Taxpayers and business owners are scratching their heads over the authority to remit Value Added Tax (VAT), as the Federal Inland Service (FIRS) and state governments lay claim to the right to collect taxes.
In Rivers State for example, the state government has signed into law its VAT Law No. 4 of 2021, making it legally binding on businesses operating in the state to pay to the state tax authority. The governor, Nyesom Wike, cited the ruling of a Federal High Court in Port Harcourt that ceded the right to collect VAT and Personal Income Tax (PIT) to state governments as against FIRS.
In Lagos, the government is insisting it is its prerogative to collect VAT. Also citing the ruling of the court in Port Harcourt, Moyosore Onigbanjo, the state attorney-general and commissioner for justice, says their VAT-enabled law will come into effect in a few days.
In spite of the court ruling, which is yet to be vacated at an appellate court, the FIRS has insisted on collecting the specified tax, a development taxpayers and businesses say has thrown up uncertainty in the system.
“The situation we are in now is not appropriate for the country and is not good for taxpayers because it creates uncertainty and leaves taxpayers confused,” Taiwo Oyedele, fiscal policy partner and Africa tax leader at PricewaterhouseCoopers (PwC), states.
According to Oyedele, the absence of VAT provisions in the Constitution has also contributed to the confusion.
“What should have happened in an ideal situation is to have maintained status quo until directives are given from a higher court, and if there is need for it, the Constitution could be amended,” he says.
Oyedele, while urging taxpayers to pay, however, wants disagreeing parties to resolve the present uncertainty.
Frank Onyebu, executive director, Noclink Ventures Limited, a firm into manufacturing, says his company still remits VAT to the FIRS. He notes, however, that it is crucial for both parties to resolve the scuffle and create an enabling environment for business operators in the country.
“What we need is for the government to reciprocate and provide necessary amenities that will boost business activities so that we can continue to do our part of tax payment,” says Onyebu who is also chairman, Manufacturers Association of Nigeria (MAN), Apapa branch.
On his part, Muda Yusuf, former director-general, Lagos Chamber of Commerce and Industry (LCCI), says the current allocation mechanism of VAT proceeds raises concerns around issues of equity and fairness.
According to Yusuf, the derivation factor in the distribution of VAT revenue should be much higher than what is obtained presently.
Read also: Our law on VAT out in few days, says Lagos
“What is unfolding in this conversation is the challenge of a unitary system, which we wrongly characterise as a federal system. However, as the revenue allocation formula is being revised, the inequity in the distribution of VAT proceeds should be addressed in the context of the ongoing review,” Yusuf states.
Moses Ojo, a Lagos-based economic analyst, notes that the issue of collection of VAT by individual states internal revenue bothers on fiscal federalism.
“The states that are concerned in this are relying on the judgment of the Federal High Court in Port Harcourt, which ruled in favour of Rivers State government on the collection of the VAT,” Ojo says.
The FIRS has appealed the ruling and it is pending in the Court of Appeal. However, bearing the outcome of the appeal, the implication of the ruling is that state governments will now be collecting VAT in their individual jurisdiction. This is expected to boost internally generated revenue of some states that have high VATable economic activities while others with low VATable economic activities will suffer loss of revenue from Federal Government.
States like Lagos, Rivers, Oyo, Delta and Kaduna will be the greatest beneficiary of the ruling while states like
Ebonyi, Ekiti and others mostly in the Northern part of the country will suffer revenue loss.
Currently, the sharing formula for VAT is as follows: Federal Government 15 percent, States 50 percent, and Local Government 35 percent. With the ruling, the Federal Government will not be impacted negatively so much because it will still be collecting VAT in the Federal Capital Territory. If the appellate court affirms the ruling, it will then simply deepen fiscal federalism among the three tiers of government.
However, this will then bring complexities in the area of interstates transactions that attract VAT, as to the state that has the right to collect VAT on such transactions.
The victory in Rivers State had propelled Lagos State to follow suit and if it continues to press further, it will be positive for them. It means more revenue for Lagos, which accounts for 55 percent of Nigeria’s VAT revenue.
Moyosore Onigbanjo, attorney-general and commissioner for justice, Lagos State, said on Wednesday that a legislation empowering the state to demand and collect VAT from businesses operating within the state would be ready in a few days.
BusinessDay had earlier reported on Tuesday, August 31, that Lagos was insisting on collecting VAT following a recent ruling by a Federal High Court in Port Harcourt.
According to Onigbanjo, the FIRS must obey the judgment of the court and hands off VAT.
“We are demanding VAT from people that seek to do business in Lagos. We have our law, which will be out in a couple of days. We will make sure that the judgment of the Federal High Court in Port Harcourt is enforced to the letter.
“We are not going to relent; we are not going to give an inch to FIRS to collect VAT in Lagos State. FIRS must obey the judgment of the court of Law,” Onigbanjo said.
Lagos, West Africa’s economic nerve centre with a population estimated at about 22 million people, accounts for 55 percent of Nigeria’s total VAT which is distributed to all states of the federation, some of which contribute less than 1 percent of VAT to the national purse.
