While it is a well-known mantra of the Federal Inland Revenue Service, Nigeria to say, ‘It pays to pay your tax,’ it would seem that, Rivers and Lagos States, have gone beyond a metaphorical interpretation of this intonation as far as the administration of VAT is concerned by literally attempting to dismantle the West Wall in order to repair the East Wall, the result of which would be covering the remaining state is Nigeria with a short sheet…
A fracas on the administration of VAT with FIRS on one end of the ring and the Rivers and Lagos State governments on the other end has not only been formed, it seems to be taking a byzantine dimention. The dispute stems from the recent judgment obtained by the Rivers State government at the federal high court, Port Harcourt. In its judgement, the court ruled that States, and not the Federal Government, are constitutionally empowered to collect VAT. As a result of this court’s position, the recent conundrum between FIRS, the Rivers state government and the Lagos state government was effectively born.
The Value Added Tax (VAT) is governed in Nigeria by the Value Added Tax Act Cap. V1, Laws of the Federation of Nigeria, 2004. VAT is a consumption tax paid when goods are purchased and services are rendered. It is a multi-stage tax and is borne by the final consumer. All goods and services produced and rendered within the country or imported are taxable except those specifically exempted by the VAT Act. VAT is charged at the rate of 7.5% although some goods and services such as non-oil exports are zero rated. All taxable persons are required to file VAT monthly returns not later than the 21st day following the month of transaction.
Crisis started when States that believe that they contribute a large chunk of the VAT income yet do not benefit so little and at per with States that contribute minimally began to look at the legal regime of VAT administration in Nigeria. These select states came to the conclusion that States could legislate on VAT realized from transactions within the State. Rivers State fired the first salvo by enacting the Rivers State VAT Law and approached the Federal High Court in Port Harcourt to restrain FIRS from collecting VAT from persons and companies operating within Rivers State. Lagos State, which is said to contribute 55% of the VAT income has also made a VAT Law similar to that of Rivers State and the VAT controversy rages on.
Rivers State won the case at the Federal High Court and FIRS has lodged an appeal to the Court of Appeal and against the judgment. The Court of Appeal has also ordered a stay of execution of the judgment taking into account the guiding principles for the grant of such order.
Now, looking at the whole matter from general vantage point, one may wonder why only these two states, out of the 36 states in Nigeria, are clamouring for VAT collection by individual state, rather than the Federal Government. The answer is not far-fetched… The two states in this matter are the only states, as well as FCT, whose share of the distributed VAT falls below the VAT generated from their states as per the 2020 VAT collection and distribution to States and Local Governments as reported by Federal Allocation and Account Committee (FAAC). While Rivers State has enacted its VAT Act, Lagos State has set in motion plans to pass a bill for the collection of VAT.
In its argument to support its position, Rivers state opined that there is no constitutional basis for the FIRS to demand for and collect VAT, Withholding Tax, Education Tax and Technology levy in Rivers State or any other states of the federation. Its rationale hinges on the fact that, being that the constitutional powers and competence of the Federal Government is limited to taxation of incomes, profits and capital gains, which does not include VAT or any other species of sales, or levy other than those specifically mentioned in items 58 and 59 of the Exclusive Legislative List of the Constitution.
Even though the Nigerian Constitution does not clearly give FIRS the power to administer VAT, there are a number of reasons why the VAT administration should be centralized. It is also important to note that if this judgment is enforced or upheld on appeal, it would apply to other states and not just Rivers State. Due to this inevitable and far-reaching consequence, it is paramount to dissect the implications of such a judgment.
Primarily, the likely implications of having States administer VAT would be the general increase in prices of VAT-able goods and services. In this respect, one should picture a situation where, for example, an Oyo-based company that sources the raw materials for the manufacturing of its product from a company based in Lagos pays VAT at 7.5% through the Lagos-based company (input VAT). In this case, when this particular company’s product is eventually sold, the final consumer is charged VAT at 7.5% (output VAT).
Under the current structure for VAT collection, where the FIRS is responsible for the administration of VAT, the same Oyo-based company is permitted to offset its input VAT against its output VAT such that the total tax burden by the final consumer is capped at 7.5%.
However, on the other hand, if the States become responsible for the VAT administration, collection becomes complicated in that each state may be unwilling to permit the offsetting of input VAT against output VAT. If this becomes the likely outcome, then, there will be an added burden on final consumers as companies factor this additional tax burden when setting prices. The impact of this is a surge in the rate of inflation over a short period of time. And that would have a detrimental effect on every Nigerian despite their location beyond the ‘Center of Excellence’ and the ‘Treasure Base!’
Additionally, another consequence would be reduced VAT revenue for majority of the states. In a situation where state governments are responsible for the collection of VAT, all the states of the federation, with the exception of Lagos, Rivers and FCT, going by the 2020 VAT collection data, are likely to be worse off than they are under the present system of VAT collection and distribution. The data, shows that VAT generated from Lagos represents 65% of the total VAT generated in Nigeria; followed by FCT, which represents 17% of total VAT revenue. Apart from this fact, the majority of the States Internal Revenue Service (IRS) lacks the requisite capacity to administer VAT when compared with FIRS.
Furthermore, another effect of having States take up this role is that, VAT administration would likely become more complicated and cost more. From the stance that Rivers and Lagos state have taken, it is almost as if they fail to consider that VAT is based on the destination principle, i.e., the state where the final consumer resides takes the benefits of VAT. This is demonstrated in the treatment of VAT on imports and exports. VAT is charged on imported goods while exported goods are VAT exempt. If this fundamental principle were to be followed, it would mean that a system would need to be in place to monitor the flow of goods and services within states in order to ensure VAT administration is effective. Perhaps, each state would need to establish its own customs agency to track the inflow and outflow of goods into and out of the state. This would, no doubt, impair the flow of inter-state commerce and also have adverse effect on the ease of doing business ranking of the country.
State governments should consider the cost implication of monitoring and administering VAT and match it with the benefits they expect to derive from having VAT administered individually. Likewise, tax filing process may become more tedious for companies and this may motivate companies to evade paying up tax.
Although there is a constitutional argument surrounding the administration of VAT, it is quite clear that only a few states (Lagos, FCT and River) stand to benefit from the enforcement of this new judgment, probably in the short distance time. Conversely, the other majority states, which individually contribute less than 1% of total VAT generated (with the exception of Kano, which contributes ~3%), would be worse off both immediately and in the long term.
The fairness of this could lead to a whole new argument, because some states have an undue advantage, due to their geography and natural endowment. In this instance Lagos and Rivers have an undue advantage when compared to other states in terms of their proximity to sea. It is a well-known fact that economic development is faster in areas that have sea ports, as businesses look to setup in and around that area for ease of inbound and outbound logistics.
Like the Supreme Court held in AG Ogun State V. Aberuagba (supra) at page 427, para. D, our Constitution should be interpreted in such a manner as to satisfy the susceptibilities of the Nigerian societies for whom it was made and to meet the needs of the Nigerian institutions. If we interpret the Constitution to mean that every State in Nigerian could legislate on VAT collection without looking at its restrictive tendencies then the intention of the Constitution will be defeated as States will prefer that goods provided within should be consumed in the State to enhance the volume of VAT in the State thereby distorting the free flow of inter- States goods and services in Nigeria. This will adversely affect the economy and no Federal Government will stand and fold its hands in the face of such looming economic disaster.
While looking for a means to bring an end to this lingering contentious issue with respect to whom the responsibility of VAT administration falls, which will include the amendment of the Constitution, FIRS should continue to administer VAT for the nation.
Anything short of that in the present atmosphere would give credence to the saying ‘It pays to pay your tax,’ for Rivers and Lagos States only. However, for the remaining States in Nigeria, the result would be one where they would be covered with a short sheet that puts them highly at a disadvantage.