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Before 2020, Nigeria earned more from company income tax than VAT

Nigeria has earned cumulatively more from Company Income Tax (CIT) than Value Added Tax (VAT) since the past 10 years (2011-2020). Though, in 2020 alone, VAT receipt at N1.531trillion was about N256billion more than CIT at N1.275trillion. Across the 10-year period, CIT at N11.250 trillion was about N1.9 trillion more than VAT receipts (N9.372 trillion).

These were revealed in data from Federal Inland Revenue Service (FIRS) tax statistics compiled by the Lagos-based Danne Institute for Research, a not-for-profit organization that carries out researches that positively impact the African environment.

To enable conversations that are data driven, the Danne Institute for Research compiled tax revenue statistic at the FIRS, which show that in 2011, the country earned N654.4billion as CIT while VAT receipts stood at N659.15billion; in 2012, CIT was N820.56billion while it earned N710.5billion as VAT.

The acceleration in 2020 VAT receipt no doubt reflects the hike in the standard rate of VAT from 5percent to 7.5percent, which became effective from February 2020.

Read also: VAT dispute is constitutional, not capacity of states to collect

In 2019, VAT receipt was N1.189trillion while CIT was N1.60trillion. In 2018, VAT receipt was N1.108trillion while CIT was N1.340trillion. In 2017, VAT receipt was N972.3billion as against CIT of N1.22trillion, while in 2016, VAT receipt stood at N828.19billion while CIT earn was N933.53billion.

In 2013, about N963.45billion was earned from CIT while VAT was N802.6billion; the N1.17trillion earned as CIT in 2014 surpassed VAT receipts of N802.9billion; while CIT receipt of N1.268trillion in 2015 outweighed that of VAT at N767.3billion same year.

“VAT receipt has grown significantly in recent years. That shows the significance of the VAT in the non-oil tax revenue pool and its importance to the overall public sector financing architecture in Nigeria”, the Danne Institute further noted in its September insight.

The institute ran the numbers for 10 years and found that CIT, Nigeria’s largest non-oil tax, was about N1.9 trillion more than VAT receipts that totaled N9.372 trillion in the period. However, VAT was N255.79 billion more than the total CIT receipts in 2020.

“The new rate still lags the standard 15percent levied by Nigeria’s fellow members of the Economic Community of West African States (ECOWAS). Professional services topped the table in Q2 ’20 and was second this year. We assume that it includes telecoms, the fastest growing sector of the economy before and during the COVID-19 pandemic”, FBN Quest analysts said in their August 12 note.

For VAT receipts, Federal Government gets about 15percent, States – 50percent and Local Governments – 35percent: Net of 4percent cost of collection which goes to the FIRS and 20percent of pool shared based on derivation. Data show that Lagos is by far the largest recipient of VAT allocation. Rivers occupied the third and fourth positions in 2018 and 2019, respectively.

Manufacturing and Professional Services contributed above 10percent each of VAT receipts between 2016 and 2019. Only Rivers State’s Net VAT share of total revenue was less than 10percent in 2019. It was at least 20percent in 24 states.

For Ekiti, Ebonyi and Gombe states, VAT receipts accounted for as much as 30percent of total revenue, according to institute’s statistics on BudgIT State of States 2020 and NBS IGR at State Level 2020 and NBS FAAC Disbursement Series.

“We believe that the ongoing debates on VAT are a great way to kick-start important conversations about Nigeria’s public sector financing architecture. In line with our mission to champion conversations that promote transformational change in Nigeria and Africa, we compiled the numbers to enable conversations that are data driven. Trends can be identified in the data. For example, VAT and CIT receipts across 10 years, top VAT receiving states, etc”, they noted.

One of the two major national events that informed the report by Danne Institute for Research is the August 9, 2021, Federal High Court ruling that the Rivers State government and not the FIRS has the authority to collect VAT in the state. The judge explained that FIRS has no constitutional grounds to collect VAT, Withholding Tax, Education Tax and Technology levy in Rivers State or any other state in the country. Following this ruling, the Lagos State government swiftly passed its VAT Act, which gives it the power to collect VAT. An appeal court later halted the implementation of the judgment by the High Court. The Rivers government has taken the matter to the Supreme Court.

VAT is a consumption tax paid when goods are purchased and services rendered. It is a multi-stage tax borne by the final consumer. All goods and services (produced within or imported into the country) are taxable except those specifically exempted by the VAT Act. VAT is charged at a rate of 7.5percent. Some goods and services such as non-oil exports are zero rated. All taxable persons are required to file VAT monthly returns not later than 21 day following the month of transaction.

“In July 2021, the Minister of Finance submitted the draft 2022 – 2024 Medium Term Expenditure Framework and Fiscal Strategy Paper (MTEF/FSP) laying out proposed budget estimates for the next three years. However, the document provided insights into the government’s budget implementation performance for the first five months of the year (January to May 2021).

“Overall, revenue performance printed at a disappointing 67percent of budgeted revenue, the lowest level in three years as total revenue for January – May 2021 stood at N1.8trillion. Impressively, non-oil revenue performance stood at 99.7percent driven by over-collection on CIT and VAT,” according to United Capital research analysts in their July 29 note.

Under the Nigerian VAT regime, three groups of taxpayers are obligated to deduct VAT at source and remit directly to the tax authority. These are: Nigerian companies that are carrying on VATable transactions with non-resident companies within the country; Government ministries, statutory bodies and other agencies of government; and Companies operating in the oil and gas sector.

“The VAT ruling has sparked debates in the country. While oil proceeds remain the main source of federal revenue, VAT has become an important contributor to the country’s non-oil revenue”, the Danne Institute noted.

In the same vein, CIT is a tax on the profits of registered companies in Nigeria. It also includes the tax on the profits of foreign companies carrying on any business in Nigeria. The CIT is currently charged at the rate of 30percent for companies having more than N100million turnover.

It is also charged at the rate of 20percent for companies with a turnover between N25million and N100million. The tax is assessed on a preceding year basis (that is tax is charged on profits for the accounting year ending in the year preceding assessment). The companies having less than N25million turnover are not liable to pay company income tax in line with the Finance Act 2019.

Alter Konsult, a firm of financial and management consultants in its September 15 position on current conflict over VAT, noted that the current conflict over VAT between Rivers, Lagos, potentially, other states of the federation on one end and the Federal Government through FIRS on the other end have long existed.

“The increasing call for improvement in internally generated revenue (IGR) by states and local governments will reveal more of this kind of conflicts inherent within our tax system. VAT collection and administration should be a joint effort between Federal (FIRS), States (SIRS) and Local Government (LIRS), so as to create unified tax system, avoid multiple taxes and increase tax base,” Alter Konsult said.

“Doing this will enable government at all levels function synergistically and focus on the provisions of fiscal variables necessary for economic growth within their levels while eliminating inefficiencies. The fiscal variables—taxes, the quality and quantity of services (infrastructure) provided by government—are what policymakers can control and they will be able to know what effect these variables have on economic growth and firm location.

“The impact of taxes on firms will be easy to measure because accurate measurement relies in part on the incidence of the tax. We also propose the adoption of a mixed economic structure that will enable the local and state governments concentrate on the economic activities that is indigenous. For the harmonious working of the model, we recommend a new revenue sharing formula where all revenue generated is distributed equitably, as captured by the incidence of VAT modified,” it stated.

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