Nigerian states have grown increasingly dependent on the Federal Government for revenue since the economic crisis of 1979–1980, not minding it contradicted true fiscal federalism.
That is however only one part of the problem, the more contentious issue is that the revenue allocation system in Nigeria can neither be said to be efficient nor equitable.
States that contribute the bulk of revenue to the central pool do not get the largest share of revenue under the current sharing system.
Lagos, Nigeria’s wealthiest state and economic capital, for instance, is said to contribute 55 percent of Value Added Taxes (VAT), a major contributor to the consolidated revenue fund in the country.
In 2020, Nigeria generated N1.53 trillion in VAT, about 10 percent of the country’s entire revenue that year.
With import VAT contributing 51 percent, local VAT in the period was N763 billion. If Lagos state’s 55 percent contribution is factored into local VAT, then it implies the state contributed about N400 billion to the VAT pool last year.
Yet, the state’s total federal allocation, which includes VAT, was only N115.93 billion. Little wonder Lagos is pushing to have VAT control wrested from the Federal Government.
The FCT can also feel hard done by. The second largest contributor to VAT after Lagos only gets 1 percent of VAT revenue.
In some cases, states that contribute less to the VAT pool often walk away with a larger share than their contributions.
“The current VAT revenue sharing formula among states is not equitable,” says Taiwo Oyedele, fiscal policy partner and Africa tax leader.
“This inequity can be addressed by allocating any domestic VAT collected from each state entirely to the respective state.
“Only VAT collected on imports, international services and inter-state transactions should be paid into the VAT pool and shared based on derivation,” Oyedele states.
The lack of equity in the federal allocation system is why states are now pushing for the first time to enact laws that give them the right to collect VAT within their jurisdictions.
Since a Federal High Court in Port Harcourt ruled last month that states, and not the Federal Inland Revenue Service (FIRS), should be collecting VAT and Personal Income Tax (PIT), some states have been keen to use the landmark ruling as a precursor to push for true fiscal federalism.
In the latest development, Lagos has passed legislation giving it power to wrest the Federal Government’s control of VAT.
Lagos is convinced that being in charge of VAT collection would lead to increase in revenue and increase in infrastructure development in the state.
“This is in line with fiscal federalism that we have been talking about,” Mudashiru Obasa, speaker, Lagos State House of Assembly, said.
Read Also: States expected to win, lose if VAT sharing formula changes
Lagos says its Internally Generated Revenue (IGR) could top N1 trillion if it takes responsibility for collecting VAT, a N400 billion addition to its IGR last year.
On the flipside, however, Lagos could lose claim to some VAT if it is decentralised. This is because some companies with sales across the country will no longer pay all their VAT to Lagos.
To deliver equity for all states, an economist who spoke with BusinessDay recommends that the taxes are shared based on origination. For instance, sharia states who do not allow consumption of alcohol should not get any share of alcohol taxes while the states where it is allowed keep all the value added taxes that accrue from alcohol consumption.
If the contentious issue of equity is resolved, the states may be more open to weigh lessons from India, which tried to decentralise VAT but was forced back to the drawing board after the move backfired.
Despite the stiff resistance by the FIRS, which collects taxes on behalf of the Federal Government, the states, particularly Rivers and Lagos, are however not stopping at wanting to collect VAT.
The battle ground is shifting to the collection of stamp duties after the 36 states instituted legal action against the Federal Government over its continued collection of stamp duties in the country.
The states in a suit filed last month at the Supreme Court are claiming that the right to collect stamp duties on financial transactions between persons or individuals in a state is the exclusive right of the states; hence the apex court should intervene and restrain the Federal Government from further collection of the money.
They are asking for a refund of N176 billion as stamp duties collected between 2015 and 2020.
“It is great to see the states finally pushing for true fiscal federalism,” a development economist told BusinessDay.
States, it is argued, need some financial autonomy if they are to contribute to national development and reduce their decades-old dependence on federal handouts.
“It also forces the states that contribute little to the federal purse but are very dependent on federal allocations to raise their game,” the development economist, who did not want to be named, said.
