Businesses and tax experts have raised concern over the challenges they may face to file their tax claims following the recent court ruling in favour of state governments taking over the collection of VAT from the Federal Inland Revenue Service, an agency of the federal government.
They have, therefore, urged the federal and state governments to find a quick solution to the tax brouhaha.
Also, states with low internally generated revenues (IGR) may be in for a deeper financial crises if the ongoing legal tussle between the Rivers State government and the FIRS over who has the power to collect VAT swings in favour of states.
The Rivers State government has led the battle against the federal government by challenging the existing VAT regime in the court of law and praying the court to stop the FIRS from collecting VAT in the state. Lagos State is also in the race as it, on Thursday, passed its VAT Bill.
Sections three and four of the Constitution empower the National Assembly to legislate on matters contained in the Exclusive Legislative List and certain items under the Concurrent Legislative List.
The second Schedule to the Constitution, items 7 & 8 of Part II (Concurrent Legislative List) provide that the National Assembly, in exercise of its power to impose tax or duty on persons other than companies, may prescribe that such tax or duty be collected or administered by the state.
While tax experts see the current happening as a good development which will wake up sleeping states to the task of generating revenue internally, the initial challenges that the court judgement will pose to taxpayers and to states that do not have existing structures for collection of VAT are hurdles they have to scale.
According to Fiscal Policy Partner and Africa Tax Leader at PriceWaterCooper (PwC), Taiwo Oyedele, upholding the judgement will mean that every state will collect VAT in their territory, keep the money and spend it like they do currently for personal income tax.
He said the only winner in the whole matter will be Lagos State which will earn more than its share currently.
“I think the other states will be worse off, likely even Rivers State which secured the judgment.
“At the end of the day, the states will have more to lose than the federal government and, unfortunately, taxpayers will have to deal with a lot of complications because VAT is not a straightforward tax. The collection process will become complicated for banks, telecoms, and anyone who has business in more than one state. They have to be dealing with different authorities, and probably different tax rates,” he said.
Speaking on the issue, the director-general of Manufacturers Association of Nigeria (MAN), Segun Ajayi-Kadir stated that the recent controversy over the control of VAT between the federal and state governments, the seemingly conflicting court judgements and strong statements emanating from the two tiers of government are unhealthy for business, especially this time that the economy is showing signs of full recovery and reasonable growth.
According to the MAN chief executive, manufacturers, like many other business operators in Nigeria, are deeply concerned about what becomes of their fate come September 20 when businesses are expected to file VAT claims, and beyond.
“The contentions are worrisome and potentially inimical to the smooth operations of our businesses. On the one hand, the Federal Inland Revenue Service (FIRS) is insisting on continuing to collect VAT. Rivers State government is ordering immediate and complete collection of the same tax. Lagos State is preparing the ground to go the way of Rivers State. Who knows, other states may be warming up to join the fray.
“As the leading payers of VAT in Nigeria, having contributed N44.9 billion in the first half of 2021, according to the National Bureau of Statistics (NBS), the manufacturing sector is going to be the hardest hit by this looming impasse.
“What we expect, therefore, is for the federal and state governments to stop the grandstanding and find a mutually acceptable way forward. The business community can ill afford the anxiety and confusion that this controversy is generating. We should not be made to suffer while the two tiers of government fight over who should control VAT.
“Also, we should not be put in a situation where we have to pay both governments the same tax. This will amount to an overkill for the struggling manufacturing sector, and I, dare say, a recovering economy. This is potentially dangerous, not only to the profitability of the manufacturing sector, it is ruinous to the disposable income of the average Nigerian consumer,” Ajayi-Kadir said.
LEADERSHIP Weekend reports that from 1993 till date, the FIRS has collected and disbursed VAT on behalf of the states. The tax agency keeps 15 per cent of the amount collected as cost of collection and distributes the remaining 85 per cent among the states.
To Oyedele of PwC, if implemented, the change in the collection of VAT may mean more income for the federal government, but most states will end up with little or nothing in terms of tax income.
According to him, the only state that will benefit fully from the judgement, if upheld and implemented, is Lagos State.
“Some states will have almost nothing to collect and the federal government will actually be better off. At the moment it (FG) takes about 15 per cent of the VAT but if this judgement is implemented and every state collects VAT, it means that the FG will collect on international trade and the Federal Capital Territory (FCT). As of last year, VAT collection was N2.2 trillion, out of that about N550 billion was on import tax, which is already like 25 per cent. By the time you add VAT on federal government contracts, it can easily cross 30 per cent, which means that the FG will now keep about 30 per cent instead of 15 per cent that it currently keeps.”
LEADERSHIP Weekend findings show that the bulk of the VAT realised comes from Lagos, which contributes as much as 65 percent of the total. Rivers State and the FCT also make substantial contributions of around 20 per cent into the VAT purse while the other states contribute the rest.
An official of the FIRS, who spoke with LEADERSHIP Weekend, lamented that whilst tax officers in Lagos are given huge targets, officials in other states get very low targets which they can easily meet without any hassle.
The official, who spoke on condition of anonymity, said the development is very much welcome by tax officers in Lagos as it will be a wake-up call for states without existing structures for tax collection.
The official argued that whilst the implementation will cause a huge disruption to the existing tax collection process, thereby putting taxpayers in confusion, a middle ground can be reached by adjusting the present sharing formula.
Weighing in on the matter, the president of the Institute of Chartered Secretaries and Administrators of Nigeria (ICSAN), Taiwo Owokalade, said, “The import of that judgement on Nigeria is for every state to face reality and start addressing those realities going forward. If they don’t have the VAT money, they have other resources that they could use to develop their states.
“There is going to be some impact instantly. When you say you want VAT to reside in the state where it has been generated, that does not mean other states will die because the bulk of people who make life meaningful in Lagos are not Lagosians; they also came from other states.
“So, maybe it will help us even distribute the population in the right places because many migrated to Lagos because they think Lagos is much more prosperous. We need to put in place those methodology that will ensure that other states are much more viable.”
In his reaction, Mr. Abiodun Ajayi, a chartered accountant and tax expert with over 20 years of experience, said going by the ruling of the court, state governments should take steps to create the enabling environment that will attract huge investments to build strong tax generation structures.
Ajayi said this has become necessary given that VAT is an income generated on daily basis as it comes from every business transaction.
According to him, it is about spreading development in the sense that states will begin to protect investments and woo investors with incentives so as to retain investments.
He said the FIRS may have realised the balanced argument by Rivers State government which the court relied upon before delivering its judgement, but advised the agency to consider approaching the National Assembly to amend the tax law where expedient.
Ajayi dismissed the argument that state governments lack the capacity to collect VAT in their various states, saying that lack of capacity is not a key factor in this regard.
“No system is perfect and no one can claim to possess absolute capacity. What I will say is that state governments should begin to build capacity to ensure it maximises the opportunities in VAT collection. Capacity cannot be developed in one day but you grow your capacity as demand arises,” he added.
He likened the VAT demand to decades of appeal by Lagos State for special status to secure more funds for infrastructure development.
“The ruling is a sort of relief to states like Lagos and oil bearing states which have deficit of infrastructure among others,” he added.
An economist and former director-general of the Lagos Chamber of Commerce and Industry (LCCI), Dr Muda Yusuf said, “The controversy over the jurisdiction of VAT between the states and federal government is for the judiciary to settle. It is a question of law and the interpretation of the law, but there are legal as well as equity issues in the VAT question.
“But an expeditious hearing of the matter by the judiciary should reduce the risk of disruption and friction between the states and the federal government.”
According to him, in many jurisdictions around the world, VAT is essentially domiciled with the sub-nationals, and that in some instances it is imposed as consumption tax. He pointed out that the current allocation mechanism of VAT proceeds raises fundamental questions of equity and fairness.
“The derivation factor in the distribution of VAT revenue should be much higher than what obtains presently,” he said.
“The reason is that there is a strong correlation between the volume and scale of economic activities, VAT revenue generated and negative externalities to the host states. Such economic activities generate proportionate negative externalities which the host states have to take responsibility for.
“Such externalities include impact on the environment, pressure on economic infrastructure such as roads, pressure on social infrastructure such as schools and hospitals, social problems such as heightened criminality, waste management, urbanisation challenges such as proliferation of slums and traffic congestion, among others. “These externalities put enormous pressures on the finances of the subnationals that provide the bulk of the VAT revenue. A stronger derivative principle of up to 70 percent should be incorporated into the sharing formula for equity and fairness.”
He attributed the problem to a default in Nigeria’s federal system of government.
“What is unfolding in this conversation are the challenges of a unitary system which we wrongly characterise as federal system. This situation underscores the imperative of fiscal federalism. The good news is that the revenue allocation formula is being tinkered with at this time. The inequity in the distribution of VAT proceeds should be addressed in the context of the ongoing review,” he added.
Residents who spoke with LEADERSHIP Weekend said this decision will not only boost the states’ economies, but engebder real development.
A system analyst in Lagos, Daniel Chokor, told LEADERSHIP Weekend that states that were sleeping prior to the judgement of the High Court will wake up from their slumber and start looking inwards on how to generate revenue from their states.
“Once it is passed into the law, some states will feel it at the beginning, but it is a way to have true federalism because some states who are sleeping right now will then wake up and start looking inwards on how to develop their states.
“God has blessed all states with natural resources and means for them to survive; it is left for the state governments to exploit these resources and other means to generate revenue for themselves.”
Chokor, however, expressed the fear that if states are given the nod to start collecting tax, it may cause confusion, especially for the corporate organisations on who and how to remit their taxes to, and this may linger until the matter gets to the supreme court before it is decided.
He urged the court to follow this matter to the end as soon as possible because it is a welcome development, one that is sure to boost the economy and bring development in various states in Nigeria.
Speaking in the same vein, the founder of Blockchain Mobile Technologies, Mr Stanley Okwu, told our correspondent that if states finally get the nod to start collecting TAX, it will bring about speedy development of each state in Nigeria.
“It is time for the federal government to hands off tax collection. Let there be a change for once. If states are giving the nod to collect tax, they will use the revenue to develop their states. This is a wake-up call for those states who are sleeping, waiting for federal government’s allocation,” he said.
Okwu recommended that states should decide what percentage should go to the federal government.
“I suggest five per cent from the revenue collected at state levels to be given to the federal government for national development,” he added.
