Resolving VAT imbroglio in favour of consumers 

The enduring agitation for restructuring and fiscal federalism boiled over recently with a Federal High Court in Port Harcourt forbidding Federal Inland Revenue Service (FIRS) from further collecting VAT in Rivers State and by implication, any other state. Being a consumption tax, VAT is a subnational affair and was not on the exclusive legislative list of the constitution. Since then, Rivers and Lagos states have enacted their VAT laws while others such as Delta, Ogun, Edo and Akwa Ibom are already preparing similar laws too. Benue, Adamawa and other states expressed support for the court order, arguing that it will entrench fiscal federalism. Sources have also confirmed that legislators from other states in the South-West are already busy on their own VAT legislations.

Politicians and economic experts have also been adding their voices to the debate. Dr Usman Gwarzo described the development as “a good one for Northern Nigeria but we may be stupid to miss it. In June (2021) N15.1 billion was collected as taxes in Rivers State but N4.7 billion was given to Rivers State. N46.4 billion was collected from Lagos State but Lagos was given N9.3 billion. Kano generated N2.8 billion and got N2.8 billion. What is missing from the picture above is that Kano could have generated 30 billion or more, if it does the following: Charge VAT on farm produce. Presently this is exempted from VAT. So states that rely on agriculture end up feeding the nation, but have no tax revenue to show; insist that companies pay for VAT on what they process in its state. For instance, Indomie sells a huge amount in Kano, but all its taxes are reflected as earned by Lagos state. Kano gets nothing – stupid Kano; maize is produced in Kano, but is processed in Ogun. The entire VAT is reflected in Ogun; MTN makes brisk business in Kano, but pays personal income tax for all staff in Lagos; if the Northern states are wise, Wike’s challenge is a life-saver. They can use it to reclaim taxes currently lost to other states. They can also use the opportunity to shrink their informal business sector and bring businesses into view and the tax net.”

Human rights lawyer, Ebun-Olu Adegboruwa (SAN), said the collection of VAT by states is a “form of restructuring”. We’ve been shouting and crying for this lopsided federalism to be made equitable. Those who make peaceful change impossible make violent change inevitable. Other laws should follow. LASG should go to Lagos High Court to seek an order for immediate compliance with the VAT law by all persons and authorities doing business in Lagos State. It’s a good beginning and enough of feeding-bottle federalism and Abuja financial pilgrimage!”

Also, a former adviser to Kano State Governor, Mr Salihu Tanko Yakasai said “any northerner that’s attacking Wike on this VAT issue does not mean well for his region. On this I’m with Wike 100 per cent. It’s time we look inwards and do some soul searching on how to revive our economic status in this country. To me, this is a wakeup call to Arewa leaders and followers”.

On the other hand, Governor Aminu Masari of Katsina State said the import of the Federal High Court judgement is that “people will begin to pay double VAT because if you pay VAT in Kano at the point of departure when you come to Katsina, you will pay another VAT. If you pay VAT in Lagos, it means you will also pay VAT all along the way until you reach your destination. It will bring a lot of burden on the people. That judgment is not fair.”

Similarly, Gombe State Commissioner for Finance and Economic Development, Muhammad Magaji reasoned “the VAT issue will have adverse effects not only on Gombe state but almost all the states of the federation. I was part of the discussion few weeks ago by all commissioners of finance across the country. The realisation was that only Lagos, Rivers and probably Delta states would be able to pull through without this VAT being administered centrally, and it is our appeal that we all put sentiments behind and work towards a federation that is one, by being our brothers’ keepers and ensuring that what is pulled together at the centre is distributed to be able to balance resources across the country.”

To policy strategist, Ayo Bankole, while collection of VAT by state governments will not solve the injustice that Nigerians seek to eliminate, it will rather create more problems and further complicate the ease of doing business. “Now, the solution is to prioritise contribution as the major or only basis of distribution. This can be achieved irrespective of who collects. For example, FIRS can collect but distribute based on contribution, such that 80 percent of a state’s generated VAT goes to that state and 20 per cent to their local government areas, while VAT on foreign transactions get shared equally among states.”

VAT problematic in federations

VAT in federal economies presents several difficult issues and it is significant that Australia, Switzerland and the US, the only three OECD countries that have not switched over to VAT are all federations. Globally, general sales taxes have typically been the domain of the states. In his 1988 work: Value Added Tax: International Practice and Problems, Alan A. Tait advised that the simplest solution is to entrust the administration and collation of the VAT either with the states or with the federal government and then use a formula to share the revenue between the central government and the states. If this is unacceptable owing to the loss of fiscal autonomy, then a federal VAT might have a state VAT ‘piggybacked’ on it.

Although VAT appears to be working satisfactorily in Germany, fiscal federalism issues still stand in the way of a smooth switch over to a national VAT even in an industrial country like Canada. It is therefore, not surprising that it is causing uproar in a developing country like Nigeria.

Group Lead, Special Operations Group, FIRS, Matthew Gbonjubola argued in this direction when he noted that “VAT is practiced on an input-output mechanism. What it means is for a business either importing or buying products, that business will pay VAT either at the port if its importing or to the manufacturer if it is buying from a local manufacturer and when that business pays VAT it is accounted for that business as an input tax such that when it begins to sell in any part of Nigeria and charges VAT to its own customers, it is able to recoup the input tax paid either at the port if it is an imported item or paid to the manufacturer if it is an item bought locally and it works only at a national level. VAT cannot work at subnational level and there is no country in the world where VAT works at subnational level and the reason is because VAT depends on the input-output mechanism.”

In their work, Consumption Tax Policies in OECD Countries, IMF staff, Daniel Bunn, Cristina Enache and Ulrik Boesen explained that “a well-designed consumption tax would apply only to all final consumption. The ideal consumption tax would not apply (or there would be an offset mechanism) if a restaurant bought groceries. Since the groceries are an input for the restaurant, the restaurant’s purchase is not final consumption. However, someone who buys the meal in the restaurant would represent a final consumer.”

VAT is designed to avoid the tax pyramiding problem by providing businesses with tax relief for the VAT they pay on the inputs to their products. The arrangement must be that the whole supply chain ensures that at each stage only the additional VAT is remitted to the government.

Who should administer VAT?

In many countries, VAT is administered by the traditional tax authority but introduction of the VAT disrupted the existing tax administration in other economies because of difficulties in establishing a proper VAT organisation. In 1995, Ghana VAT was repealed just three months after its introduction. Eventually, a third Board of Revenue was established for the VAT, in addition to those for the internal revenue service and the customs service. Kenya and Uganda also established separate agency for the administration of VAT. Most countries where the VAT and income tax are administered in a function-based organisation have maintained specific VAT programs in separate units.

In essence, states and Federal Government will still have to decide whether to use FIRS as a clearing house to ensure that Nigerians do not end up paying double VAT or establish another body entirely for the purpose in order to avoid escalation of inflation and discourage consumption.

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