States lack mechanism to administer VAT – FIRS declares

The raging battle over Value Added Tax (VAT) in Africa’s biggest economy continued on Wednesday with the Federal Inland Revenue Service (FIRS) declaring that the 36 federating states lack the mechanism to administer the sales tax.

The FIRS insisted it will continue to administer and collect VAT centrally for redistribution to the three tiers of federal, state and local governments notwithstanding a subsisting court ruling barring it.

Legal practitioners have, again, warned that the action of the federal tax authority is tantamount to contempt of court.

“So long as Appeal Court hasn’t yet heard or made a pronouncement on the matter, it is expected that the FIRS will abide the ruling of the Federal High Court in Port Harcourt. It could be charged for contempt of court,” said Osa Director, a lawyer.

Recall that a Federal High Court in Port Harcourt in a case filed by the Rivers State Government, ruled last month, that collection of VAT and Personal Income Tax (PIT) was within the powers of state governments and not the FIRS.

At a news conference in Abuja, the FIRS claimed that ceding VAT to states will short-change businesses and lead to double taxation of the citizens. It said will continue collection pending the outcome of its appeal against the Federal High Court’s judgment.

Mathew Gbonjubola, group lead, special tax operation, FIRS, who addressed journalists, said, “FIRS has approached the appellate court to review the judgment at the lower court in Rivers.

Read Also: FIRS insists on collecting VAT after River’s judgement

“I can assure you that FIRS has filed an appeal and it is in process; that is why we are not going to speak on certain issues.”

On why VAT will not work at the state level, Gbonjubola explained that the mechanism involved in collecting VAT makes it impossible to be administered at the sub-national level. According to him, doing so will lead to business being short-changed; citizens paying double VAT and creating confusion. He explained that VAT is practiced on an input-output basis which can only work at the national level.

“VAT works only at the national level, it cannot work at the sub-national level. There is no country in the world where VAT works at sub-national level. This is because it depends on the input-output mechanism” he said.

“Assuming a business person bought an item in Osun State and paid VAT in the state and then takes the goods to Sokoto to sell. When selling in Sokoto, he will charge VAT on his consumers, so by the operation of the input-output mechanism, this business person will deduct the input tax paid in Osun State from the output charged in Sokoto State”, he explained.

“But, because there is a single tax authority handling VAT, it is the same authority that received in Osun that will receive the additional VAT payable in Sokoto State, it is easy to work out the input-output mechanism and there is no issue of the business person being short-changed or the consumer having to pay VAT more than once.”

Gbonjubola further pointed out that VAT is administered on behalf of the federation and not on behalf of the Federal Government.

“By that I mean that VAT is administered on behalf of the three tiers of government we have in Nigeria; the 774 LGAs, 36 states and the FCT. The revenue arising from VAT is shared based on the extant provisions. Currently, 35 percent goes to the local government, 50 percent goes to state while only 15 percent goes to the federal government”, he said.

He also pointed out that VAT revenue is not paid into the federation account at inception, but goes into a VAT-owned account. “It is only after the sharing and allocation that the Federal government’s share goes to the federation account” Gbonjubola explained.

Speaking on the proposed social media tax bill at the National Assembly, Gbonjubola said FIRS is not aware of such bill and is not sponsoring it.

“I can tell you that this is not from us. If there is any such bill at the National Assembly, FIRS is not a sponsor and not a party to that, I can confirm that”, he said.

Also speaking, Chiaka Ben-Obi, the group lead, digital and innovation support, FIRS informed that the service was able to generate N1 trillion from VAT in the first six months of 2021 because the service leveraged on technology.

Meanwhile, Governor Nyesom Wike has threatened to seal off FIRS’ offices if the service continues to “bully” organisations within Rivers State over VAT payment. Wike made this known during an interactive session with corporate organisations in Port Harcourt on Wednesday.

“An agency of government cannot dictate to a state government. If they will ever dictate, not to a state like Rivers, because certainly, we will not allow it.

“People say that ‘let heaven not fall’, sometimes I believe that it is important that heaven should come down so everybody will rest.

“We have challenged it (VAT collection in court), and we have no apologies to anybody. And the problem in this country is that no one wants to come out.

“And all this bullying by FIRS…they should mind the state they are bullying, they should be very careful. You don’t bully states like us.

“I will not be a party to injustice, but let history be that some of us stood up and challenged the illegality. Until we leave May 29, 2023, I will continue to challenge what I think is not right.”

The governor also said that shares allocated to states from VAT collection are inequitable and unjust.

In Delta, Olisah Ifeajiakah, the chief press secretary to Governor Ifeanyi Okowa says the state will soon come out with a position on VAT.

He, however, added that VAT “is just a fraction of Nigeria’s lopsided federalism.

“There are major things like endowment, oil, farm in your area and states should be allowed to harness them and do whatever they want to do and pay royalty to the centre which is the Federal Government.”