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Much Ado About VAT

Dr Abubakar Alkali, Convener, Movement for a New Nigeria (MNN).

 

All the altercation between the federal government and some states -Rivers and Lagos in the first instance- about collection of VAT is clearly unnecessary. It is a distraction and dissipation of time and energy. The 1999 constitution has stipulated what to do. Any other thing outside the constitution is invalid, null, void and of no effect whatsoever.

When the VAT altercation was first bursted out by Rivers state Governor Nyesom Wike, my first impression was that someone was playing a game of ‘political grandstanding. But progressively, the VAT debate degenerated into an ethno-political chess game with overflogged issues such as ‘restructuring’ ‘taking Southern money to the North’ ‘You are not entitled to money from alcohol’ etc etc brought into the foray.

The last straw that still hasn’t broken the camel’s back is the so-called ‘signing of bills into acts by Rivers and Lagos state governors to challenge the status quo and allow the states collect VAT. Rivers state actually went to court to get a ruling that allows the state to collect VAT. This ruling was given by the federal high court sitting in Port Harcourt through justice Stephen Pam. Expectedly, the federal inland revenue service (FIRS), the body constitutionally mandated to collect VAT, went amok to preserve the status quo and wrote to the National Assembly to state its position on the matter. After the ruling by the high court sitting in Port Harcourt, the FIRS dissatisfied, approached the court of appeal which last Friday ruled that the parties on the VAT matter should ‘maintain status quo ante Berlin’. This means the parties should continue on the position before the breakdown of hostilities. This was seen as a victory for the FIRS as they will continue to collect VAT- that was the status quo ante bellum.

The two states nonetheless vowed to start collecting VAT regardless of the appeal court ruling.

Either way, there is an issue for the judicial system to adjudicate and put to rest once and for all.

Nigeria can do without any such distractions at this critical time of a fragile unity and ethnic mistrust.

Clearly, the fragility of Nigeria’s unity is not in doubt. What will strengthen our unity as a nation is more of bonded economic interests rather than a loose political collabo.

Even after the determination by the court of appeal as to who should collect VAT between the federal or state governments, the legal fireworks are expected to continue as this issue will almost get to, and finally be determined by the Supreme Court.

VAT AS THE JUICY POT

Value added tax is that tax which reimburses for the shared service, infrastructure and cost of production of a product or service in a certain locality. VAT is dependent on the final destination of the consumer and is included in the sales price. Foreign exports are usually exempt and some VATs are refundable. A VAT is refundable usually in case of exports when the company has paid excess tax on purchases than in actual sales. Individual consumers can also claim VAT refund when your output tax pay (amount due on sales) is higher than the input tax (amount you can reclaim on purchases).

VAT is big money not only in Nigeria but in the global business community. In Nigeria, VAT was charged at 5% before last year 2020 when it was increased to 7.5%. This has translated to an upward increase in prices of goods and services.

In 2020 alone, Nigeria raked in N1.53 Trillion from VAT. This is about 10.5 % of the total budget of N10.52 Trillion in 2020. We can all see why their excellencies – Rivers and Lagos helmsmen – want to lay their hands on VAT. Clearly, VAT is a big issue more so when juxtaposed with the huge amount of money involved.

WHAT THE LAW SAYS ON VAT.

The subsisting ruling on this matter is that of the court of appeal which ruled on the motion on appeal that parties should maintain the position before break out of hostilities (maintain status quo ante bellum). Impliedly, the FIRS will continue to collect VAT pending the determination of the substantive suit.

To understand the legality of VAT collection between the federal and state governments, it is necessary to go back to the 1999 constitution as the final destination of any arguments for or against VAT.

The constitution is clear in the exclusive legislative list, second schedule: legislative powers item 59 that VAT collection lies with the federal government of Nigeria through the FIRS. This relevant section is clear, explicit and unambiguous that;

‘Taxation of incomes, profits and capital gains is an exclusive preserve of the central government which only the National Assembly can legislate upon, except as otherwise

prescribed by this Constitution’

To that extent, the acts passed by the Rivers and Lagos state governments and signed into law by their state governors is null, void and of no effect whatsoever. State houses of assembly cannot legislate on taxation of incomes, profits and capital gains because taxation is in the exclusive legislative list.

Again, section 163(b) of the same constitution is clear that the federal government is eligible to collect tax revenues and share it amongst states. The relevant section states that:

‘Where such tax or duty is collected by the Government of the Federation or other authority of the Federation, these shall be paid to each State at such times as the National Assembly may prescribe a sum equal to the proportion of the net proceeds of such tax or duty that are derived from that State’

The status quo has been such that the federal government collects VAT under legislation by the National Assembly and such revenues are paid into the federation account after which it is paid to states on pro-rata basis.

It is in this light that section 163 outlines that the tax collected shall be distributed to states on the basis of derivation. Hence Rivers state which obviously has more oil companies and other big businesses operating on its soil normally gets more of the revenue than Kebbi state for example which has less big businesses on its soil.

The 1999 constitution has unambiguously given powers to the federal government to collect VAT and distribute it to states in measured proportions. So why all the distractions about VAT?

TRUE FEDERALISM AND COLLECTION OF VAT

The concept of federalism is about a system of government with a central authority (the federal government) and constituent units -states and local governments working together for a shared interest. The major objective of true federalism is sharing of responsibility in decision making between the central government and the constituent units- in this case, the states and local governments. This conforms to the 3 – tier system in Nigeria- federal, states and local governments as partners in progress.

Albeit it can be argued that realistically, there are only two tiers of government in Nigeria, the federal and states because the local government system has literally been annihilated, subsumed and decimated by the state governments: this topic has been discussed previously but is still one for another day.

True federalism is often viewed by some politicians and other stakeholders to mean more powers to states and less to the federal government but I disagree.

I think true federalism means an objective and fair relationship between government institutions such that both assets and liabilities are shared in an equitable and decent manner so that no tier of government is shortchanged.

To this extent, it is not true that federalism means giving powers to Rivers and Lagos states to collect VAT and keep it to themselves while leaving other states out of the equation simply because they generate more of it than the others. Rivers collects 20% out of the 13% derivation fund, enjoys NDDC, amnesty programme, ministry of Niger Delta, ecological fund and still wants to keep VAT to itself.

SHARING OF VAT REVENUE

The federal government collects VAT but retains little for itself while it distributes the rest to states.

The federal government operates a VAT pool where the proceeds of VAT are lodged and takes 15% (including 1% for the FCT) while 50% goes to the states and 35% to the local governments as stipulated by the 1999 constitution and the revenue mobilisation, allocation and fiscal commission (RMAFC). Remember that states still end up sittting on the 35% meant for local governments under the so-called joint account.

Lagos and the oil producing states particularly Rivers have thrown away the concept of true federalism and replaced it with parochialism and economic rapacity by wanting to keep VAT to themselves.

In the federal account allocation committee (FAAC) states’ share of 2020 revenue, Lagos state took 6.97% while Rivers had 5.62%. Down the ladder and for the sake of comparison, Nassarawa state collected 1.79% while Ekiti took a paltry 1.78%. The difference in what Rivers and Lagos states enjoyed from FAAC and what Nassarawa and Ekiti collected says it all. The gap on revenue allocation amongst states is too wide. It needs a review by the RMAFC.

In conclusion, it has long been established that politicians have a way of creating avenues to bring in more money into their states from the federation account only for the funds to be diverted and end up in private pockets. This was clearly demonstrated by the advance mega corruption going on unabated at the Niger Delta development commission (NDDC).  This is separate from the monumental corruption at the amnesty programme for the so-called Niger Delta militants.

The elites of the Niger Delta are the problem of the Niger Delta. The political elite in the Niger Delta use NDDC and other revenue windows meant for the people as conduit pipes while leaving their subjects high and dry.

Is the current campaign for VAT collection by states another ploy by the elite of the Niger Delta to create more conduit pipes of corruption for themselves ala NDDC?

It will be left to be seen if companies and other businesses will change status quo against the order of the appeal court and pay VAT to states to risk sanctions by the federal government OR respect the order of the appeal court and maintain status quo by paying VAT to the federal inland revenue service (FIRS) where VAT collection rightly belongs.

DR ABUBAKAR ALKALI

Convener, Movement for a New Nigeria (MNN).

 

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