BusinessDay
Nigeria's leading finance and market intelligence news report.

States expected to win, lose if VAT sharing formula changes

If the responsibility of collecting Nigeria’s consumption tax, value-added tax (VAT) is transferred from the Federal Government to states, findings by BusinessDay show that some states with low economic activities will lose out while others with revenue-generating capacity will win.

Currently, Section 40 of VAT Act requires that the VAT pool be shared 50 percent to states. With this sharing formula, about 30 states that account for less than 20 percent of VAT collection are tapping from their counterparts that generate 80 percent of the VAT revenue.

But if the collection and sharing formula change as ruled by a Federal High Court in Rivers State, the 30 states that account for less than 20 percent of the VAT may likely suffer significant revenue decline.

The Federal High Court in Port Harcourt on August 9, 2021, ruled that the Rivers State Government (and not the FIRS) is entitled to collect VAT in the state. This is on the premise that only the state is constitutionally entitled to impose taxes in its territory of the nature of consumption or sales tax.

“Based on the constitution, consumption tax belongs to the states and don’t think that anyone is debating that,” Taiwo Oyedele, fiscal policy partner and Africa tax leader at PwC said.

Explaining the origin of the VAT, Oyedele said in 1993 when the VAT law was introduced, there was an understanding that the Federal Government had the capacity to collect the tax.

“At the time, even Lagos state did not have the capacity to collect. So, FG was only collecting on behalf of the state and then keeping a percentage of the state to cover the cost of collecting,” he said.

VAT is a consumption tax payable on goods and services purchased by individuals, government agencies and business organisations. VAT is one of the sources of government revenue generation. This type of tax is paid indirectly by a consumer to the supplier of the product or service consumed.

Read also: Rivers VAT judgment throws up sharing formula for debate

If the judgment to allow River State to collect and spend its VAT is enforced or upheld on appeal, industry analysts say it will apply to other states and not just Rivers State. This means each state would administer VAT within their territory. By implication, FIRS will administer VAT within the FCT and non-import foreign VAT while the Nigeria Customs Service will continue to collect import VAT on international trade.

States expected to win

States with high contributions to the VAT pool will largely benefit from the changes, a five analyst poll by BusinessDay said.

States like Lagos, Kano, Kaduna, Delta, Oyo, Kastina, Ogun and River State are expected to top the gainers’ chat while other states with little contribution will no longer tap from those generating higher VAT.

According to available data, Lagos generated over 55 percent from VAT. This is followed by the 20 percent generated by Abuja, Rivers (6%), Kano (5%) and Kaduna (1%).

With a massive consumer market, Nigeria’s busiest city, Lagos, which is home to most of the country’s over 500 active start-ups is expected to ride on its economic activities to top the gainer’s list with the most VAT.

On its own, Lagos would rank as Africa’s seventh-largest economy. Known for its traffic gridlock and entrepreneurial dynamism, Lagos alone is responsible for about 30 percent of Nigeria’s GDP. If Lagos was a country, its economy which is worth over $136-billion would not only be the seventh-largest in Africa, but it would also be ahead of Cote D’Ivoire and Kenya.

States projected to lose

The remaining 32 states which account for about 13 percent of the total VAT contribution are expected to take the most hit if the sharing formula of the consumption tax is changed. States with lower economic activities like Katsina, Osun, Jigawa, Benue, Niger, Bauchi, and among others were cited by analysts.

“With a further breakdown, we will even discover that some states can only generate 0.5 percent or less. We can just say this is as a result of lack of economic activities in those states,” Karasira Livinus, Accounts Officer at a Lagos-based engineering firm said.

According to Livinus, if those states are empowered or “burdened” with the duty of administering VAT, they might not be able to and might end up getting less than they currently get from the shared VAT pool.

Other implications

Beyond some states gaining or losing from the likely change in VAT sharing formula, the enforcement of the judgment, according to analysts, will force many states to look inwards for revenue-generating opportunities and become less dependent on the federal government for

“It is the beginning of fiscal federalism we have been clamouring for. Every state should look inward and dig out its areas of comparative advantage to increase revenue generation. It is a wakeup call,” Lukman Oyelami, lecturer at University of Lagos and associate economist at Institute of Nigeria-China Development Studies, said.

If enforced, Joshua Atuchi, a Lagos-based consultant believes it will create a competitive spirit among all states to stop depending on and start being independent. According to him, in the long run, “it can have positive effects on most of the states.”

N512.25 billion was generated by the Federal Government from VAT in the second quarter of 2021, as gathered from the Q2 2021 sectoral distribution of VAT by the National Bureau of Statistics (NBS). This was an improvement of 3.2 percent compared to N496.39 billion made in the first quarter of the year.

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