Nigeria's leading finance and market intelligence news report.

Fiscal centralisation and the VAT puzzle: Should FG back off?

In the last three decades, Nigeria has struggled with much variableness in real earnings, unfathomable levels of unemployment, escalating price levels, decay in social amenities and a poor infrastructural set-up.

This ugly realisation has prevented the creation of opportunities for the vast majority of Nigerians over the years, and a continued contention for an inclusively-led growth and sustained development does not seem like a battle to be won anytime soon.

True fiscal federalism, which apportions a level of fiscal responsibility to subnational governments in a country, has been a topic of national debate over time. This time around, this age-long talk has metamorphosed into some action by some state governments who are already fed up with the Federal Government’s excesses in this regard.

Before now, fiscal responsibility and taxing power remained a central property. Now, two states of the country have dared the King Kong, and others are in a silent watch, scratching their chins while they debate their readiness to join the moving train or remain in abject loss of control over their priced resources and earnings.

Indeed, the practice of true fiscal federalism or decentralisation in Nigeria has been inhabited by several forces, including the dominance of the Federal Government in the revenue sharing formula of the nation, the protracted period of interrupted military rule, and the over-reliance of state and local governments on federal allocation handouts from the centre.

This unfortunate norm has rendered the revenue sharing style highly inefficient and overly skewed in favour of more unproductive and lazy states but disfavours towards their more productive counterparts. For this reason, many question the allocative role of Nigeria’s central authorities in their fiscal assignment and argue for a more equitable style of fiscal administration.

Read Also: States, FIRS’ claim to VAT deepens

Recently, the Rivers State government has battled the Federal Inland Revenue Service (FIRS) on this matter and emerged victoriously. On this, the Federal High Court in Port Harcourt has ruled that the FIRS should cease its VAT and Personal Income Tax (PIT) collection duty. Following this victory, the Lagos State government has also signed the State VAT Bill as passed by the House of Assembly.

The bill was signed into law on September 10, 2021.

This bill is set to compel the Federal Government to dissolve some of its tax powers to the state to stimulate healthy fiscal independence and competition among states in the country. Accordingly, fiscal decentralisation is a better driver of public sector performance over a centrally managed revenue arrangement.

Value Added Tax (VAT) collection in Nigeria dates back to the early 90s, by the VAT Act No. 102 of 1993, which was a replacement of the sales tax that was in operation under the Federal Government legislated Decree No. 7 of 1986. The VAT is an indirect consumption tax chargeable on final consumers of produced goods and services. The main aim of this charge is to increase sovereign revenue, influence the consumption pattern of individuals on some goods, and regulate the economy by influencing economic variables such as income, employment, prices, and so on.

In addition to improving the government’s revenue base, VAT collection is also set to divert the nation’s over dependence on oil proceeds. This attitude has cost the economy much more than it bargained for.

However, many believe that the responsibility of VAT collection should rest on state government shoulders instead of the federal.

Since the Finance Act 2020 took effect on February 1, 2020, VAT charges have increased from 5 percent to 7.5 percent. Before now, the FIRS collected VAT on behalf of the 36 states of Nigeria and the Federal Capital Territory (FCT) and then shared it among the three tiers of government.

However, unfolding events situate a new order. Still, some northern powers are sorely against the newly emerging system of VAT administration in the country.

In 2020, for instance, the total VAT collected was about N1.53 trillion, with import VAT standing at N348 billion and foreign non-import VAT N420 billion. Local VAT recorded a total of N763 billion. Of the N763 billion local VAT realised in 2020, N400 billion, representing 55 percent of the sum, is reported to come from Lagos State alone.

Within the same fiscal year 2020, Lagos was reported to have generated N418.99 billion as internally generated revenue (IGR). However, the state received in the same year N115.93 billion as federal allocation.

There are instances when Lagos alone contributed more to the Federal Government’s sovereign purse but received a much lower amount in federal allocation, while some other states who contributed much less received bigger handouts from the Federal Government.

Kemi Adeosun, a one-time minister of finance, lamented that in 2017, 55 percent of total revenue generated by the Federal Government was from VAT collected from Lagos, while 45 percent was from the remaining 35 states and the FCT.

In Q1’2021, the National Bureau of Statistics (NBS) reported that Nigeria generated N496.39 billion from VAT alone. Compared on a year-on-year basis, Q1’2020 VAT figures stood at N324.58 billion. Hence, VAT is seen as a great contributor to national development.

But the sovereign control of collected taxes by the Federal Government has been seen to assist states that rely heavily on federal allocation. In contrast, the productive states are left as a beast of burden for these hitherto unproductive states.

Also, the sovereign VAT collection system condones laziness, underutilisation of resources, and signals an unfair treatment towards those more productive states.

For instance, some states have outlawed the consumption of alcohol within their jurisdiction. However, when VAT is collected in states whose disposition towards alcohol consumption is neutral, the proceeds are shared with all, regardless of their doctrine towards alcohol. This alone seems unfair.

Therefore, pooling VAT together to share among states will continue to fuel idleness and disproportionate fiscal treatment. State and local governments can only be driven towards higher productivity levels if they are given direct control over their resources and revenue receipts.

Lagos, for instance, is predicted to increase its IGR by N400 billion annually if it commences state VAT collection. At the same time, its annual revenue may hit over N1 trillion. It is hoped that other states will emulate this new move if they truly desire to unlock their internal potentials and drive state-generated revenue beyond their current capacities.

Get real time updates directly on you device, subscribe now.