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Taxation - December 20, 2024

Tax bill, it’s discontents

 

By Abdullahi Olayiwola Gegele

Nigeria’s first attempt at incorporating Value-Added Tax (VAT) as a means of generating additional tax revenue was in 1986 under the General Ibrahim Babangida military junta when decree No 7 was promulgated to legalize sales tax (now VAT) and was being collected by the 36 States and the Federal Capital Territory, Abuja.

The chaos and frustration this collection system created for businesses and other stakeholders is better imagined. More importantly, the potential of making this cheap source of revenue sustainable and profitable for the government became slimmer with each passing day.

This informed the Federal Government’s decision to abolish that decree and replace it with VAT Act No 102 of 1993, which empowered the Federal Inland Revenue Service (FIRS) as the sole collector of this revenue source.

Whatever was collected every month was then remitted to the Federation Account for sharing among the three tiers of government.

Although the VAT Act of 1993 was inadvertently omitted in the 1999 Constitution, the FIRS continued to enforce the collection of VAT and account for it through remittance to the Federation Account.

However, the omission of the VAT Act 1993 was a major loophole, as it turned out to be the basis on which Rivers State Government under Chief Nyesom Wike as the Executive Governor decided to approach the court to declare that the FIRS does not have the power to administer the collection of VAT, as according to the State, they have the right to administer and collect VAT within their jurisdiction.

The Federal High Court in Rivers State ruled in favor of the Rivers State Government, but the Court of Appeal has countered that judgment by directing the parties involved (FIRS, Rivers State, and Lagos State) to maintain the status quo and await Supreme Court Ruling on the matter.

The reason Lagos and Rivers States went to court is not so much about the legality or otherwise of the FIRS collecting the VAT. Rather, it was clearly because they felt short-changed by the present sharing formulae which usually resulted in lower VAT allocation than what is originally collected within their jurisdiction.

This is a recurring decimal for Lagos and three other states. An analysis of VAT collection and allocation between January and October 2024 reveals that Lagos got 16.76% of what was collected as VAT within its jurisdiction during this period. In the same period, Rivers State got 22.45% of what was collected. In short, the existing sharing formulae seems to put 4 States – Lagos, Rivers, Oyo, and Bayelsa at a disadvantage as they got less than what they contributed to the national VAT pot, while the remaining 32 States and FCT Abuja got more than 100% of their contributions between January and October 2024. Oyo and Bayelsa States got 42.76% and 94.69%, respectively, of their contribution to VAT in these ten months.

Even though the understanding under federalism is for the federating units to be each other’s brother’s keepers, no one will be happy if the relationship seems exploitative.

The available data will make it difficult to provide any meaningful justification to the disgruntled States, the reason they have to contend with less than 100% of their contribution when the remaining 32 States and the FCT Abuja are smiling to the bank to cash over 100% of their contribution to the national cake.

The 32 States, in this instance, can best be likened to a lottery guy who stakes N1,000,000 to cash N5,000,000! This is not an exaggeration, as the data available shows that States with a lesser contribution to VAT get between 101% and 1,715.98% as VAT allocation.

Specifically, using the VAT collection and allocation between January and October 2024, 17 States got between 101% and 300%, 11 States got between 301% and 500% and 4 States got over 700%! The four States that got over 700% are Kebbi State 723.77%, Cross Rivers State 725.27%, Abia State 793.13% and the clear benefactor of all is Imo State, which got 1,715.98% of its actual contribution to the VAT purse within the period.

Thus, head or tail, there is no fair-minded person who will expect Lagos, Rivers, Bayelsa, and Oyo State to clap for the present arrangement. At least, it is human to expect that if a relationship cannot add to your existing value, it should not depreciate it. This perhaps explains the reason Lagos and Rivers are up in arms with the Federal Government and they are justified to do so. Despite this, one fact that cannot be muddled up is the headquarters effect of VAT collection.

Lagos indeed has huge potential to generate cheap funds through VAT. However, accounting for a humongous VAT amount of N2.21 trillion of the N5.09 trillion that was collected and shared by the three tiers of government between January and October 2024 shows there is indeed more to this figure. If the VAT from telecommunications, banking, airlines, port activities, cement, fast-moving consumer products, multi-level marketing, etc, which are remitted centrally, can be effectively net-off from the N2.21 trillion, Lagos will lose ground drastically.

The headquarter effect simply means that businesses that have their headquarters in Lagos will remit VAT due on qualifying transactions to FIRS in Lagos regardless of the part of the country in which such VAT is earned.

Assuming there are 1.2 million MTN Subscribers in Kwara State, the VAT due on their recharge for calls or data in a month is automatically remitted to FIRS Lagos since MTN’s Head Office is in Lagos and VAT is remitted centrally. Therefore, Lagos houses Kwara and the remaining 35 States, plus FCT Abuja monthly MTN VAT remittances.

It is logical, therefore, to assert that if the headquarters effect is properly dis-aggregated, and VAT due on MTN call card and data used by people residing in a particular State is remitted to such State, Lagos will not account for N2.21 trillion VAT in ten months. By the time this dis-aggregation is extended to other telecommunications, banks, manufacturing companies, airlines, law and accounting firms, etc with headquarters in Lagos, then the margin may reduce drastically beyond what anyone could have envisaged. Perhaps the N371.09 billion, which is a mere 16.76% of the N2.21 trillion that Lagos State collected as its share of VAT between January to October 2024, may even be more than 100% of what is due to the State.

I have refused to agree with some commentators’ argument that the present formulae tend to be parasitic and give some States undue advantage to reap from where they have not sown and would rather request that subject matter experts be invited to disaggregate the headquarters effect and properly allocate VAT in line with origin of consumption.

For example, if the headquarters effect is effectively removed, the Southern States may benefit more than the Northern States in VAT on telecommunications, airlines, and port services. However, the Northern States may do better in VAT on banking transactions, cement, sugar, and carbonated drinks.

The implication of adopting 60% derivation in the sharing of VAT is more complicated than what has been dished out, and to strengthen this, I will cite a few examples. If I recharge ₦1,000 MTN call card on my way to Lagos from Ilorin and I end up using the call card between Ilorin, Oyo, and Lagos State, the question is, which State will be credited with the VAT due on such recharge? Also, if I buy an imported car from Elizade Motors in Lagos, drive it to Ilorin, and decide to sell the same car to a buyer in Kaduna, which of the States between Lagos, Kwara, and Kaduna will the VAT be allocated to? Remember that the final consumer inevitably bears the burden of VAT.

Equally, If Dangote supplies 500,000 bags of cement to a major distributor in Kwara State, and the distributor equally has sub-distributors spread across Kwara as well as Otun Local Government Area in Ekiti State that shares borders with Kwara State, what mechanism do we have in place to determine the last point of consumption for sharing accruable VAT?

We can even take it further and assume that the same distributor has sub-distributors at Jebba in Kwara State, as well as New Bussa in Niger State that he equally sells part of this cement. How do we effectively break down the sales, determine the VAT as related to each State, and ensure equitable sharing without rancor? It will become more complicated and rancorous if this same exercise has to be done between the State and the Local Government Councils, and it has to because that is what the law says anyway. I still find it quite difficult to understand how, for example, the movement of cement between Share and Tsaragi LGAs in Kwara State will be determined and the accruable VAT shared justly.

While it is not impossible to develop technology to solve this puzzle, it makes sense to test the workability before we even begin to talk about implementing the new formulae.

This is because, there are so many transactions that will have this kind of interconnectivity and which will require careful dissection to ensure fairness for all, particularly given our history that is replete with poorly implemented policies.

The possibility of implementing the new sharing formulae without activating the necessary infrastructures to ensure fairness and justice is very high; in fact, that possibility is presently the only card on the table.

Despite the above, I will be the last person to oppose the amendments made to the VAT Act, and this is because I see this move as having the capacity to boost productivity and promote healthy competition between the Sub-National Governments in the Country.

However, I am not in agreement with the position of the Presidential Committee on Tax and Fiscal Policy Reforms concerning zero VAT on food items!

It is a fact that some State’s major strength is farming and to remove VAT on the farm produces just by mere presidential fiat as proposed by the Committee is not only unjust but may be construed as a deliberate attempt to starve States that are strong in farming of the needed funds to promote security, prosperity and strategic development of their regions.

If the States that are strong in ICT, Banking, Manufacturing, Airline Services, and Port Services stand to benefit greatly from the newly proposed formulae, why should States that are strong in farming be denied this opportunity under the excuse of making food items cheaper?

After all, the removal of VAT on the other sectors can and would also make their products and services cheaper and affordable for Nigerians. Every State requires all the available financial resources to make life meaningful for their residents, and as such, the desire to ensure justice in revenue sharing should be, as they say in medicine, “all or no.”. You cannot ask people to relinquish 40% revenue source, while at the same time denying them the opportunity to make money from other viable sources.

Gegele, abdullahigegele@gmail.com

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