The VAT collection imbroglio
A few days ago Nigerians were greeted with the announcement that a high court sitting in Port Harcourt, Rivers state has granted Rivers state the right to collect Value Added Tax (VAT), a tax hitherto collected by the Federal Inland Revenue Service (FIRS). The FIRS is a Federal Government agency that is saddled with the responsibility to collect VAT on behalf of the FG and states.
The collection of VAT has been the responsibility of the FIRS and based on the agreed revenue sharing formula, the Federal Government gets 15 per cent, while states share 50 per cent, and local governments share 35 per cent. The portion to states and LG are further shared using 50 per cent based on equality, 30 per cent on population while the balance of 20 per cent is on derivation.
According to Investopedia, VAT is a consumption tax that is levied on a product repeatedly at every point of sale at which value has been added. It is charged at the rate of 7.5 per cent on goods and services that is usually termed luxury in nature. It is divided into three parts (I) non-import VAT local (ii) non-import VAT for foreign and (iii)Nigerian Customs Service Import VAT. Out of the total VAT generated in Nigeria, 50 per cent accounts for those derived locally while the balance is from imported goods and foreign goods or services not imported. Local VAT is imposed on goods and services consumed within each state of the federation.
Recent FG activities have prompted citizens to query its fairness, transparency, justice and equity. For instance, the continuous mining of gold in Zamfara and the CBNs commitment to make purchase of such was condemned widely but calls for FG’s intervention were ignored. Many have made references to the issue of resource control and lately, FGs policies on curtailing farmers and herders clash through the introduction of RUGA and grazing routes. Many have also condemned the activities of Hisbah in Kano who are reported to have destroyed large quantities of alcoholic beverages and continues to take action against places and activities that they deem do not satisfy their religious orientation. These have been hot contentious issues in the public domain but the attitude and carriage of the FG have spiked an unprecedented reprisal that has now led many to seek legal ways of gaining control over their resources or resource potentials.
To underscore the above paragraph, the executive governor of Rivers State, Chief NyesomeWike queried the FG’s fairness when he claimed that Rivers state was given only 31per cent of the total VAT the state contributed to the centre. He claimed Lagos got about 20% of its total contribution and goes ahead to query why Kano got 100 per cent of what it contributed. He has vowed to change the narrative and as if by dint of knowledge went ahead to defeat the FIRS in the high court when they applied for a stay of execution. The only thing that has slowed the moving train is the application by Lagos state to be added to the case as a defendant at the court of appeal as the FG has appealed the judgement of the lower court. As we wait for the legal documentation to enable the appeal court to hear the case, many analysts have tried to predict the outcome. Some have blamed agitating governors, accusing them of being selfish and self-centred, myopic and greedy. Others have commended their courage and claim that they have started the engine of a systematic restructuring in Nigeria.
Those against agitating governors have claimed that decentralizing VAT collection is not the best citing lack of appropriate structure, manpower and seamless process for effective collection as a reason. This argument in my opinion may not hold water as most IRS offices of states are as good as FIRS. Rivers and Lagos state for instance maintains an IT compliant revenue collection system and annexing it for VAT collection would not be a problem. If Governor Nyesome Wike’s threat is anything to go by, he could convert the current FIRS location to that of the state and offer FIRS team on ground employment in the Rivers state public service to continue what they were doing at the centre.
Some others have argued against decentralization on the grounds of multiple taxations, discouragement of foreign investors, eroding investors’ confidence, hampering the ease of doing business etc. Rivers have reduced the VAT rate from 7.5 per cent to 6 per cent and broaden the tax base. What I figured would happen is an investors influx. This regime would give room for investor mobility on the basis of taxation. States would compete for investors offering them concessions and friendly terms to attract business. Who says Edo state, for instance, cannot reduce its VAT rate to 5%. Goods and services will move towards the direction of friendly and competitive taxation, unlike the present system in which no matter where you do business, the rate is flat.
One other argument against decentralization is that of remittance and allocation. SG, many fear, would cheat the LGs as they currently do with JAAC. Nigeria is a project and the polity is transiting. While I cannot hold brief for the SGs, I believe the governors will score an own goal with this because just like agitating governors, local government chairmen will rise tomorrow and demand better treatment for their LGs. We have heard clamours from LGs in Lagos demanding a fifty-fifty share of VAT proceed collected by the SG. This is going to intensify. Though the quality of governance may impede it for now, the resources and opportunities that will exist at the LG level will drive constructive dialogue in the future.
A few, however, have misinterpreted VAT collection decentralization to mean secession. This is a capital No!!! Nigeria is our country and it is within the civic right of every citizen to act positively in keeping its sanctity. When proponents of VAT collection decentralisation clamour for SG collection on the premise that the current model further weakens the creativity and innovation potentials of SGs, it does not insinuate secession. Rather, it will instigate hard work and a push for the SGs to look inwards for self-sustenance which will further lead to independence on certain issues where hitherto SGs were blackmailed by the FG where opinion differed.
The agitating governor’s pedigree speaks of one that picks their battles. The victory at the High court is a signal that indicates that should this matter get to the supreme court; the verdict of the lower court would be upheld. It would be in the best interest of this country for such to happen as it would change the narrative and give credibility to our justice system. It will encourage individuals and institutions to challenge the status quo. Rather than wait for the bureaucratic route of NASS intervention, more interpretations would be sought from the court.
The FG and SG have engaged in a legal tussle and like the saying goes, when two elephants fight the grass suffers. Both arm of government should courteously prosecute this battle and avoid a negative impact on the people for which they both fight. Should the FG desire to keep control, they should propose a new sharing ratio that will seed not less than 50 per cent to SGs on the basis of derivation. Another parameter using the ratio of IGR to FAAC should be introduced which will require a state to forfeit their share in VAT if the ratio of the IGR to FAAC falls below half of the average for the 36 states.
On a final note however, I see a win-win for all parties; the FG does not lose anything as an entity. In fact, many analysts have argued that the FG will be better off. The investors will be better off too as they can make investment decisions using competitive indices and negotiate with state governments of interest. The citizens would enjoy the benefits of additional revenue. The question of whether it would be utilized appropriately is a different discussion. The effective deployment of revenue collected should be the responsibility of the citizens who should learn to hold their leaders accountable.