It could be remembered that on the 9th August, 2021 the Federal High Court sitting at Rivers State pronounced verdict on the legality of Value Added Tax (VAT) collection in Nigeria, the pronouncement ignited not only legal arguments but also raised economic and social concerns. The said judgment has clearly given State Governments the power to administer VAT law, as against the status qua (Federal Government, through Federal Inland Revenue Services (FIRS)). Since then, multitude of comments were made by relevant interest groups; including legal luminaries, tax consultants, academics, and the business community, which consequently portrays the issue as number one priority in Nigeria.
It is a common fact among average individuals, especial those with interest in macroeconomic issues that VAT is a consumption tax on economic activities (goods and services) which historically was introduced in Nigeria on 24th August 1993 by the Federal Military Government. Before VAT introduction, Sales tax was administered by the states government.
Investopedia defined VAT as a consumption tax that is levied on a product repeatedly at every point of sale at which value has been added. VAT is generally a multi-stage tax; thus, the burden is on the final consumer. Unless, categorically exempted, all goods and services are taxable under the VAT Act provision. Like many other taxes, the principal objectives of VAT are said to be revenue generation, redistribution of income and wealth, management of economy and harmonization of economic activities among others.
Going by the Adam Smith seven canon of taxation that guide present day tax system (equity, certainty, convenience, administrative efficiency, simplicity, productivity, and flexibility/stability). To achieve probity and accountability, three basic stages were instituted for VAT computation: Firstly, computation of what taxable person pay to procure goods and services for production (input VAT); Secondly, ascertaining the amount of tax collected from sell of goods or services on behalf of tax authority (output VAT); and Thirdly, VAT is determined on the basis of the difference between input and output VAT.
Initially, VAT revenue is shared vertically in the ratio of 80:20. 80% was for the states while 20% for the Federal government as administrative charges.
Later, the sharing formula was adjusted to 50:25:25 with federal government taking 50%, states 25% and local government 25%. Dissatisfied with the skewed sharing formula, state governments protested and as a result the formula was reviewed and readjusted to the current 15:50:35 ratio for federal, states and local governments, respectively. Horizontally, VAT is shared 20:50:30, 20% derivation, 50% equality, and 30% population. But then, one may interest to ask, does the current sharing formula promote creativity, competitiveness, effectiveness or laziness among the states?
Eminently, Rivers Federal High Court judgement has generated plethora of discussions; including professional and academic sentiments, as well as dishonest sectarian interests which bordered around ethnic and regional considerations, and which eventually took mainstream media pages and social media.
To make it worse, the issue is now being regionalized and or personalized to the level of seeing such new lexicon as Wike effect, Rivers federating model, new restructuring templates, North versus South, Wike versus federal government etc. Some even termed it as PDP and APC show of strength.
Going back to the clash of interests, there appeared to be apparent polarization of opinions among various commentators from different professional and interest groups, with some portion supporting state VAT collection while the other portion is faulting it. Logically, the dispute is far from who shall administer VAT, but about who gets what from the pool (The Interest). Factually, the issue is not about VAT collection but the fairness of VAT Pool sharing.
As against the conception of many Nigerians, dispute of who shall collect VAT between FIRS and SBIRS is not fresh; but this time it is unique because of the character involved and the fiscal constraint that enmeshed the federating unit. Although, no one can authoritatively tell who will laugh last between the contesting parties (States and FIRS), one can say with certainty that the Supreme Court will be the final arbiter. However, the core question is who will be the ultimate winner irrespective of where the pendulum swings?
In my view, the strategic importance of what is at stake outweighs all the regionally and politically affiliated and emotionally naïve justifications and conclusions. I presumed that it is more reasonable to look at the issue from holistic point of view; historical, strategic, economic, political and sustainable development angles. This will allow for involving the right caliber of institutions and individual who are capable of providing realistic and actionable solution, rather than giving it regional, ethnic or partisan political colorations. Legal expert & practitioners, economic strategists, intellectual community relevant legislative and security wings are all very significant in fashioning out the best way forward for VAT administration based on constitutional provisions, previous legal pronouncements and other enabling laws of the federation.
Structurally, VAT revenue is clustered into three constituents, namely: Non-Import (Foreign) VAT, and Nigerian Custom Services- Import VAT, and Non-Import (Local) VAT. Interestingly, according to data from National Bureau of Statistics, in the last three years 2018, 2019, and 2020, Non-Import (foreign) VAT plus NCS Import VAT which all fall within the federal government are more than 50% of VAT collection.
Fascinatingly, in 2020, out of the N763 billions Non-import local VAT, FCT generated about N202 billions 26.3%, which revealed that the 36 states only generated 36.6% of VAT in preceding year. Even the 2021 Q1 N496.4 Billion VAT collected, Non-Import (foreign) VAT plus NCS Import VAT accounted for N271.53 Billion (54.7%). Thus, in addition to superior skills, capacity and competencies of FIRS to administer VAT, Federal government has more taxable person regardless of the litigation outcome.
In Practical term, consumption of goods and services in Nigeria are classified into intra-transaction (within state), inter-transaction (between states) and international transaction (with foreign transaction). Also, since VAT is multi stages, production through final consumption of goods and services might go through different states of the federation, if not judiciously look at it will create difficulties in defining the right jurisdiction for VAT collection, and also add to taxable person input and output VAT computation complexity as different tax jurisdiction will have different tax rate just as it is happened presently with Lagos (6%) and Rivers state (7.5%).
Admittedly, one of the salient economic realities is that tax laws affect investment decisions and corporate profit margins, and as such, to prevent investors negative sentiment states and Federal governments should be more proactive in reaching business friendly and supportive settlement at all times.
Going by the principles of Harvard Business School of win-win negotiation, which encourages separating position and interest as well as disconnecting issues from the parties, it can then be clearly averred that the dispute should not be about Wike and Federal Government, North and South, and of course not between PDP and APC.
For one to draw his or her perceptual conclusion on this timely and strategic issue there is need to understand and acknowledge the fact that Covid-19 pandemic has thrown many economies into recession. Nigeria escaped it with meager marginal GDP growth of 0.11% in Q4 2020. Cautiously, the fragile GDP growth rate in Nigeria coupled with double digit inflation and interest rates, high unemployment, currency crisis, poor attitude to real economic sector lending, insecurity and rising foreign and domestic debt, unless the monetary and fiscal authorities introduce new economic model and create better conducive environment that can accelerate private sector productivity to compete locally and globally, then, sustainable win-win settlement to the current VAT spat will not hold.
One of the salient economic realities is that tax laws affect investment decisions and corporate profit margins, across the globe, there is no acceptable VAT collection format. In some jurisdiction, state and central government jointly collect VAT, while in some only central government collect VAT.
In Nigeria, state governments and federal government need to employ jaw-jaw approach to address and develop VAT collection format that will be acceptable for all parties. By so doing, it will help in minimizing double taxation, VAT payment litigation, killing of businesses and reduction of government revenue. Consequently, considering the nature of Nigerian federating unit, technicalities VAT computation, and need to incorporate Adam Smith seven guides in VAT administration FIRS and not SIRB might be better candidates to administer VAT in Nigeria, decentralization of tax collection in Nigeria will driveaway investors, and will led to avoidable litigation among states and possibly between state and local governments.
Bawalle, Aliyu Ali
Chartered Accountant & Management Consultant Centre for Management Development (CMD)