As the deadline for filing of Value Added Tax (VAT) returns expires today, the Chartered Institute of Taxation of Nigeria (CITN), the body that regulates all tax professionals in the country has directed its members to continue filing returns with the Federal Inland Revenue Service (FIRS).
This is coming in the wake of disagreement between the FIRS and the states over who is entitled to collect VAT. Rivers State had led the battle against the FIRS, seeking the court of law to bar the federal tax collector from collecting VAT, a call that is being supported by many states in the country.
In an interview with LEADERSHIP, the President of CITN, Mr. Adesina Adedayo, who said the institute will be working in line with the law of the land, said its members have been advised to maintain status quo.
On what could be the implications of not filing returns due to the disagreement between the states and the FIRS, Adedayo said “as an Institute and based on the ruling by the Court of Appeal, we have advised our members to maintain the status quo and keep filing VAT returns with the Federal Inland Revenue Service pending the outcome of the appeal process.”
On the remote and immediate effect of the VAT war between the federal government and the states, he said “I hope we will not end up having the ‘cobra effect’, which technically means we may have intended and unintended consequences of our actions and we, therefore, need to manage this issue, in terms of the fallout. As an Institute, our position aligns with the provisions of our constitution. However, if we do not rein in our emotions, we may win the battle and lose the war.”
The director-general of Manufacturers Association of Nigeria (MAN), Segun Ajayi-Kadir stated that the controversy over the control of VAT between the federal and state governments, the conflicting court judgements and strong statements emanating from the two tiers of government are unhealthy for business.
He noted that this is more so at this time that the economy is showing signs of full recovery and reasonable growth, saying that manufacturers, like many other business operators in Nigeria are deeply concerned about what becomes of their fate this week, when businesses are expected to file value-added tax (VAT) claims and beyond.
“The contentions are worrisome and potentially inimical to the smooth operations of our businesses. On the one hand, the Federal Inland Revenue Service (FIRS) is insisting on continuing to collect VAT. Rivers State government is ordering immediate and complete collection of the same tax. Lagos State is preparing the grounds to go the way of Rivers State. Who knows, other states may be warming up to join the fray.
“As the leading payers of VAT in Nigeria, having contributed N44.9 billion in the first half of 2021, according to NBS, the manufacturing sector is going to be hardest hit by this looming impasse.
Court of Appeal, Abuja Division, had ordered the Rivers government, FIRS and the Attorney-General of the Federation to maintain status quo, pending the hearing and determination of applications before it in respect of VAT.
However, the Rivers State government last week Tuesday asked the Supreme Court of Nigeria to quash the ruling of the Court of Appeal, Abuja Division, which ordered parties to maintain Status Quo in a suit seeking to determine who has the right to collect Value Added Tax in Rivers State.
Meanwhile, Dr Muda Yusuf, an economist and former director-general of Lagos Chamber of Commerce and Industry (LCCI) said that “In many jurisdictions around the world, VAT is essentially domiciled with the sub-nationals. In some instances it is imposed as a consumption tax.
“The current allocation mechanism of VAT proceeds raises fundamental questions of equity and fairness. The derivation factor in the distribution of VAT revenue should be much higher than what obtains presently.”
According to Yusuf, 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, urbanisation challenges such as proliferation of slums, traffic congestion among others. These externalities put enormous pressures on the finances of the sub-nationals that provide the bulk of the VAT revenue. A stronger derivative principle of up to 70 per cent should be incorporated into the sharing formula for equity and fairness.”
He added that “What is unfolding in this conversation are the challenges of a unitary system which we wrongly characterise as a federal system. This situation underscores the imperative of fiscal federalism. The good news is that the revenue allocation formula is being tinkered with at this time. The inequity in the distribution of VAT proceeds should be addressed in the context of the ongoing review.”