The revenue allocation system in Nigeria is not a fair one, and has been described as neither efficient nor equitable. This has been a contentious issue, especially because Nigerian states depend on the Federal Government for revenue, after the economic crisis of 1979-1980. This system however, does not represent true fiscal federalism.
In the current Nigerian revenue allocation system from the government, states that generate the major revenue to the FG, such as Lagos, Rivers etc., do not get the largest revenue flow from the FG. An example is Lagos State, which contributes 55% of VAT to the FG, gets a poor federal allocation from the government.
To break it down, in 2020, Lagos alone generated N1.53 trillion in VAT, about 10 percent of Nigeria’s entire revenue. Import VAT contributed 51 percent, local VAT in the period was N763 billion. If Lagos state’s 55 percent contribution is factored into local VAT, then it implies the state contributed about N400 billion to the VAT pool last year. However, Lagos got a total of N115.93 billion from the Federal Government, while the second largest contributor after Lagos State, only gets 1% of VAT revenue, your guess is as good as mine. You can imagine why Lagos and other states are pushing to have VAT control removed from the Federal Government. And in some cases, states that contribute little to the federal VAT pool, get a larger contribution from the government.
Experts believe that this inequity should be addressed through the allocation of domestic VAT to the respective states. While imports, international and inter- state transaction VATs should be paid to the FG VAT pool. Maybe because that may be a long haul, that is why some states are now pushing for the review of the VAT laws, so they can collect VAT within their jurisdictions.
A Federal High Court judgement in Port Harcourt recently stated, that “states and not the Federal Inland Revenue Service (FIRS), should be collecting VAT and Personal Income Tax (PIT)”. This gave a ray of hope to the VAT quagmire, and now, Lagos State, has passed a legislation giving it power to wrest the Federal Government’s control of VAT.
Lagos being in charge of VAT collection would lead to increase in revenue and increase in infrastructure development in the state, and which government would not want that.
According to Mudashiru Obasa, Speaker, Lagos State House of Assembly, “This is in line with fiscal federalism that we have been talking about”. This could be a win-lose situation as Lagos could earn an Internally Generated Revenue (IGR) of N1 trillion, but Lagos could also lose claim to some VAT if it is decentralized, as some companies who operate nationwide sales will no longerpay all their VAT to Lagos.
Another win-win situation in the VAT issue, would be for equity for all states based on origination. The states in the Northern part of Nigeria, who do not allow alcohol consumption, should not get any share from alcohol taxes, while the states that allow alcohol consumption should keep the VAT that accrues from alcohol taxes.
This move is being resisted strongly by the FIRS, which collects taxes on behalf of the Federal Government, they have written the National Assembly, to include tax in the exclusive legislative list. They are also requesting the federal lawmakers to approve the establishment of the federal revenue court of Nigeria. FIRS, also pleaded with the court to vest, exclusively, all adjudication of tax disputes, including federal tax laws, companies’ income tax, petroleum tax, income tax, capital gain tax, stamp duty, VAT, taxes, levies and other laws, regulations, proclamations, government notices and rules on it.
Mathew Gbonjubola, Group Lead, Special Operations Group, FIRS, told newsmen in Abuja that if VAT was ceded to the states to administer, it would breed confusion.
“VAT cannot work at the subnational level and there is no country in the world where VAT works at the subnational level and the reason is that VAT depends on the input-output mechanism,” he said.
But the states such as Rivers and Lagos, are pressing further with requests to not only wanting to collect VAT, but also to stop the federal government from collecting stamp duties in the country.
The states claimed that the right to collect stamp duties on financial transactions between persons or individuals in a state is the exclusive right of the states; and they are also asking for a refund of N176 billion, which was stamp duties collected between 2015 and 2020 by the Federal Government.
What this inadvertently means is that some states who depend entirely on federal allocations may go bankrupt, except if they brace up and decide to create economic benefits to their states.
The action taken by Lagos and Rivers states, means that the VAT pool, which was shared 15% to FG, 50% to states, 35% to LGs, 4% cost of collection to the FIRS, and 20% to be shared based on derivation.
This will be a huge loss to the Federal Government, which generated over N2.5 trillion from VAT alone in the last 18 months, according to the 2020 Finance Act. And data filed by the Federal Inland Revenue Service (FIRS), from the National Bureau of Statistics (NBS), showed that Nigeria may have earned about N2.5 trillion from January 2020 to June 2021 at a 7.5% VAT rate.
In Q1 of 2021, VAT collected was N496.39bn, and it increased by N15.8bn in Q2 of 2021 to N512.25bn. The breakdown of VAT generation for Q2 shows that N187.4bn was from non-import VAT locally, N207.7bn from non-import VAT for foreign goods. The balance of N117.1bn VAT was from the Nigeria Customs Service (NCS), VAT on imports. Interestingly, the public hearing of Lagos State on the VAT bill titled, ‘Bill for a Law to Impose and Charge Value Added Tax on Certain Goods and Services, provided for the Administration of the Tax and for Related Matters,” had passed through first and second reading as at press time.
Surprisingly, experts have thrown their support behind the states quest to collect VAT. Fiscal Policy Partner and Africa Tax Leader at the PriceWaterCoopers (PwC), Taiwo Oyedele, said at least 30 states, which account for less than 20% of VAT collection would suffer significant revenue decline. He also opined that 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.
Also, a former Commissioner for Finance in Imo State and financial expert, Prof Uche Uwaleke, said, “The judgement is in line with true fiscal federalism as it returns taxing powers concerning VAT to the state governments. It will boost the IGR of many states, since they will now be in a stronger position to collect VAT. As you know, VAT collection efficiency in Nigeria is low partly because it is centrally collected. So, I think it will reduce the incidence of non-remittance of VAT collections by companies.”
Dr Muda Yusuf, an economist stated that the issue of VAT tussle between the states and the FG, can only be settled by the judiciary as it was a question of law and the interpretation of the law.
