It is recalled that on August 9, 2021, the Federal High Court sitting in Rivers State rendered a verdict on the legality of the collection of value added tax (VAT) in Nigeria, the declaration triggered not only legal arguments, but also raised economic and social concerns. The said ruling clearly gave state governments the power to administer VAT law, contrary to the statu qua (federal government, through the Federal Tax Services (FIRS)). Since then, a plethora of comments have been made by relevant interest groups; including legal luminaries, tax advisers, academics and the business community, which consequently portrays the issue as the number one priority in Nigeria.
It is a common fact among average individuals, especially those interested in macroeconomic issues, that VAT is a consumption tax on economic activities (goods and services) that was historically introduced in Nigeria on August 24. 1993 by the federal military government. Before the introduction of VAT, sales tax was administered by the state government.
Investopedia has defined VAT as a consumption tax that is levied on a product multiple times at each point of sale to which value has been added. VAT is generally a multi-step tax; thus, the burden is on the end consumer. Unless, categorically exempt, all goods and services are taxable under the provision of the VAT Act. Like many other taxes, the main objectives of VAT would be the generation of income, the redistribution of income and wealth, the management of the economy and the harmonization of economic activities, among others.
According to Adam Smith’s seven tax canons that guide the current tax system (fairness, certainty, convenience, administrative efficiency, simplicity, productivity and flexibility / stability). To achieve probity and responsibility, three basic steps have been instituted for the calculation of VAT: First, the calculation of what the taxable person pays to purchase goods and services for production (input VAT); Second, determine the amount of tax collected on the sale of goods or services on behalf of the tax administration (output VAT); and third, VAT is determined on the basis of the difference between input VAT and output VAT.
Initially, VAT revenue is split vertically in the 80:20 ratio. 80% were for the states while 20% for the federal government in the form of administrative burdens.
Later, the split formula was adjusted to 50:25:25, with the federal government taking 50%, the states 25%, and the local government 25%. Dissatisfied with the biased sharing formula, state governments protested and as a result the formula was reviewed and readjusted to the current ratio of 15:50:35 for federal, state, and local governments, respectively. Horizontally, VAT is shared 20:50:30, 20% derivation, 50% tie and 30% population. But then, may one be interesting to ask, does the current sharing formula promote creativity, competitiveness, efficiency or laziness between states?
Eminently, the Federal High Court judgment in Rivers generated a plethora of discussion; including professional and academic sentiments, as well as dishonest sectarian interests that bordered on ethnic and regional considerations, and which ultimately took the pages of mainstream media and social media.
To make matters worse, the problem is now regionalized and / or personalized to the point of seeing a new lexicon such as the Wike effect, the unifying Rivers model, the new restructuring models, the North against the South, the Wike against the federal government, etc. Some even called it PDP. and APC’s show of force.
Coming back to the conflict of interest, there seems to be an apparent polarization of opinion among various commentators from different professional and interest groups, with one side supporting the state’s collection of VAT while the other side blames it. . Logically, the dispute is far from who will administer the VAT, but who gets what from the pool (the interest). In fact, the problem is not the collection of VAT but the fairness of the sharing of the VAT pool.
Contrary to the conception of many Nigerians, the dispute between FIRS and SBIRS over the collection of VAT is not new; but this time it is unique by the character at stake and the fiscal constraint which entangles the federating unit. While no one can say with authority who laughs last between the warring parties (states and FIRS), it can be said with certainty that the Supreme Court will be the final arbiter. However, the central question is who will be the ultimate winner, regardless of where the pendulum swings?
In my opinion, the strategic importance of what is at stake outweighs any regionally and politically affiliated and emotionally naÃ¯ve justifications and conclusions. I have assumed that it is more reasonable to look at the matter from a holistic point of view; angles of historical, strategic, economic, political and sustainable development. This will involve the right caliber of institutions and individuals capable of providing a realistic and workable solution, rather than giving it regional, ethnic or partisan political coloring. Legal experts and practitioners, economic strategists, legislative and security wings relevant to the intellectual community are all very important to define the best way forward for the administration of VAT on the basis of constitutional provisions, legal rulings previous laws and other enabling statutes of the federation.
Structurally, VAT revenue is grouped into three components, namely: non-imported (foreign) VAT and Nigerian customs services – import VAT and non-imported (local) VAT. Interestingly, according to data from the National Bureau of Statistics, in the last three years 2018, 2019 and 2020, the non-imported (foreign) VAT plus NCS import VAT, all of which fall under the federal government, amounted to over 50% of the VAT collection.
Fascinatingly, in 2020, of the 763 billion naira of non-imported local VAT, FCT generated around 202 billion naira 26.3%, which revealed that the 36 states generated only 36.6% of VAT the previous year. Even VAT collected in the first quarter of 2021, non-imported (foreign) VAT plus NCS import VAT accounted for 271.53 billion naira (54.7%). Thus, in addition to the superior skills, capacities and competences of the FIRS to administer VAT, the federal government has more subjects regardless of the outcome of the dispute.
In practical terms, consumption of goods and services in Nigeria is categorized into intra-transaction (within-state), inter-transaction (interstate), and international transaction (with foreign transaction). In addition, since VAT is in several stages, the production to final consumption of goods and services may pass through different states of the federation, if not considered judiciously it will create difficulties in defining the correct jurisdiction for the collection of VAT, and will also add to the contribution of taxable persons. and the complexity of calculating output VAT, as different tax jurisdictions will have different tax rates, as is currently the case with Lagos (6%) and Rivers State (7.5%).
Certainly, one of the most salient economic realities is that tax laws affect investment decisions and corporate profit margins, and as such, to keep investors from feeling negative, states and governments federal governments should be more proactive in reaching a business-friendly settlement at all times.
Based on Harvard Business School’s principles of win-win negotiation, which encourages separating positions and interests as well as disconnecting parties’ issues, then it can be clearly stated that the dispute should not be about Wike and the federal government, the North and the South. , and of course not between PDP and APC.
To draw its perceptual conclusion on this timely and strategic issue, it is necessary to understand and recognize the fact that the Covid-19 pandemic has plunged many economies into recession. Nigeria escaped with weak marginal GDP growth of 0.11% in the fourth quarter of 2020. With caution, the fragile GDP growth rate in Nigeria coupled with double-digit inflation and interest rates, unemployment high, a currency crisis, a bad attitude towards lending from the real economic sector, insecurity and rising external and domestic debt, unless the monetary and fiscal authorities introduce a new economic model and create a more conducive environment that can accelerate the productivity of the private sector to be competitive locally and globally, then a sustainable win-win settlement of the current VAT spat will not hold.
One of the main economic realities is that tax laws affect investment decisions and corporate profit margins, across the world there is no acceptable VAT collection format. In some jurisdictions, the state and central government jointly collect VAT, while in others, only the central government collects VAT.
In Nigeria, state governments and the federal government must use a jaw-dropping approach to process and develop a VAT collection format that will be acceptable to all parties. In doing so, it will help minimize double taxation, disputes over payment of VAT, corporate murder and reduced public revenue. Therefore, given the nature of the Nigerian Federal Unity, the technical details of VAT calculation and the need to integrate Adam Smith’s Seven Guides into VAT administration, FIRS and not the SIRB might be better candidates to administer VAT in Nigeria, decentralization of tax collection in Nigeria will drive investors away, and lead to avoidable litigation between states and possibly between state and local governments.
Bawalle, Aliyu Ali
Chartered Accountant and Management Consultant Management Development Center (CMD)
[email protected]; +2348034887166.