The raging VAT controversy

The recent High Court judgement that stripped Nigeria’s federal tax agency of the powers to collect some taxes has touched the country’s VAT Act and raised fresh agitation by some states of the federation, writes EHIME ALEX

Since the Federal High Court sitting in Port Harcourt, Rivers State, gave a ruling restraining the Federal Inland Revenue Service and the Attorney General of the Federation from demanding Value Added Tax from residents and businesses in Rivers, other states are beginning to muster the strength to challenge the Federal Government on VAT collection.

On Thursday, September 9, 2021, the Lagos State House of Assembly passed the state’s VAT Bill, transmitting a clean copy to the governor, and it was signed into law the next day. Hurriedly legislated on, the bill came on the heels of Justice Stephen Pam’s judgement on August 10.

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

While the development has ignited legal fireworks, it has also opened up discussions on the issue of fiscal autonomies and drama of some sorts.

Nigeria’s VAT administration

Before now, the FIRS had been responsible for assessing, collecting and accounting for revenues accruing to the Nigeria government, including the VAT, which has now changed following the court’s directive for states to take charge of the collection.

In a swift reaction, the Rivers State government promulgated the state’s VAT Law, which provides for the imposition and administration of VAT in the state. According to the Governor, Nyesom Wike, the state had awarded contracts and paid over N30bn to contractors within the last month, explaining that when 7.5 per cent current VAT rate is taken away, that will amount to about N3bn, from which it had never received more than N2bn.

VAT’s breakdown

According to the VAT Act 2004 (as amended in 2020), the FIRS, by Section 7, is charged with the administration, management and collection of VAT in Nigeria. Originally, the sharing formula shows that the Federal Government gets 15 per cent, states get 50 per cent and local councils receive 35 per cent. But,data shows that four states provide 81 per cent of the VAT collected by the FIRS. Lagos with the highest VAT collection, amounting to 55 per cent, the Federal Capital Territory 20 per cent, Rivers six per cent and Kano five per cent.

The remaining 33 states only provide 14 per cent of the total VAT in the country. And according to the Fiscal Policy Partner and Africa Tax Leader at the PriceWaterahouseCoopers, Taiwo Oyedele, at least 30 states, which account for less than 20 per cent of VAT collection, would suffer significant revenue decline.

In the first half of 2021, VAT collected came to over N1tn, according to the ‘Sectoral Distribution of Value Added Tax’ report released by the National Bureau of Statistics. Looking at what Lagos contributes as VAT, the state is not getting anything commensurate, said the House Assembly. While Lagos got N21bn in VAT revenue last year from FIRS, N500bn worth of VAT was collected from businesses operating in the state.

Where it may leave the states

The FHC ruling, which the FIRS has challenged, seems to favour mostly Lagos, Rivers and a few other states.

It has, as a matter of fact, become customary for states to run to Abuja cap-in-hand every month to collect federal allocations, but use the funds for payment of salaries and other administrative expenditure, while neglecting capital projects.

According to states’ IGR report by the NBS, in 2020, the 36 states and FCT generated N1.31tn as IGR. Of the N1.09tn generated from taxes, Lagos accounted for 83.3 per cent of the total IGR received in that year. However, the state recorded the highest of N418.99bn IGR, accounting for 32.1 per cent of the total. This was closely followed by Rivers with N117.19bn and the FCT with N92.06bn.

Issues at stake

Going by what states collect from their IGR and the manner at which they go about it, views making the rounds portray that majority of the states lacked the capability to collect VAT, compared to the technical and organisational capacity already put in place by the FIRS to manage VAT collection. 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, Oyedele asserted.

There is also the view that it will be difficult, if not impossible, for the state to go after multinational and foreign companies in VAT collection.

Some states have admitted to their inability. “How many industries do we have in Plateau State? Not many. So, the position of the Plateau government on VAT is that the Federal Government, through the FIRS, should continue to collect it on behalf of the states and thereafter remit the proceeds to them.”

Gombe also reportedly said that states lacked the capacity to effectively carry out that responsibility; hence the Federal Government should continue the collection.

Oyedele further clarified that the judgement might also have implication for taxes collectible by local councils, which are currently administered by states as well as the amendment by Finance Act 2020, which introduced Electronic Money Transfer levy in place of stamp duties, among others.

Among other concerns is that while, in the case of Lagos, the VAT rate is put at six per cent, there will be no registration exemption for small businesses unlike the N25m exemption under the national VAT Act.

An economist, Muda Yusuf, said the controversy over the jurisdiction of VAT between the states and federal Government was for the judiciary to settle; noting that it was a question of law and the interpretation of it.

Prioritising project development

With a budget size of N1.163tn and capital expenditure of 61 per cent, there is a N192.49bn budget deficit the Lagos government will fund in its 2021 Appropriation Bill.

Key deliverables in the state’s budget showed that roads and other infrastructure have a budgetary provision of N167.801bn, the largest, which is provided for the construction and maintenance of roads and other infrastructure within the state. This is billed to be used for construction, reconstruction and completion of public services, community/grassroots projects and for enhancing coastal infrastructure in and around the state.

The education sector takes the second largest with N146.935bn. The provision is to cater for the construction, renovation and provision of furniture and equipment for schools within the six-education districts in the state.

The ‘Full Year 2020 Performance Review’ for Lagos showed that it achieved a 89 per cent budget performance in its total capital expenditure of N507.062bn from actual N451.79bn, while its total revenue performance stood at 94 per cent in the same year.

The Commissioner for Finance, Rabiu Onalapo, stated then that the debts were totally tied to capital projects. The state’s 19.8 per cent debt to revenue ratio is projected to rise to 22 per cent in 2021, but remains below the World Bank and Federal Government’s benchmark of 40 per cent and 30 per respectively, Onalapo added.

Under its 2021 ‘Budget of Recovery and Consolidation’ of a sum of N448.6bn, Rivers has earmarked N306bn for capital expenditure. This will go for the provision of infrastructure, including roads, bridges and the completion of flyover projects all in and around Port Harcourt metropolis.