Sunday, 24th October 2021
To guardian.ng
Search
Breaking News:

Why states should collect VAT in Nigeria

By Bayo Ogunmupe
15 October 2021   |   3:22 am
As many Nigerian states lock horns with the Federal Government (FG) through the Federal Inland Revenue Service (FIRS) on the collection of Value Added Tax (VAT), the stage is set for restructuring the Nigerian federation...

Cash

As many Nigerian states lock horns with the Federal Government (FG) through the Federal Inland Revenue Service (FIRS) on the collection of Value Added Tax (VAT), the stage is set for restructuring the Nigerian federation from the present unitary system. Recently, Rivers State Government won by a High Court judgment the right to collect VAT in its state in the Nigerian federation. Other states like Lagos, Ogun, and Oyo have joined in an appeal to the Supreme Court by the FG.

We may recall VAT was introduced to Nigeria under the military regime of General Sani Abacha. Thus, it was by military fiat. The FG collected it at 5 percent of the sales value, although there was an unsuccessful attempt to increase it to 10 percent in 2007. However, but for the Finance Act of 2019 which increased the VAT rate to 7.5 percent and another Finance Act of 2020, there has been little legislative scrutiny of the VAT Act. Thus, this matter is constitutional, on whether FG has power to collect these matters in a federal republic, when such bills are collected by states in federations such as the USA, Canada and the Federal Republic of Germany.

Though the VAT Act provided for the sharing formula of 15 percent, 50 percent and 35 percent for the federal, state and Local government, based on a derivation formula, some states such as Lagos have been unfavourably affected by this distribution formula. While Lagos contributes more than 55 percent of the pool, it is given less than 10 percent of the pool. In a federation as we’re in Nigeria, Lagos should retain 50 percent, giving FG the rest to use as it pleases. The idea of sharing money to the LGA is preposterous in a federation. Federalism like Democracy is an academic subject which should be studied and applied. Which is why ignorance is a major problem of leadership in Nigeria.

The legality of the VAT Act has attracted differing responses from legal scholars; most of these opinions centre on the propriety of VAT Act in the doctrine of covering the field to be superior to the laws of states. Thus, the issue in contention is whether the FG has any Constitutional powers to impose VAT on the states. Federalist lawyers are saying FG has no power to enact the VAT Act under the 1999 Constitution. The judgment being appealed to the Supreme Court held that FG is only empowered to make tax laws, impose and collect taxes on stamp duties, incomes, profits and capital gains, as contained in items 58 and 59 of Part 1, Second Schedule of the 1999 Constitution.

The Court also held that these provisions must be read to exclude other species of taxes like VAT. The court decisions clearly stated that the power to impose VAT on the states is not within the purview of the National Assembly. Thus, VAT is a residual matter falling within the legislative and administrative competence of the states.` Historically, VAT was introduced as tax by Decree 102 of 1993. The tax became operational via Decree 7 of 1996. But the 1999 Constitution ushered democracy into Nigeria  and all decrees were converted into Acts deemed enacted by the National Assembly. But careful scrutiny revealed FG lacks powers to legislate on sales tax/VAT.

There was an omission of such taxing powers in the preceding 1979 Constitution although the Constitutions of 1960 and 1963 provided for imposition and collection of sales taxes by the Regions (States) and the FG. And VAT had been imposed and administered centrally since 1999. Where there is no Constitutional basis for the Federal administration of VAT, there is no basis for the erroneous belief that FG can collect VAT on imports at the ports. As a federation, fiscal federalism allows for taxing powers for each tier of government.

In the absence of any law empowering the FG to collect VAT, it behooves the states to start collecting VAT in their domains henceforth. As I have said earlier, there are no federally administered sales tax laws in such countries as the USA, Brazil, India and Canada. Sales or VAT belong to the states, regions and local governments. The need to operate true federalism rests with the states. Where FG refuses to back down the states should enforce its laws and ignore the FG. The VAT issue is just one of the areas where the states are exhibiting timidity rather than the courage to enforce federalism.