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The VAT controversy and the need for interrogation and engagement

THERE was a time in Nigeria when tax revenue was not an issue. Petro-dollars from oil sales had blinded the operators of government to other streams of income into the national treasury. It was a bazaar which lasted for only a while, after which the realities set in. The rising and falling crude oil prices, non-control of the pricing template and production levels brought home the reality that proceeds from commodity sales and taxes were more stable sources of revenue than the almighty crude oil which had taken over the country’s export trade and has continued to be its major cash cow.

As government revenues began to dwindle, and funds to execute critical projects started becoming a challenge, especially as whatever was harvested was either squandered on irrelevances or stolen by the custodians, government started dusting others sources of income while also looking for new ones. Tax came into focus and all sorts were thrust on the people and businesses. The Personal Income Tax Act (PIT), Companies Income Tax (CIT), Petroleum Profit Tax (PPT), Education Tax (ET), Customs Excise Tariffs (CETs), Value Added Tax (VAT) etc., became increasingly attractive.

Of all these, VAT has been in the news much more than others since 1993 when the decree bringing it into being was promulgated by the Ibrahim Babangida administration.  Every administration after that regime sought to carry out one reform after another just to bring more money into the coffers of the national and sub-national governments. It has become one of the most controversial taxes in the country, of late.

The VAT issue recently moved from reforms to the legality of who, between the state and federal government, should be doing the collection and appropriation. The move by Rivers State Governor, Nyesom Wike and his Lagos State counterpart, Babajide Sanwo-Olu, in the last two months to remove the collection responsibility from federal to the states, through the courts, has taken the narrative to another level. Quite a number of postulations have been put forward by experts and commentators; and as usual, there is yet to be a consensus in the direction of discussion.

Wike got a court judgement and made the State Assembly to back it up with a legislation to give impetus to the court judgement which gave the right to collect VAT to Rivers State. Sanwo-Olu also got his State Assembly to do same. Other governors are now divided on the issue. While some queue behind Wike and Sanwo-Olu, some are behind the status quo while others have adopted a sidon look posture.   

The federal government appealed the ruling and got an injunction mandating all parties to maintain status quo, until the final resolution of the matter.  While these were on, the public space was flooded with prognosis and permutations; but one thing is sure – things are not likely going to remain the same anymore, however it ends. Already, it is being speculated that the federal government would be the worse for it; but others argue it might be the other way round. Some posit that it would alter the allocation to states such that even those in the forefront of the “States-must-collect VAT” campaign will end up being losers, if it comes to that.  

This might be so because of the Headquarters’ Effect. All Value Added Taxes are paid through the headquarters of organisations giving the impression that the VAT remitted is wholly generated from the location of the headquarters. However, with decentralisation, many States and the FCT may not get as much VAT as projected.

There is also another angle of the fear of the people becoming the ultimate victim of the squabble, if eventually the States win. There is the fear of duplication of taxes which may put the people in a quandary as to who exactly to pay some to. That is why some commentators are raising the challenge of ease of collection and administration as one of the challenges that the development might throw up if the states are left to make their own laws on VAT. The dominant method of tax collection by the States, employing both conventional and unconventional means, might be unleashed on the people; businesses will be taxed in every state of residence as well which may affect returns and eventually cripple businesses. 

Considering the diversity of perspectives, a more appropriate home-grown format is also being canvassed since, whichever way the matter ends, casualties are likely going to be more than the beneficiaries, compared with the present dispensation. In the current template, the federal government gets 15%, States 50%; and Local Government, 35%. The Federal Inland Revenue Service (FIRS), the agency in the centre of the debacle, has already warned against a copy-and-paste template as some experts are pointing to what obtains elsewhere. FIRS points to a number of federations around the world that have the VAT regime but collection is by the central government. It mentioned Canada and Brazil, where the system is working to the advantage of all involved. But there is also a counter argument that the USA and India operate a sub-national VAT regime, and it is also working perfectly.

In spite of all these, one thing remains fundamental: as a country, we need to get serious in the tax space and avoid political statements and regional sentiments. A very high percentage of commentaries made so far are based more on sentiments rather than on knowledge and reason. There is no reason to rush into precipitate actions when the matter is still going through a decision process. It must be noted that there are various forms of VAT practiced in various countries from which any of the States can base its VAT law on. There are four different methods of VAT, which are (i) Credit Invoice VAT, which is the one in use in Nigeria; (ii) Credit Subtraction VAT that does not rely on invoices, which is used in Japan; (iii) Sales Subtraction VAT, used in Finland; and (iv) Addition Method VAT, used in the USA, particularly in Michigan.

In Nigeria, each State has the consumption appropriate to its needs. It is instructive to note that majority of the VAT is from imports and the Federal Capital Territory. In the face of the impending shortfall, some States are already appealing for accommodation as if taxes are social security dole-outs. Even social security is not interstate benevolence, from a sister state. To put it candidly, the present VAT Law in Nigeria promotes laziness. No State should be poor. It is our view that the way the VAT is being shared is not equitable because only 20% is shared based on derivation, 50% is based on equality, and 30% is based on population. That is why the likes of Rivers and Lagos and a few other states believe the way VAT is shared is not equitable.

Legally, the FIRS has no right to collect VAT in Nigeria, as constituted. There is no taxation without law. Tax statutes are interpreted strictly. There is no equity about tax. These are global and national imperatives of taxation while the social imperatives are in spending the money generated by taxation.

As suggested in some quarters, we have to look for what is the most appropriate structure for Nigeria — a formula that does not create problems for some sectors and more importantly for the people. Although tax issues are usually presented as being very complex, the solution could be simple. VAT should be done on the basis of derivation, similar to the provision in Section 163 of the Nigerian Constitution on stamp duties and capital gains tax. All VAT collected by the Customs on imports and exports as well as on federal government contracts should be paid into the Federation Account for sharing, while the ones collected from the states should be given back to the states.

It would therefore be necessary for all parties concerned to take a more critical look at the situation instead of rushing into actions that might turn out to be counter-productive. While awaiting the final verdict on the matter from the Supreme Court, the contending parties can start serious interrogation of, and engagement on, the various issues involved, so that whichever way the verdict goes, the eventual resolution would have taken care of those areas that are likely to throw up new challenges. This can be done without unnecessarily heating up the system.

1 Comment
  1. Avatar of Ebongabasi EkpeJuda
    Ebongabasi EkpeJuda says

    This is a fair analysis. Kudos! Like you said the situation can never remain the same again. Let each state must look inward and stop the feeding bottle approach to governance. It is time for government at all levels to put on their thinking cap. I foresee the eon of collect and chop by government especially governors beginning to come to a gradual end. Now people who aspire to be governor must think out what they really want to achieve and how.

    With the news that the Nigerian senate has begun the move for oil companies to relocate to their production base things will shape if properly and earnestly implemented. This is fiscal federalism setting the pace for a gradual restructuring we have been clamouring for. God has a way of working out things.

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