The VAT Conversation: Time to Return Collection to States?

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Wednesday, August 25, 2021  / 2:32 PM / by CSL Research / Header Image Credit: iStock

 

Sales Tax (Value Added Tax) in Nigeria has assumed different forms over time, morphing from the brainchild of Decree 7 of the Ibrahim Babangida regime (now repealed) in 1986 to the Value Added Tax (VAT) act of 1993 with a significant adjustment till the Finance Act of 2020. Going by recent developments, there is a new twist to the VAT conversation in Nigeria, as the Rivers State Government has just signed into law the Value Added Tax Act No. 4 of 2021 following the submission of these bills to the Governor for assent by the Rivers State House of Assembly (RSHOA). In his reaction following the signing of the bill to law, Nyesom Wike, the Rivers State Governor, allegedly said; "no campaign of calumny or blackmail on the part of Federal Inland Revenue Service (FIRS) would make what is illegal become legal. He dismissed the FIRS's propaganda that 30 states will suffer if some states can collect VAT".

 

The Rivers State Government's decision has generated heated conversation across the polity, with commendation and backlash coming in similar proportions. To put in context, the current 15:50:35 sharing formula recognizes VAT belongs to the states as manifested by the 85% of total VAT that goes back into the state and its Local Government Areas (LGA). Nonetheless, the ongoing practice of VAT administration in Nigeria leaves many questions unanswered, given that a state tax is being collected through the Federal Inland Revenue Service (FIRS). One of the questions that have remained unanswered is at whose behest is the FIRS now the collection agent for VAT? To ensure fiscal federalism, however, we believe it is high time a conversation is had on VAT collection in Nigeria.


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Preceding the recent decision of Rivers State is the call for a re-arrangement of the VAT administration system in Nigeria, as the more economically viable state becomes increasingly reluctant to shoulder the inefficiencies of others through the current pooling structure. States like Lagos, Rivers, Ogun, Kano continue to drive robust consumption activities which engender VATable transactions. As such, thinks it is fair that such efficiencies should reflect in revenue generation. This realization became rife amid dwindling revenue and the ever-increasing government expenditure across all the tiers of government in Nigeria.

 

The administration of Value Added Tax is an important revenue generation activity in Nigeria. Going by the history of its (VAT) administration in the country, we see the decision of the Rivers State government as long overdue and a wake-up call for all stakeholders on the need for a frank conversation on the administration of VAT in Nigeria. For all we can recall, VAT (Sales Tax) was originally administered by states, until the federal government intervened to ensure collection efficiency – which effectively makes it a collection agent for the states.


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