Legal battle over VAT collection stirs debates on equity, fiscal federalism




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TUNDE AJAJA examines the likely solutions to the salient issues presented by the raging controversy over the collection of Value Added Tax in Nigeria.

The August 10, 2021 ruling of the Federal High Court in Port Harcourt, Rivers State on the issue of Value Added Tax appeared as what some people would describe as a storm in a teacup.

Prior to the judgement, the right authority to collect VAT was hardly an issue, possibly because it was a sustained source of revenue that contributed significantly to government revenue at all levels.

However, since the court ruled that the Rivers State Government, and not the Federal Inland Revenue Service, should collect VAT, which implied that every state would collect VAT, the political landscape has been inundated with arguments for and against the ruling.

The FIRS has filed an appeal at the Court of Appeal in Abuja, and the court ordered that parties should maintain status quo. The Rivers State Government, which already enacted its VAT law, has also approached the Supreme Court to set aside the Appeal Court’s ruling.

Also, the Lagos State Government, which has also enacted its VAT law, has asked to be joined in the appeal and the Appeal Court fixed October 7 for further hearing.

Meanwhile, the discourse has since shifted from an economic issue to the murky waters of politics before it was reduced to the usual inter-ethnic conflict between and South.

For example, Governor Aminu Masari of Katsina State, reacting to the Federal High Court ruling, said the judgement could not stand and the state had already filed an appeal. He argued that other states contributed to the success of Lagos and Rivers states.

But Governor Nyesom Wike of Rivers State, reacting to the opposition to the court ruling by some northern governors, took a swipe at them, saying could not be contributing humongous numbers during elections that could not translate to tax earnings for their states. “If they can vote, they should be able to work and pay tax,” he added.

Wike lamented that his state generated N15bn VAT revenue in June 2021 but received only N4.7bn, noting that Kano State generated N2.8bn in the same month and received the same N2.8bn while, according to him, Lagos State generated N46.4bn but received N9.3bn.

In a related development, Governor Udom Emmanuel of Akwa Ibom State a few days ago queried how his state could receive N2bn as VAT despite the “humongous” VAT paid by international oil companies in the state.

In an interview he granted as part of activities to mark the state’s 34th anniversary, the governor stated, “This month, I (Akwa Ibom State) was given just N2bn in VAT. Exxon Mobil came on air and mentioned the humongous sums they are paying in VAT, not to talk of other IOCs.”

Speaking further on the perceived inequity in revenue sharing formula in the country, he added, “As at today, statistically, Akwa Ibom sits on 36.1 per cent of the entire oil and gas reserves of this country, though it might not reflect in our revenue.

“You will be shocked what I (Akwa Ibom State) was given this month of September, but there will be a time we will challenge that also, because with the level of production and quality of crude oil that we have, how can we be given something that won’t add up anywhere. We don’t understand the sharing formula anymore and I’m saying this to the entire world.”

Perhaps, the southern governors also took cognisance of the fact that data from the Federal Accounts Allocation Committee made available by the National Bureau of Statistics showed that between January 2020 and February 2021, five northern states, two south-western states, two south-south states, and one south-eastern were top earners from VAT.

The 36 states and the Federal Government shared N1.09tn as VAT revenue in the period under review, but the figures showed the top earners as Lagos (N153.94bn); Kano (N32.48bn); Oyo (N29.85bn); Rivers (N28.43bn); Kaduna (N24.75bn); Katsina (N22.72bn); Delta (N20.91bn); Bauchi (N20.49bn); Anambra (N20.14bn); and Jigawa (N20.13bn).

Based on regions, the South-West region received the highest VAT allocation (N256.21bn), followed by -West (N154.41bn), South-South (N119.88bn), North-East (107.43bn), North-Central (N106.58bn). The South-East received the least from the VAT allocations with N91.99bn.

It is equally interesting to note that the 10 states that received the least amount are from both North and South. They were Nasarawa (N15.36bn), Bayelsa (N15.79bn), Taraba (N16.23bn), Gombe (N16.33bn), Kwara (N16.35bn), Ekiti (N16.46bn), Yobe (N16.90bn), Abia (N17.03bn), Ebonyi (N17.04bn), and Cross River (N17.17bn).

The division along ethnic lines has nonetheless continued to widen. The Southern Governors’ Forum at their meeting in Enugu State some days ago supported the ruling that states should collect VAT, while the Northern Governors’ Forum at their meeting in Kaduna State few days after said even though they would await the decision of the Supreme Court on the matter, they preferred the FIRS collecting VAT to avoid double taxation and for interstate trade not to collapse.

At the moment, the Federal Government gets 15 per cent of VAT revenue, states share 50 per cent while the local governments share 35 per cent, after the FIRS deducts its four per cent commission. The sharing is premised on 50 per cent equality, 30 per cent population and 20 per cent derivation.

The unpopular solution
But, as the polarisation continued, worsened by the delayed justice delivery on the matter at both the Court of Appeal and the Supreme Court, some experts have advised that the VAT controversy should trigger a conversation to address the injustice and inequity issues raised by some states, especially those in the South who believe they are being short-changed.

A former Minister of Finance, Dr Kalu Idika Kalu, who was the brain behind the introduction of VAT in in 1993, said a conversation convened at the highest level of government would resolve the raging issues so the country could move on.

Idika Kalu in an interview with our correspondent said, “On the VAT issue, just call a few people together to review the situation and come up with an honest solution. To do that is not rocket science. Solve the problem quickly and move on. But no, we need to quarrel over it and issue threats back and forth.”

Asked if he aligned with those who believe the ongoing legal dispute would pave the way for fiscal restructuring, he said, “No, it is just another argumentation. We have to get rid of all those side issues that focus on ethnic, regional, religious and geographical differences.”

Also, a former governor of the Central Bank of Nigeria, Muhammad Sanusi, said states collecting VAT would lead to double taxation. He advised it’s better to review how resources are shared.

Similarly, the Fiscal Policy Partner and Africa Tax leader at PwC, Taiwo Oyedele, frowned at the ethnic dimension the VAT issue has assumed, noting that the recent events should rather bring about a conversation over the concerns raised by those aggrieved.

“It is not about North versus South because that is the same sentiment that has brought to its sorry state,” he said. “Abia, Osun and Zamfara states have the least VAT contribution. Abia is South-East, Osun is South-West and Zamfara is North-West. So, it is not about North against South.”

In his view, an economist and former Director-General, Lagos Chamber of Commerce and Industry, Dr Muda Yusuf, said the controversy over the jurisdiction of VAT collection between the states and Federal Government was for the judiciary to settle.

However, he argued that there were also equity issues that must be addressed. He said it was high time the VAT sharing formula was reviewed.

Yusuf, who is also the founder/CEO, Centre for the Promotion of Private Enterprise, added, “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 which is a mere 20 per cent. 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 infrastructure such as roads, pressure on social infrastructure such as schools and hospitals and social problems such as heightened criminality. You also have waste management, urbanisation challenges such as proliferation of slums, traffic congestion etc.”

He suggested that the derivation factor should be about 70 per cent instead of the current 20 per cent.

He added, “These externalities put enormous pressure 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.

“What is unfolding in this conversation are the challenges of a dysfunctional federalism. This situation underscores the imperative of fiscal federalism. The good news is that the revenue allocation formula is being tinkered with at this time. It is more efficient for the FIRS to collect but the equitable distribution is paramount.”

He called for an expeditious hearing of the matter by the judiciary, saying this would reduce the risk of disruption and friction between the states and the Federal Government.

Interestingly, Masari, who said the state would go to court to appeal the judgement, also noted that it was best for stakeholders to have a conversation on the issue as the way forward.

He said, “It is other parts of the country that make Lagos and Rivers states what they are. We have to work together as a nation and come up with something that will work for all of us.”

Calling for a review of the VAT sharing formula, the incumbent Director-General of LCCI, Dr Chinyere Almona, in an interview with The PUNCH suggested that equality should be 20 per cent, population should be 30 per cent while derivation should be 50 per cent.

Stating the position of the Northern Elders Forum, its Director of Publicity and Advocacy, Dr Hakeem Baba-Ahmed, said for the matter to have escalated suggested the need to address the fundamentals and the manner in which the federation works.

“We recognise the fact that we need to change the manner in which we generate wealth and allocate (it),” adding that the issues surrounding VAT should make northern governors recognise the need to develop their states regardless of the outcome of the cases in court.

Also, Wike also did not rule out the possibility of a dialogue. He stated, “Some people have said be your brothers’ keeper. I have no problem with that, but let us tell ourselves the simple truth. When you agree that it is the states that should collect VAT, we can sit down to say, now we know it is the states, but look at the problems. That is a different thing.”

Speaking further on why it is best to hold talks on how VAT revenue should be shared, Oyedele stated that states had not shown capacity to optimise tax collection.

He explained that seven taxes give about 98 per cent of its revenue, namely Personal Income Tax, Property Tax, Stamp Duties, Petroleum Profits Tax, VAT, Companies Income Tax and Customs and Excise Tariff. Out of these, he said Personal Income Tax, Property Tax and Stamp Duties are collected by the states while the other four are collected centrally but are still shared with states.


He said, “States do not have the capacity to collect VAT. It has taken FIRS about 28 years to build the capacity it has now. In 2020, FIRS generated N1.53tn from VAT but in the first six months of this year alone, it has collected N1tn, the highest it has collected within the same period.

“You may wonder if states can’t build the same capacity. The highest revenue yielding tax head in the world is Personal Income Tax and states collect it 100 per cent. All the states collected about N844bn from PIT, whereas South Africa, with one-third of our population and similar unemployment rate collected about N12tn from that same Personal Income Tax.

“Stamp Duties was 100 per cent a state tax and the states were barely collecting N10bn until the FIRS picked it up about three years ago.

“Land is the world’s most valuable resource and states have control over it. The amount of wealth states can unlock from it is unbelievable and that would help the economy. In fact, property tax is like the second highest revenue yielding tax in the world but what the states collect from it is what you can call out-of-pocket expenses.

“They (states) have not done well with the predominantly revenue yielding taxes they have been collecting for many years. In my view, VAT should be collected centrally.”

On the perceived injustice in how the VAT revenue is shared, Oyedele agreed that there was inequity that should be addressed. He noted that one good way to address it was to give to each state what it generated from it while the ones collected on international trade and others should be shared.

He said, “I think the real conversation here is to revisit how the revenue is shared, not by states collecting theirs. I think what we should do is to say ‘FIRS, can you track how much VAT you collect from each state?’ Then, we give it back to them 100 per cent and whatever is collected from international trade, import duties and Federal Government contracts should be shared so nobody would think they are being short-changed.

“I agree 100 per cent that there is inequity that needs to be addressed. There are states that believe they are collecting a lot but are not getting anything close to that and they believe there are other states collecting almost nothing but are getting a lot. But we cannot solve one problem and create a bigger one. We need to have that conversation and put it in the constitution the way we want it to be.”

He argued that if VAT were collected by states, the Federal Government would be the biggest beneficiary because in 2020, over 50 per cent of the N1.53tn the FIRS generated from VAT was from import VAT and international non-import (services) VAT, which is not within the jurisdiction of the states.

He added, “Also, FCT collected about N202bn but got only N35bn. So, when you add the VAT from FCT to import VAT and international services VAT, it is more than 60 per cent of the VAT collected and it got only 15 per cent while states and the local governments shared 85 per cent.

He furthermore noted that states such as Lagos and Rivers should note that they benefitted from headquarters effect, adding that what was remitted to them didn’t imply what was attributable to them.

He noted, “Almost all the banks are headquartered in Lagos, so their VAT from all the states is remitted in Lagos. The same thing for many other companies, like the telecom companies; people make calls all over but the VAT is remitted to their headquarters in Lagos.”

He pointed out that if states enacted their VAT laws, VAT generated from Lagos would reduce, saying that some states generate low VAT because part of what was generated in their states was reported under Lagos State and other big cities.

He added, “Rivers State has Port Harcourt Electricity Distribution Company, for example, but it serves a few other states. That means all their VAT on electricity is reported under Rivers State. NDDC is based in Rivers State, but it covers about nine states. That means all the VAT they withhold on their contract would be remitted under Rivers State.”

On the issue of northern states destroying alcohol but benefitting from VAT paid on it in other states, Oyedele said the reservations were valid but should not be the most important conversation.

He said, “According to the NBS, the consumption of alcohol in is about N150bn a year. The VAT on it is less than N15bn. The whole sector of beverage, soft drink, spirit and tobacco contribute about 3.9 per cent to VAT. Let us say, by exaggeration, that alcohol is half of it, making it two per cent, how is two per cent the most important conversation here.”

“As much as I agree with the principle that if you don’t like alcohol, then don’t take VAT from alcohol. But that is not the most important conversation.”

The big decision
While some experts believe that it is better to have a conversation over how the money made from VAT is shared, some others believe it is best for states to collect their VAT, not only to foster fiscal federalism, but to also try something different.

A professor of Strategy and Development, Anthony Kila, said there was no doubt that the request by Rivers and Lagos states was for fiscal federalism, noting that those hiding under technical factors to fault the move were not being courageous.

He added, “The technical issues can be solved, and we need to say if it is right or wrong, not if it is doable or not. We should agree if we want a true federal structure or not. I think it appears strange to people that those who give a lot get a lesser amount. It is not a bad thing to be seen as the state contributing less or poorer than others. If we allow states to explore their competitive advantage, we would get the dividends of those advantages.”

Kila, who is the Director, Centre for International Advanced and Professional Studies, explained that if the President and others in higher positions of authority had tabled the matter at a political forum, there would have been no need to go to court.

Also, an economist, Mr Johnson Chukwu, who is the Chief Executive Officer of Cowry Asset Management, said he was in support of fiscal federalism and that states collecting their VAT was the way to go.

He stated, “I support fiscal federalism. The truth is that this country has refused to develop economically for the past 60 years and we cannot continue to practice the same method that has kept us undeveloped. The incentive system is wrong. The day we adopt fiscal federalism, everybody would see the need to work and create value. Once citizens are involved in funding government activities, they would have the duty to demand accountability from them.”

On the view that states have not shown they have the capacity to optimise VAT collection, Chukwu said if there shouldn’t be a problem once the apex court eventually decided that states should collect VAT.

“States are collecting state taxes now, so they should have no difficulty if they are to administer VAT. On whether the states are doing well with the taxes they collect at the moment, I think those things are issues of logic.

“Taxes are extant laws, so the states would pass the necessary laws that would define the tax base as it relates to their states as well as the method of payment, which is what states such as Rivers and Lagos have done. For me, that is the way to go if we have to transform this economy.”

Asked if there would be no complications, especially for a tax that is input and output ends, Chukwu said, “I don’t think so. For example in the telecom sector, they have a settlement platform. You can reconcile on a monthly basis and set off whatever is the difference. I don’t think that should be a problem. We are just begging the issue.

“As a country, we have refused to do the right thing. The more we wait, the more we are getting to a point where it becomes difficult to address those things. Let states earn their income.’’

Similarly, a professor of Industrial Economics at the Imo State University, Igwemma Abianoro, said it would be good for states to collect tax, especially from the prism of fiscal federalism.

He added, “What will it profit the FIRS to collect the tax and give to the state? What will they gain?”

On the destruction of alcoholic drinks in some parts of while such states benefit from the VAT paid on it, Abianoro, a fellow of the Institute of Economists of and Institute of Corporate Administration, said, “Alcohol is banned in some states but VAT is collected on it and those states seem to benefit more than those who drink alcohol. I don’t think it is fair.

“I think the states should collect their VAT. If the government doesn’t handle it well, it would lead to many agitations. Government should think of how to handle it and stop the agitations. We should allow the states to collect it.”

Meanwhile, a political scientist at the University of Lagos, Dr Isiaka Adams, said fiscal federalism cannot be achieved suddenly, adding that there was the need to compensate for hard work and revenue drive. He noted that there could be a political solution to the issue if states got the same proportion of what they contributed to the purse.

He added, “For a political solution, I am of the view that whatever you contribute to the national purse, you deserve to have a commensurate proportion of it and that would stimulate you to generate more revenue. That would also challenge those not doing enough.

“One of the advantages of federalism is that it gives room for competition. A state that is doing more than the others in a certain area should benefit from that advantage. True federalism gives room for recognition of comparative advantage. You have to stimulate development across the country so that people won’t gravitate to one area and neglect the other area.”

He said that it would be an anomaly if the states in a federation draw their sustenance from the centre.

Also, the Akwa Ibom State governor said those who insisted that states should not collect VAT had yet to see the hidden treasure in it.

He added, “If a resident of Uyo (the state capital) sells a house in Uyo and the value of that property is enhanced by good roads, electricity, water, security and other amenities provided by the state, and VAT is paid on the transaction. Why shouldn’t the VAT come to the state 100 per cent?

“Why do you have to go and share? This is the same thing everywhere. VAT will favour every state in this country because it is a consumption tax. Wherever there are human beings, there must be activities and where there are activities, there must be consumption and where there is consumption, there must be VAT and where there is VAT, there is revenue. It’s simple.’’

The way forward
Oyedele advised that rather than being fixated on how revenue was shared, it was better to generate more.

He said, “If you add the entire tax revenue collected in Nigeria by the Federal Government, FIRS, the 36 states, the FCT and the 774 LGAs, it is less than $60bn. If you give it to Lagos State, it is not enough to make it what it should be, whereas New York alone has a budget of more than $200bn. Let us grow the pie; optimise existing taxes and not keep fighting about how to share the cake when we can actually bake a bigger one.”

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