As the battle rages on whose responsibility it is to collect the Value Added Tax, VAT between Federal Government and State government, alarm bells have sounded against a state-controlled system. Babajide Okeowo writes
A Value Added Tax (VAT) system controlled by State governments will slow the growth of Micro, Small and Medium Enterprises, MSMEs, who are the drivers of the Nigerian economy.
This is the position of West African Tax leader for Deloitte, a global audit and consulting firm, Mr. Yomi Olugbenro.
In a paper titled “VAT & The Pathway to Fiscal Stability in Nigeria”, Olugbenro posited that collection of VAT by states will not be potentially advantageous to states in the short term.
He argued that a decentralized VAT system is not suitable for Nigeria’s economy. Rather, it will harm businesses because of the cost implications and potential trade disputes.
Speaking further, he said if States fully administer the VAT system, taxpayers will have the burden of payments, and there will be the possibility of inter-state trade disputes. In contrast, businesses will have to put up the structure to do proper reconciliation on tax payments.
He noted that the VAT law signed by Rivers State followed by Lagos did not exempt MSMEs as provided in the Finance Act of the federation.
The tax expert believed the states need to revamp their tax system from capacity to technology to achieve fiscal stability.
Olugbenro, therefore, called for a constitutional review of the VAT system. He decried that so much uncertainty was not good for Nigeria’s tax system, especially concerning attracting investments.
Apart from the constitution, he agreed that there should be a balanced allocation formula for VAT so that more states can derive value from the business activities in their territory.
He added that the VAT is now a significant line item in Nigeria and raked in more revenue to the government in 2020 (N1.53trn) than the petroleum profit tax.
VAT is a tax payable on the supply of goods and services at different stages of the product supply and service delivery value chain. The burden of the tax ultimately falls on the final consumer.
Similarly, Cheta Nwanze, a partner at SBM Intelligence, one of Nigeria’s leading intelligence platforms
posited that Nigerian states have not put the necessary mechanisms in place to extract VAT, and the federal government will continue to focus its attention on the formal sector. The only state which appeared to have this under control in Lagos, but its dependence on touts to extract tax reduces its legitimacy in the eyes of its people.
“The VAT debate is great for all of us as the centralised Nigerian structure has clearly failed. But underneath it, all is a crisis of legitimacy for Nigeria’s states, perhaps best put in words by the Ebonyi state governor, David Umahi (who supports FIRS) when he said, “Our very weak states must be taken care of before we say let everybody control their resources” he said.
30 States Risk Bankruptcy If…. Experts
Many states in Nigeria may not be able to meet their financial commitments if the federal government could lose revenue from taxes amidst dwindling revenue in recent times.
Most states depend on funding from the Federal Allocation Account Committee (FAAC) due to their poor Internally Generated Revenue (IGR).
According to Fiscal Policy Partner and Africa Tax Leader at the PriceWaterCoopers (PwC), Taiwo Oyedele, said at least 30 states, which account for less than 20% of VAT collection would suffer significant revenue decline.
Oyedele explained that the federal government might be better off given that FCT generates the second-highest VAT after Lagos in addition to import and non-import foreign VAT.
He further clarified that the judgment may also have implications for taxes collectable by local governments, which are currently administered by states as well as the amendment via Finance Act 2020, which introduced Electronic Money Transfer levy in place of stamp duties, among others.
Lagos and Rivers states, which contribute over 70 per cent of the VAT collectables in the country, have decided to enact a law that will empower them and not FG, to collect VAT in their states.
Their action is based on the judgement of August 11 by a Federal High Court in Port Harcourt, which held that VAT collection was for the states and not for the federal government through the Federal Inland Revenue Service (FIRS).
VAT was introduced via Decree No.102 of 1993. It replaced sales tax operated under Decree No.7 of 1986, which was administered by states and the Federal Capital Territory (FCT).
Until now, the FIRS had the responsibility of collecting VAT on behalf of the 36 states and the FCT. Section 40 of the VAT Act requires that the VAT pool be shared 15% to the FG; 50% to states; and 35% to LGs (net of 4% cost of collection by the FIRS). Twenty per cent of the pool is shared based on derivation.
The Federal Government generated over N2.5 trillion from VAT alone in the last 18 months as outlined in the 2020 Finance Act.
According to data filed by the Federal Inland Revenue Service (FIRS) from the National Bureau of Statistics (NBS), Nigeria may have earned about N2.5 trillion from January 2020 to June 2021 at a 7.5 per cent VAT rate.
The breakdown shows that FIRS collected about N1.53tr in 2020 with import VAT being N348 billion (or 22.7%) while foreign non-import VAT was N420bn (or 27.4%) and local VAT amounted to N763bn (or 49.8%).
In the first quarter of 2021, VAT collection was N496.39bn while it increased by N15.8bn in the second quarter to N512.25bn.
The breakdown of VAT generation for Q2 shows that N187.4bn was from non-import VAT locally, N207.7bn from non-import VAT for foreign goods. The balance of N117.1bn VAT was from the Nigeria Customs Service (NCS) VAT on imports.
States With Highest VAT Collections
Nigeria’s current Value Added Tax is 7.5% and States with the highest derivation are Lagos (50.5%), FCT (13.2%), Oyo (2.9%), Rivers (2.7%), and Kano (1.4%).
Why States Should Be Allowed To Collect VAT
A professor of applied economics, Godwin Owoh in an earlier Interview posited that pooling VAT together to share among the states would continue to fuel idleness and leave the country perpetually poor. He said state governments could only be motivated to support an increase in economic activities if they take charge of the proceeds.
Describing the control of VAT by the Federal Government as an aberration, the economist argued that “VAT is location-specific”, hence it is not listed on the exclusive list.
“VAT is a consumption tax, and you cannot consume in proxy. I cannot eat bread in Enugu on behalf of somebody in Lagos. So, VAT should be location-specific, which is the intention of the Constitution.
“Some states in the country forbid alcohol consumption. So, why should a state allow the consumption of alcohol and bear the consequence while the proceeds of the sale of the commodity are shared to another state that does not allow its consumption?” he asked.
He also described as contradictory the move to include the administration of VAT on the exclusive list, noting that FIRS itself, which has hitherto administered the consumption, is a product of the Act of the National Assembly and not the Constitution.
Owoh added that there were many other anomalies in the administration of VAT and withholding taxes, which the country must seize the moment to correct. For instance, he queried the bracket classification of four per cent of its generated revenue as cost of collection.
“If a state issues a contract, for instance, and deducts withholding tax and is remitted to FIRS, for instance, what cost does FIRS as an organisation incur in the collection process? Why should it deduct four per cent as cost of collection from the amount involved?” he asked.
