Home Essays Essay Competition Analysing The VAT Collection Tussle by Michael Ogbonnaya.

Analysing The VAT Collection Tussle by Michael Ogbonnaya.

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Introduction

The debacle between the Rivers state government and the Federal government over the remittance and collection of VAT has dominated the Nigerian political discussion in recent times. The legal tussle, which has generated a lot of controversies, was prompted by the perceived disproportionate sharing of aggregated VAT revenues. Demanding the entitlement to collect VAT in the state, the Rivers state government took legal proceedings against the Federal Inland Revenue Service (FIRS). On 9th August 2021, The Federal High Court sitting in Port Harcourt declared that it is the Rivers State Government and not the FIRS that should collect Valued Added Tax and Personal Income Tax in the state.

1. Emboldened by the court’s judgement, Governor Nyesom Wike of Rivers State, signed into law a bill which authorizes the Rivers State Government to henceforth collect VAT in the state. He also told companies and business owners operating in the state to be ready to pay VAT for September and subsequent months to the Rivers State Internal Revenue Service (RIRS).

2. In a swift response, the FIRS filed for a stay of execution while warning taxpayers that refusal to pay VAT to the Federal government will lead to penalties. However, the suit filed by the FIRS seeking to stop the Rivers State Government from commencing collection of VAT was dismissed by the Federal High Court sitting in Port Harcourt, Rivers State.

3. The FIRS, dissatisfied with the court’s verdict, approached the Court of Appeal in Abuja to stay execution of the earlier judgement by the Federal High Court. In a ruling which generated divergent views from lawyers, a three-member panel of the appellate court ordered the parties to maintain status quo ante bellum.

4. While some lawyers argued that the ruling of the Appellate court reverts the power to collect VAT to the FIRS, others maintained that collection of VAT by the Rivers State Revenue Service has become the status quo. The ambiguity of the ruling left the public and parties involved in a legal quandary. The Rivers State Government, however, has approached the Supreme Court of Nigeria to challenge the ruling of the Court of Appeal that the parties should maintain status quo.

5. The decision of the Supreme Court is crucial as Lagos State Governor, Sanwo-Olu, has also signed the bill authorizing Lagos to collect VAT.

6. Punch reports that more states are opposing FIRS collection of VAT as Ogun, Edo, Akwa Ibom are considering tax laws.

7. To critically analyze the issues surrounding the impasse between the Rivers State government and the FIRS, we must understand the concept of VAT, how VAT works in Nigeria, the grievances of the state, the implications of state VAT collection, and the possible solutions to this issue.

The concept of VAT
VAT stands for Value Added Tax. It is a type of indirect tax payable on goods and services for every value added at different stages of the production and distribution cycle.

8. The responsibility of the tax ultimately falls on the final consumer.

How VAT works in Nigeria
Decree 102 of 1993 introduced VAT in Nigeria. It was implemented in 1994 replacing the sales tax introduced via Decree 7 of 1986. VAT has become the fastest-growing tax revenue head in Nigeria. It displaced Petroleum Profit Tax (N1.52 trillion) and Company Income Tax (N1.41 trillion) in 2020 to claim the top spot at N1.53 trillion.

9. Although VAT Act predates the 1999 Nigerian constitution, there is no mention of it in the constitution. The omission suggests that it is considered a residual item that falls on the powers of states to legislate on according to S.4(7) of the 1999 constitution. Over 500 food items are exempted from the national VAT including bread, cereal, fish, milk, fruits, yam and water. In addition, education books and materials, tuition, medical services, shared passenger transport, commercial air travel, and rent are exempted.

10. The FIRS is saddled with the responsibility of collecting VAT on behalf of the 36 states and the FCT. By virtue of the Finance Act 2020, which took effect on February 1, 2020, the VAT charged on affected goods and services rose from 5 per cent to 7.5 per cent.

11. In line with S.40 of the VAT Act, revenue is shared 15 per cent to Federal Government, 50 per cent to States and FCT, and 35 per cent to Local Governments. The principle of derivation is reflected in the distribution of 20 per cent of the VAT pool to states and local governments. Although not stated in the VAT Act, other factors used in the distribution are equality 50 per cent and population 30 per cent. There is a 4 per cent cost of collection for FIRS and 2 per cent for Nigerian Customs Service (NCS) in the case of import VAT.

12. In the early years of VAT implementation filing and payments were made based on the branch locations of companies. Due to some difficulties encountered with this approach, a central system of filing was introduced about a decade ago. Filing and remittance of VAT are now done centrally by companies based on the locations of their Head offices. This implies that all companies in Lagos, for instance, remit their VAT to the FIRS office in Lagos. This has given rise to the “Headquarter effect” by unfairly inflating the derivation of states where many companies’ headquarters are situated while reducing the VAT attributed to other states.

The grievances of Rivers, Lagos, and some other states
Some state governors have lamented the anomalies, disparities, and injustice in the generation and sharing of VAT revenue. An analysis of VAT generated and the revenue allocated to each state by FAAC explains the grievances of some states. Between January and August this year, Lagos generated N429.203 billion, Rivers generated N90.293, while Oyo came third with N64.646 billion. However, in the allocation of VAT revenue, Lagos received the sum of N139.587 billion, Kano which generated N24.492 billion received the second-highest allocation of N47.082 billion, while Rivers was in the third position as it got N46.270 billion.

13. It is unfair that Zamfara despite generating only N598.13 million during this period received the sum of N35.716 billion. This can be likened to a parasitic relationship with some states reaping abundantly where they did not sow.
Another issue that has been heavily criticized is the sharing of VAT revenues from certain products and services with states that prohibit the sales and consumption of such products and services. It is even more annoying when states that have banned such businesses receive more share than states where the products and services are consumed. Using alcohol VAT in 2019 as a case study, Anambra state consumed N13.5 billion naira worth of alcohol and received N153 million from VAT on alcohol. Conversely, Kano state estimated to have consumed N134 million of drinks got N280 million.

14. Furthermore, Katsina and Zamfara officially recorded zero sales. Yet, alcohol VAT of N194 million and N122 million was accrued to the two states respectively.
The height of irrationality and injustice in the sharing of VAT revenue appears in the allocation of 3 per cent of VAT proceeds to the North East Development Commission (NEDC). This contradicts the VAT pool as specified in section 40 of the VAT Act. Many states have expressed their displeasure at the Federal Account Allocation Committee (FAAC) meetings but were neglected with impunity. Buttressing this issue, The Cable reports that NEDC received a whooping sum of N45.9 billion naira from VAT in 2020.

15. Meanwhile, statistics of VAT shared between Jan 2020 – Feb 2021 shows that Rivers State received N28.4 billion and Abia State received N17.03 billion.

16. A careful observation would reveal that NEDC received more from VAT in 2020 than the combined amount received by the two states.
The VAT percentage taken by the FIRS and the Nigeria Customs Service (NCS) as commission has been deemed excessive. The FIRS takes 4 per cent of VAT as the cost of collection. This is four times higher than the international cost of collection, which is benchmarked at 1 per cent. Although the advent of technology has made the process of collection easier and reduced the cost of collection, the agency still charges 4 per cent. In a bid to embezzle some of these monies, the FIRS has been involved in frivolous spending. In 2019, the FIRS set aside N160 million to sew uniforms for 850 drivers, budgeted N825 million for refreshments, and N250 million of security vote.

17. The truth is, both the FIRS and NCS commissions have resulted in a reduction in the distributable amount in the VAT pool.

The implication of state VAT collection
Collection of VAT by states could drive the country towards fiscal federalism. Fiscal federalism refers to the division of governmental functions and financial relations among levels of government.

18. Due to the reliance on monthly federal allocation, many states have become economically sedentary. It is expected that fiscal autonomy will jolt states into taking necessary innovative actions to generate funds and increase revenue. Thus, states will be motivated to scale up their economic drive of attracting more Foreign Direct Investments (FDI) and Local investments. It is important to note that this is only obtainable in the long run. However, in the meantime, a decentralized VAT system will adversely affect many states except for states like Lagos, FCT, and Rivers State. Many states may not be able to meet their financial commitments as most states depend on funding from FAAC due to their poor Internally Generated Revenue. According to the 2019 Annual States Viability Index, ASVI, only six states are economically viable. At least, 30 states that generate less than 20 per cent of VAT revenue would suffer significant revenue decline.
Another problem of decentralized VAT collection is the complexity associated with it. When the 29 states in India practised this taxing system with different tax regimes, inter-state commerce was adversely affected. VAT inspection at state borders hampered economic activities as trucks carrying goods could wait for days at borders. India later centralized VAT collection by enacting the Goods and Services Tax (GST). Other federations, like Brazil and Canada, are working on centralizing VAT collection. A decentralized VAT system will create complexity and impede the ease of doing business. Under a centralized VAT system, a company would only have one tax identification number and one tax office where its file is domiciled. This is regardless of the number of states where the company has operations. With state VAT, this would no longer be possible. Companies would now have to register with multiple tax authorities and file multiple tax returns monthly. A company that has branches in all the states in Nigeria will be faced with the burden of dealing with 37 tax authorities. This will heighten logistics challenges for companies.
Difficulty in Input-Output VAT offset mechanism. States having different VAT rates can pose a huge problem since input VAT can be incurred in a different state from where the output VAT is charged and collected. Businesses in Lagos State, for instance, will have to deal with paying input VAT of 7.5 per cent on materials sourced outside the state against the lower output VAT of 6 per cent.
Administering VAT at the state level may add to the myriad of taxes across different states. The lack of capacity of some states to collect VAT and difficulty in auditing compliance could result in a higher cost of collection and negatively impact the states.
In the absence of an exemption threshold for small businesses, many SMEs will crumble. The financial capacity of the FIRS will be drastically reduced leading to the lay-off of many staff. However, many Nigerians will be employed by states governments who will be looking at increasing the capacity of the inland revenue service in their states.

Possible solutions
The unfair disbursement of VAT revenue should be reviewed and the VAT structure redesigned. The FIRS commission of 4 per cent is excessive. It should be reduced to an international benchmark of 1 per cent. Also, the Custom’s 2 per cent commission for import VAT should be reduced. The allocation of 3 per cent of VAT revenue to the North East Development Commission is ridiculous, illogical and should be stopped. This will increase the distributable amount in the VAT pool.
Since VAT remains a consumption tax, there should be a reduction in the 15 per cent received by the Federal government. Furthermore, VAT revenues should be shared strictly among states without recourse to the local governments. Each state and its local governments can agree on a sharing ratio which will be enforced by laws passed by the state House of Assembly. This is highly recommended due to the unequal number of local governments in different states. Courtesy of the lopsided distribution of local governments, states with more local governments receive more VAT revenues than other states. However, when VAT revenues are shared solely among states, it will result in a more equitable appropriation.
The distribution of 20 per cent of the VAT pool to states on the principle of derivation should be adjusted. It should be increased so that the VAT generated by states can be more reflected in the VAT distribution. Aside from that, the confusion about businesses on the VAT exempt list should be cleared. It is illogical that VAT is collected from buses and train tickets while Air tickets are exempted. Infrastructure contracts awarded by state governments should be made to be VAT exempt. By so doing, State governments can spend less on infrastructural projects. Monies saved by the exemption can be used for other purposes.
The government should ensure that the VAT issues do not degenerate into ethnic and religious crises. States that prohibit the sales and consumption of certain products and services, like alcohol and allied products, should not be shared the VAT proceeds of those products.
Going forward, the federal government must always take proactive steps in addressing the grievances of states and Nigerians at large. Platforms such as the National Economic Council (NEC), Nigeria Governors’ Forum (NGF), and the Federation Account Allocation Committee (FAAC), should be utilized for engagements and proffering solutions to national issues before they escalate.
The above solutions would be useful if the Supreme Court rules in favour of the FIRS or the parties involved decide to settle the matter outside the court. However, if the states emerged victorious, several approaches can also be adopted d in the best interest of Nigerians and businesses. The federal government can assist states with shortfalls in revenue over a certain period till these states become financially stable. Also, Every state must begin by developing a short, medium, and long-term programme that could foster economic independence and sustainability.

Conclusion
The underlying issues of Nigeria’s tax system have been exposed with recent developments. The parties involved must make decisions that are in the best interest of Nigerians. There is a need to properly analyze the situation and find the right solution to avoid misguided prescriptions that would frustrate businesses and Nigerians. The final decision on this issue now depends on our judiciary. Despite the judgement, I hope that it propels Nigeria into economic buoyancy.

References
1. https://m.guardian.ng/news/court-declares-rsg-not-firs-entitled-to-collect-vat-related-taxes-in-rivers/
2. https://dailytrust.com/30-states-risk-bankruptcy-as-lagos-rivers-set-for-new-vat-regime
3. https://www.google.com/amp/s/www.vanguardngr.com/2021/09/court-dismisses-firs-suit-seeking-to-stop-rivers-from-vat-collection/amp/
4. https://www.premiumtimesng.com/news/top-news/484471-vat-collection-tussle-what-appeal-court-ruling-means-lawyers.html
5. https://www.google.com/amp/s/punchng.com/vat-war-rivers-lagos-await-supreme-court-hearing-algon-backs-wike/%3famp
6. https://www.premiumtimesng.com/news/headlines/484173-sanwo-olu-signs-bill-authorising-lagos-to-collect-vat.html
7. https://www.google.com/amp/s/punchng.com/vat-more-states-oppose-firs-ogun-edo-akwa-ibom-consider-tax-laws/%3famp
8. https://www.investopedia.com/ask/answers/042315/what-are-some-examples-value-added-tax.asp
9. https://pwcnigeria.typepad.com/tax_matters_nigeria/2021/09/how-to-fix-nigerias-broken-vat-system.html?utm_campaign=5a78693e94a32673ae004919&utm_content=613d274a5894fb00014aa584&utm_medium=smarpshare&utm_source=twitter
10. https://www.proshareng.com/news/Taxes%20&%20Tariffs/How-to-Fix-Nigeria-s-Broken-VAT-System/58985
11. https://m.guardian.ng/opinion/fg-lagos-and-the-vat-debate/
12. https://dailytrust.com/vat-ruling-fg-to-lose-taxes-amidst-dwindling-revenue
13. https://www.google.com/amp/s/www.vanguardngr.com/2021/09/vat-what-states-generated-received-in-past-8-months/amp/
14. https://businessday.ng/features/article/bingeing-on-forbidden-taxes/
15. https://www.thecable.ng/ending-the-war-over-vat/amp
16. https://www.google.com/amp/s/punchng.com/vat-five-northern-states-two-sw-two-ss-among-top-beneficiaries/%3famp
17. https://m.guardian.ng/news/firs-budgets-n825m-for-refreshment-n160-million-for-850-drivers-uniforms/
18. https://www.britannica.com/topic/fiscal-federalism

Michael Ogbonnaya is a graduate of mechanical engineering from the Federal University of Technology Owerri. He is a creative writer who tries to tackle societal problems with his writing and can be reached via elevatedmikey@gmail.com