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VAT controversy: Experts call for fiscal federalism, equity, fairness in revenue sharing

•‘Poor states will be negatively affected’

There are calculated moves by sub-nationals (states) in Nigeria to control their resources and generate revenue from natural endowments at their disposal to grow and develop themselves. Most recent of the moves towards achieving fiscal federalism especially by economically buoyant states, is to take charge of revenue generated from value added tax. Experts are of the opinion that the move will enhance true fiscal federalism, drive growth in the financially buoyant states while poor states will emerge the losers. Bamidele Famoofo reports.

Figures obtained from the National Bureau of Statistics (NBS) showed that N1.53trillion was shared between the federal government and states as revenue from Value Added Tax (VAT) in the fiscal year ended 2020. As at half year in 2021, about N1.01trillion has been shared from the proceeds of VAT between the two layers of government. A bulk of the revenue is generated by a few economically buoyant states and shared to all. But the ‘big states’ are beginning to make moves to change the narrative as they claim they have the right to keep whatever revenue generated as VAT from their domain for their personal use.

The agitation

The Rivers state government blazed the trail in the move for states to collect value added tax and to keep it for their personal use on August 19, when the governor, Nyemson Wike, signed into law a bill on value added tax collection in the state. It would appear that the state is winning as a federal high court sitting in Port Harcourt had issued an order restraining the Federal Inland Revenue Service (FIRS) from collecting VAT and personal income tax (PIT) –- directing the Rivers state gov-ernment to take charge of the collection. Motivated by the bold move of Rivers, Lagos state which is the largest VAT revenue earner in Nigeria is following the same lane as its house of assembly has also passed the law to collect VAT. The speaker of the house of Assembly in Lagos state, Mudashiru Obasa, had alleged that despite the state generating about N500billion as VAT annually, it only gets a paltry amount from the source to run its affairs.

Obasa who urged the Lagos government to do everything legally possible to ensure the judgment of the court in Port Harcourt is sustained up to the Supreme Court, said the VAT bill would lead to an increase in revenue and infrastructure development.

“It is an opportunity for us to emphasise again on the need for the consideration of true federalism,” he added. According to Obasa, the VAT bill, when signed into law, will help the state tackle challenges in various sectors. Efforts by the Federal Inland Revenue Service (FIRS), the agency charged with the responsibility to collect taxes for the federal government appears to have failed so far as its application to get a stay of execution on the VAT judgment did not sail through according to governor Wike.

Views from experts

Financial consultant and chief executive officer of BIC Consulting Ltd, Dr. Boniface Chizea said the move by states to collect and use their VAT revenue is in order as he decries the level of unfairness, inequity and injustice in the system. His words: “If the VAT collection is now with the states, that will be a boost to their revenue base and reduce their dependence on FAAC. We need fiscal federalism.

It is overdue. And this should give a shot in the arm to all those clamouring that we need to restructure this country. The unfairness, the inequity, the injustice in the system is unbelievable.” Economist and former director general of the Lagos Chamber of Commerce and Industry, Dr. Muda Yusuf, told Saturday Telegraph that the controversy over the jurisdiction of VAT between the states and federal government is for the judiciary to settle. He also noted that current allocation mechanism of VAT proceeds raises funda-mental questions of equity and fairness.

“The derivation factor in the distribution of VAT revenue should be much higher than what obtains presently”, he said. Muda threw his weight behind the agitation to collect VAT by states as he said that is what obtains in many jurisdictions around the world. “VAT is essentially domiciled with the subnationals.

In some instances it is imposed as consumption tax,” he said. Muda called for a review of the sharing formula of the proceeds of VAT if the current structure of collecting VAT by the government at the centre must remain. He recommended a derivative principle of up to 70 percent sharing formula for equity and fairness. His words: “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 infrastructures such as roads, pressure on social infrastructure such as schools and hospitals, social problems such as heightened criminality, waste management, urbanization challenges such as proliferation of slums, traffic congestion etc.

These externalities put enormous pressures on the finances of the sub-nationals that provide the bulk of the VAT revenue. What is unfolding in this conversation are the challenges of a unitary system which we wrongly characterize as federal system. This situation underscores the imperative of fiscal federalism.” He said the good news is that the revenue allocation formula is being tinkered with at this time, asking that the inequity in the distribution of VAT proceeds should be addressed in the context of the ongoing review. Another economist, Marcel Okeke, who also supported the agitation, said the poor states will become poorer if the battle is won by the financially buoyant states. He also noted that the states are permitted to collect VAT by law as he said the enabling Act of the FIRS did not empower it to collect VAT but other tax revenue.

“There was a letter written sometime ago by the Executive Chairman of FIRS to the National Assembly in July 2021, asking it to amend the enabling act to include VAT collection, but that has not been done hitherto, and states like Rivers and Lagos have discovered that lacuna which they are trying to cash -in on,” he said. “Meanwhile, when you consider the contribution of states to VAT, you will discover that these two states-Rivers and Lagos are largest contributors and this money is shared to all states, including those who generate little or nothing. Many states will be losing out if these two states successfully fight to control their VAT revenue.

It means FIRS will no longer be allowed to collect and share to all. Like I have told you this move will affect many states negatively. It will affect those states that don’t generate much revenue from VAT. But states like Lagos and Rivers that make the money will have more money at their disposals to grow and develop themselves.” Like his colleagues, Okeke sought for fiscal federalism, noting that states will have the right to generate revenue from the natural endowments within their jurisdictions. “It would be better for all as that takes us back to what used to happen in our various regions when we run regional government.”

Q2 VAT distribution

Sectoral distribution of value added tax (VAT) data for second quarter in 2021 reflected that the sum of N512.25billion was generated as VAT in Q2 2021 as against N496.39bilion generated in Q1 2021 and N327.20billion generated in Q2 2020 representing 3.20 percent increase quarter- on-quarter and 56.56 percent increase Year-on-Year. Other Manufacturing generated the highest amount of VAT with N44.89billion generated and closely followed by professional services generating N29.30billion, commercial and trading generating N21.96billion while textile and garment industry generated the least and closely followed by pioneering and pharmaceutical, soaps and toiletries with N77.74million, N169million and N188.71million generated respectively. Out of the total amounted generated in Q2 2021, N187.43bn was generated as Non-Import VAT locally while N207.69bn was generated as Non-Import VAT for foreign. The balance of N117.13bn was generated as NCS-Import VAT.

 

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