As the argument between the Federal Inland Revenue Service (FIRS) and state governments over the collection of Value Added Tax continues, tax experts have laid out the modalities and/or issues that would define the operationality of VAT administration in the states.
This is as manufacturers, tax experts and industry watchers say they foresee a multiple tax system that would be complicated if collection is left for states.
Except for the few challenges identified in the possibility of states’ collection of VAT, the experts said it would be better for the states to be in charge of tax collection for developmental purposes.
They, however, raised concern that allowing states to collect VAT would have a negative impact on ease of doing business. They also expressed worry at the capacity of the states to effectively collect tax; issues of lack of policies to address legal issues of border checks and destination inspection without increasing the burden of payment on the taxpayers.
Tax consultant, Dr Fredrick Obasi said, “It’s not the administration of tax that is important, but the capacity to collect. The right thing to do for developmental purposes is to allow the states to collect tax,” he said.
But can they collect? Most states do not have the capacity.
On the expected controversy that could emerge if states are allowed to collect VAT, Dr Obasi said the law has taken care of how it should be done.
“It’s a consumption tax. You pay at the point of purchase or consumption. VAT law and compliance is not ambiguous. It is an input/output VAT. When the output is more, you don’t pay because you would have added something more. The input should always be more than output.”
“The general view is that most states do not even have the will power.
“If the states have the capacity, they should be allowed to collect. Nigeria will be better off because development will be closer to the masses; and collection administration will be easier because the taxpayers will be known one-on-one,” he stated.
But Barrister Lawrence Emeka Ihebie has a slightly different notion of how it should work, in a scenario of the supreme court pronouncing that VAT collection should be done by the respective states.
He said in an interview that “it’s going to be difficult and it will require cooperation among states.”
According to him, the only area of challenge is in the input and output VAT collection. Output VAT is paid at the point of the reselling of a product, which implies that the VAT on a product that is being sold for the second time should be less than the amount of the VAT paid at the first point of purchase of the product.
The fear is that some states would still want to collect the full value of the 5% VAT on a product where VAT had been paid in full sum, regardless of the place of payment.
The law provides that you remove the value of the 5% VAT paid at the first point of purchase and then deduct it from the VAT input on the product at the second point of sale of the product.
Ihebie’s view is that the federal government should collect VAT on a business transaction that happens between states (interstate). The law states that when a transaction involves two states, only the federal government has the power to make law on it. That was the supreme court judgment in Aberuagba vs Attorney-general of Ogun State case.
There are reports of people paying stamp duty in one state and they are mandated to still pay stamp duty on the same product in another state.
Experts also foresee a major challenge in filing of tax returns for individuals and businesses that have operations beyond a state.
In the case that states are allowed to collect VAT, people would be required to file tax returns in two or more states on a particular product or service. For instance, a company that operates in all the states of the federation will then be required to maintain tax returns in each of the states.
“That will decrease ease of doing business and ease of paying tax. It will be difficult to determine who will be entitled to certain VAT where it happens in a border between states,” Barrister Ihebie said.
However, he said, states should be allowed to collect tax, adding that it would make the governors start attracting business.
“You don’t solve a problem by running away from it. So, when these issues arise, the states will come up with a policy or an amendment whereby the input paid in a particular state can be recognised in the other state. The federal government could also collect the VAT and share it equally between the states involved.
“All the issues raised are issues that can be resolved. It might, however, increase the burden on the taxpayers,” Ihebie stated.
Operators in the organised private sector also raised concern that some states may increase the VAT from the current 7.5 per cent up to 10 percent once they commence collection, bringing more disruptions to the already complicated tax system in the country.
A former director-general of LCCI, Dr. Muda Yusuf, said state collection of VAT will surely come with some complications and overlaps which may be detrimental to business interests.
He argued that the VAT conundrum had created a great deal of uncertainty among investors “such that we are dealing with conflicting and overlapping instructions from the states and federal government.”
He said this is surely not the best for investors’ confidence, stating that the resolution of the VAT controversy should be both legal and political.
He affirmed that it is important to have some engagements and discussions among the key players and participants.
“This should, however, be without prejudice to the central issue of equity and justice in the distribution of the VAT proceeds. The bigger issue is actually the equity question,” he said.
On his part, the national president, Association of Small Business Owners of Nigeria (ASBON), Dr Femi Egbesola, said the idea of state governments collecting taxes means that enough funds will be allotted to building a structure that will manage the collection of VAT, stating that “we don’t need it in an economy that is descending and reclining.”
He explained that VAT collection will not bring advantage to business owners due to the overlapping in VAT collection from companies that have offices in different states, which could cause companies to pay multiple taxes.
He said harmonising the payment of tax will become very difficult as business owners will bear the brunt of paying more taxes on vatable products.
“Apparently, this will see state governments charging different rates from 7.5 per cent to 10 percent while some other states may even charge more, and how do they begin to harmonise the payment of tax.”
The ASBON boss stated that the CAMA Act of 2020 that was signed into law exempts small businesses whose turnover in a year is N25 million and below from paying tax, adding that the CAMA Act belongs to the federal government and when it comes to states collecting VAT, they may say they don’t recognize the law and that means small businesses who are struggling will begin to pay VAT.
He further posited that multiple payment of tax will occur as manufacturers are likely to pay more taxes in their manufacturing states with state government officials clamping down on their distributors for tax and, largely, if the state government succeeds on this, it will bring negative consequences to small businesses.
“It is no gainsaying that for any economy to survive, we must grow the small business sector and that’s why some of us are clamouring that the VAT policy should not fly, or else it will affect us negatively,” Egbesola said.
Industrialist Urges FG, States To Dialogue On VAT
Meanwhile, an industrialist, Kayode Ojo, has called the federal and state governments to come to a round table and discuss the contentious issue of who collects the Value Added Tax (VAT).
Ojo said the two levels of government should not allow the VAT collection matter to create tension in the country.
Speaking on the issue, the All Progressive Congress (APC) chieftain in Ekiti State said the issue should be critically looked into by the parties involved in order to reach a reasonable compromise that will benefit all.
“My position on VAT, which is a consumption tax, is that the federal and state government should come together and dialogue on how it will generate maximum benefit to all and sundry.
“It is not one-cap-fits-all; a lot of studies should be done to arrive at how it should be administered,” he said.
Ojo said he was very sure that the two contending parties could reach a compromise that would be favourable to all sides.
The front line politician stressed the need for the harmonious relationship that has been existing between the two tiers of the government to be built upon to resolve the controversial issue.
“Let us remember that we are the ruling party, the All Progressives Congress, so I don’t expect the VAT issue to degenerate into chaos.
“The committee set up by the federal government and the states should parley, ‘jaw- jaw’ and see how they will generate maximum benefit for all and sundry .
“The two parties should arrive at the best option that could be good for both the federal and the States government and, I am sure, a compromise can be reached on the matter.”
LEADERSHIP Weekend reports that there is ongoing legal battle between the Rivers State government and Federal Inland Revenue Services (FIRS), an agency of the federal government -on who is entitled to collect VAT.
Lagos State has also recently domesticated the VAT collection after passing a bill into law to that effect.
The Southern Governors Forum, at a meeting in Enugu State last week, also took a joint position to support VAT collection by states.