may reduce VAT revenue. The study uses a quadratic VAT revenue function with data from 2010 to 2023, finding significant effects from the VAT rate and its squared term, while inflation is insignificant. The paper is part of ongoing research and does not reflect the Central Bank's official views or policies.