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FG, Lagos and the VAT debate

By Tayo Ogunbiyi
06 September 2021   |   2:35 pm
It is no longer news that a Federal High Court in Port Harcourt has ruled that states, and not the Federal Inland Revenue Service (FIRS), should be collecting Value Added Tax (VAT) and Personal Income Tax. Following the milestone ruling, the Lagos state government has rightly expressed its readiness to begin the collection of VAT…

Sanwo-Olu. Photo/facebook/jidesanwooluofficial

It is no longer news that a Federal High Court in Port Harcourt has ruled that states, and not the Federal Inland Revenue Service (FIRS), should be collecting Value Added Tax (VAT) and Personal Income Tax.

Following the milestone ruling, the Lagos state government has rightly expressed its readiness to begin the collection of VAT in accordance with the judgment.

Already, the Rivers State Governor, Nyesom Wike, had signed into law the bill that authorizes the state to collect VAT.

On its part, the Lagos state government has alerted all the stakeholders involved in the payment and receipt of VAT of its determination to explicitly enforce the verdict.

Unsurprisingly, the FIRS, an agent of the Federal Government (FG) has already filed an appeal against the judgment, while some northern states had expressed their preference for the status quo to be maintained.

Justice Stephen Pam, who delivered the judgment on August 10, 2021, also restrained the FIRS and the Attorney General of the Federation (AGF) from demanding the taxes from the residents of the Rivers State, which by implication affects other states.

VAT is charged on the supply of goods and services in the country, including those imported into the country, except the goods and services specifically exempted under the VAT Act.

By virtue of the Finance Act 2020, which took effect on February 1, 2020, the VAT charged on affected goods and services rose from five per cent to 7.5 per cent. Yearly, VAT contributes significantly to the total revenue generated by the government.

Until now, the FIRS had the responsibility of collecting VAT on behalf of the 36 states and the Federal Capital Territory (FCT). The sum collected is then shared among the three tiers of government, with the FG taking 15 per cent, the states 50 per cent and Local.

No doubt, the Port Harcourt judgment truly reflects true federalism and it should be celebrated by every lover of democracy. In a true federation, that is the way to go. It is really a huge leap in our pursuit of true federalism.

Looking at it from this perspective, it is, therefore, not surprising that apart from the FIRS, some states in the north have conveyed fierce opposition to the judgment, given the impact it would have on their revenue.

VAT has been a major contributor to the consolidated revenue fund. In 2020, for example, total VAT collection was about N1.53tn, with import VAT being N348bn while foreign non-import VAT was N420bn and local VAT amounted to N763bn.

In the first quarter of 2021 alone, the National Bureau of Statistics disclosed that the country generated N496.39bn from VAT, which was an improvement on the N324.58bn it earned in the same period in 2020.

According to former Minister of Finance, Mrs. Kemi Adeosun, in August 2017, 55 per cent of the revenue generated by the FG was from the VAT collected from Lagos State alone, while the remaining 45 per cent was generated from the remaining 35 states and the FCT.

The truth is that the collection of VAT by the states is the only way to assist states that are heavily dependent on federal allocations to be able to wean themselves and meet their fiduciary obligations. So, if there are areas where revenues can be exploited and extended, surely the state government will welcome it.

If the Lagos State government perfects its books for the VAT and followed it up by collecting the tax directly, then the state’s Internally Generated Revenue (IGR) may grow with about N400 billion yearly and the state’s annual revenue may be above N1 trillion.

A 55 per cent of the N763 billion that the FG realised from local VAT in 2020 showed Lagos alone contributed over N400 billion as VAT last year.

In 2020, it was recorded that Lagos generated N418.99 billion as IGR and got N115.93 billion as federal allocation. So, if the state starts collecting VAT, Lagos IGR may exceed N1 trillion. Considering the huge financial outlay required by the state to constantly fix its infrastructure due to exerted pressure, Lagos surely needs every legitimate income it could get.

It is on this basis that Lagos has directed FIRS to stop issuing demand notices for payment of VAT in the state and demand that FIRS renders accounts, within seven days, of all sums it collected as VAT in 2021 in the state.

Legal practitioners have argued that the appeal by FIRS does not imply stay of action and state governments are the legal custodian of VAT until the Port Harcourt judgment is reversed by a higher court.

Besides, pooling VAT together to share among the states would continue to fuel idleness and leave the country perpetually poor. State and Local Governments could only be motivated to support an increase in economic activities if they take charge of the proceeds.

It needs to be stressed that the collection of VAT by the FG is an aberration because VAT is location-specific. Hence, it is not listed on the exclusive list.

Since it is a consumption tax, consumption cannot be done in proxy. For instance, one cannot eat yam in Markurdi on behalf of another person 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?

Certainly, the move to include the administration of VAT on the exclusive list is nothing but contradictory. The FIRS itself, which has hitherto administered the consumption, is a product of the Act of the National Assembly and not the Constitution.

There were many other anomalies in the administration of VAT and withholding taxes, which the country must seize the moment to correct. For instance, if a state issues a contract and deducts withholding tax and is remitted to FIRS, what cost does FIRS incur in the collection process? Why should it deduct four per cent as cost of collection from the amount involved?

Technically, VAT is the old sales tax, which should be collected by the state government. There should not be controversy. The FG has, over the years, settled for juicy and buoyant taxes, which should not be.

The decision of the Federal High Court in Attorney-General of Rivers State v. Attorney-General of the Federation that the VAT Act is unconstitutional is the law for now, much as the right of appeal up to the Supreme Court is open.

The clamour for fiscal federalism, true federalism, is rife. It is widely viewed as an instrument of sustainable peace and unity as well as geographically spread rapid economic development in Nigeria.

It is high time the culture of states leaning on revenue distribution from the centre ended. The power of VAT collection should be restored to the states as a step in the right direction. This is to enable them to look inwards and activate their potential.

Ogunbiyi wrote in from Alausa, Ikeja.