According to the judgement of a Federal High Court in Port Harcourt, which ruled that states, and not the Federal Inland Revenue Service, should be collecting VAT and Personal Income Tax, the governments of Lagos and Rivers states have expressed their readiness to begin the collection of Value Added Tax in accordance with Court.
Already, the Rivers State Governor, Nyesom Wike, had signed into law the bill that empowers the state to collect VAT, while the Lagos State Government said it had already notified all the stakeholders involved in the payment and receipt of VAT of its resolve to enforce the judgement to the letter.
This is in spite of the opposition by the FIRS, which already filed an appeal against the judgment, and some northern states, who said they preferred the Federal Government to continue collecting the tax.
Justice Stephen Pam, who delivered the judgment on August 10, 2021, also restrained the FIRS and the Attorney General of the Federation from demanding the taxes from the residents of the Rivers State, which by implication affects other states.
VAT is charged on the supply of goods and services in Nigeria, including those imported into the country, except the goods and services specifically exempted under the VAT Act.
By virtue of the Finance Act 2020, which took effect on February 1, 2020, the Value Added Tax charged on affected goods and services rose from five per cent to 7.5 per cent. Yearly, VAT contributes significantly to the total revenue generated by the government.
Prior to the court judgment, however, the FIRS, an agency of the Federal Government, had the responsibility of collecting VAT on behalf of the 36 states of the federation and the Federal Capital Territory. The sum collected is then shared among the three tiers of government, with the Federal Government taking 15 per cent, the states 50 per cent; local governments 35 per cent.
While signing the Valued Added Tax Law No. 4 of 2021 and some other bills into law, Wike said, “We (Rivers State) are standing on the part of history as representatives of the state to have taken the bull by the horns to challenge the illegality of the Federal Government through the Federal inland Revenue Services.”
Justifying the reason for filing the suit, Wike added, “In this Rivers State, we awarded contracts to companies and within the last month, we paid over N30bn to the contractors and 7.5 per cent will now be deducted from that and to be given to FIRS.
“Now, look at 7.5 per cent of N30bn of contracts we awarded to companies in Rivers State, you will be talking about almost N3bn only from that source. Now, at the end of the month, the Rivers State government has never received more than N2bn from VAT. So, I have contributed more through the award of the contract and you are giving me less. What’s the justification for it?”
In Lagos State, the Commissioner for Information and Strategy, Mr Gbenga Omotosho, said the state government would soon commence the implementation of the court judgment even if it had to send a bill to the House of Assembly to amend the relevant laws.
He said the judgment was a reflection of true federalism and the state government had already notified all the stakeholders involved in the payment and receipt of VAT of its resolve to enforce it.
Omotosho stated, “We are aware of the judgment and we applauded it. In a federation, that is the way it goes. In our pursuit of true federalism, it is a giant step forward. And in fact, we have notified all our stakeholders about the judgment that the Lagos State Government will implement.
“We are writing to all the stakeholders to let them know that this is a judgment we are going to obey to the letter.”
Asked when it would take effect in the state, he said, “We are working on it. It is a matter of law. (It will commence) very soon except if we will be sending a bill to the House of Assembly to officially notify the Assembly about the judgment and adjust our own law that will compel those who pay VAT to the state government in obedience to the judgment.”
Meanwhile, there has been an uneasy calm over the judgement, because according to tax experts, no fewer than 30 states would likely face a huge drop in their revenue from the federal allocation, which is the main source of revenue for the states.
Former Minister of Finance, Mrs Kemi Adeosun, had said in August 2017 that 55 per cent of the revenue generated by the Federal Government from VAT was being collected from Lagos State alone, adding that the remaining 45 per cent was being generated from the remaining 35 states and the Federal Capital Territory.
Fiscal Policy Partner and the Africa Tax Leader at PricewaterhouseCoopers, Mr Taiwo Oyedele, had earlier said that the biggest losers would be the states, except Lagos.
“A few states like Kano, Rivers, Oyo, Kaduna, Delta and Katsina may experience minimal impact, while at least 30 states, which account for less than 20 per cent of VAT collection, will suffer significant revenue decline,” he added.
Consequently, apart from the FIRS, some states in the north have also expressed their opposition to the judgement, given the impact it would have on their revenue and how it could worsen their already shaky economy. Some of the states had in the past relied on bailouts from the Federal Government to pay salaries.
VAT has been a major contributor to the consolidated revenue fund. In 2020, for example, total VAT collection was about N1.53tn, with import VAT being N348bn while foreign non-import VAT was N420bn and local VAT amounted to N763bn.
In the first quarter of 2021 alone, the National Bureau of Statistics disclosed that the country generated N496.39bn from VAT, which was an improvement on the N324.58bn it earned in the same period in 2020.
Apart from the FIRS, some governors in the northern part of the country have also kicked against the judgment.
The Plateau State Commissioner for Information, Dan Manjang, told one of our correspondents on Friday that the Federal Government should continue to collect the VAT, arguing that states tend to benefit more if the FIRS is allowed to handle the collection.
Manjang said, “How many industries do we have in Plateau State? There are not many. So, the position of the Plateau State Government on VAT is that the Federal Government, through the FIRS, should continue to collect VAT on our behalf and thereafter remit the proceeds to us.
“We prefer it this way because we discovered that the amount that we will spend in collecting the VAT will be more than what we will get eventually.”
In Gombe State, the Chairman, Internal Revenue Service, Abubakar Tata, argued that states lacked the capacity to effectively carry out that responsibility, noting that the consumption tax states were allowed to collect had not been optimally done.
He added, “There are certain taxes that the Federal Government collects on behalf of the states because we have the Joint Tax Board account where all the collection regarding Value Added Tax is paid into and later shared based on the allocation formula. If you allow state governments to begin to collect tax, will it be effective? After all, the states have a consumption tax which is five per cent of what is consumed at restaurants, event centres and other services.
At the moment, not all the states are collecting the consumption tax because of issues like capacity, enforcement and other issues surrounding tax administration at the lower level, particularly at the state level. If you strip the Federal Government of the power to compel any company or taxpaying entity operating in Nigeria to make the payment and you give them the power to states, the level of collection we are seeing at the moment will not be the same.”
While questioning the decision of Rivers State Government to test the collection of VAT in court, he stressed that the state might not have appropriately enforced consumption tax because of politics.
He added, “At the moment, Gombe is implementing the new tax law in phases and we are distributing letters to all relevant taxpaying entities because we are expected to collect five per cent from the services they render and remit it to the Internal Revenue Service. We are, at the moment, raising awareness through the mass media.
“Assuming all states are collecting the consumption tax as it is enshrined in the state law then we can say we have the capacity and the legal framework to do it and remit the same to our Internal Revenue service.
“At the moment, we lack the capacity to execute that mandate because even the consumption tax, if you go to Rivers, go and find out how much they are able to collect under a consumption tax. It’s for politics, somehow to overheat the polity and the economic stabilisation of the country as a whole.”
In Borno State, a top government official, who spoke on condition of anonymity, said no state in the North would want the enforcement of the judgment because it would make the prices of goods rise beyond the reach of the people.
He added, “The wisdom behind allowing the Federal Government to receive the taxes on behalf of the states at the point of entry through the then Federal Inland Revenue Agency was to normalise prices and distribute to all states through the Federal Accounts Allocation Committee after deducting 15 per cent.
“The general consensus among the states is that the judge that delivered that judgment did not have the complete information about the service because if he did, he would have understood the idea behind the Federal Government receiving the VAT.”
The official stressed that if all states were to collect their VAT respectively, people, including the rich, would find things expensive to buy.
He added, “For example, here in Borno State, if we are transporting trucks loaded with rice from Lagos down to Maiduguri, how many states will that truck pass through before getting to Borno. If the truck refuses to pay VAT, that state will impound the car.
“The states came together and discussed that all consumables should be charged uniformly and FIRS was appointed to collect the VAT and share among the states. We agreed on the percentage to be deducted by the Federal Government, which is 15 per cent and, considering the total amount being realised and shared, that percentage is small and negligible.”
In Adamawa State, the Director-General, Media and Communications in the state, Solomon Kumangar, who spoke to one of our correspondents on Friday, said the matter was of interest to the state, noting that the state would like to be joined should the Federal Government appeal the judgment and the case proceeds to the Supreme Court.
He added, “Anything to extend and improve on our IGR is welcomed. So, we are keen on joining Rivers State Government should the Federal Government appeal the judgment which granted Rivers State the right to collect VAT. That is because whatever will bring improvement in IGR is a welcome idea for a state like Adamawa just recovery from the ravages of insurgency.
“The truth is that the collection of VAT by the states is the only way to assist states who are heavily dependent on federal allocations to be able to wean themselves and meet their fiduciary obligations. So, if there are areas where revenues can be exploited and extended, surely the state government will welcome it.”
Earlier, Governor Bello Masari of Katsina State, while receiving a delegation from the Revenue Mobilisation Allocation and Fiscal Commission, had said the state had also appealed the judgment, vowing that the court’s decision would not stand.
“We have heard the judgment of the Federal High Court in Rivers and we have appealed against that judgment. It means people will begin to pay double VAT because if you pay VAT in Kano, at the point of departure, it means when you come to Katsina you pay another VAT.
“If you pay VAT in Lagos, it means you also pay VAT all along the way until you reach your destination. It will bring a lot of burden on the people. That judgment is not fair. It is other parts of the country that make Lagos and Rivers states what they are. We have to work together as a nation and come up with something that will work for all of us.”
Meanwhile, Kaduna and Niger states said they had yet to take on a position on the issue as they were still studying the judgement.
The Executive Chairman, Niger State Internal Revenue Service, Mohammed Madami Etsu, told one of our correspondents that once the state took a decision, it would be made public.
“We are still studying the judgment and the decision of the state would be made public once a decision is taken on the matter but for now, I cannot say much about it,” Etsu said.
Also, also the Secretary to the State Government, Alhaji Ibrahim Matane, said he could not make any statement on it because it was a policy issue that needed to be discussed at the state executive level.
“I can’t make any statement on it because it is a matter that needs to be discussed at the policy level. We are a federation and individual states would want to collect it by themselves but there are consequences to such a decision. This is a policy issue that needs extensive deliberation at the state executive level,” Matane added.
In Kaduna State, the Special Assistant to Governor Nasir El-Rufai, Muyiwa Adekeye, told one of our correspondents in an interview on Friday that the state was studying the judgment to understand its details, impact and ramifications.
Adekeye noted that the state remained a champion of true federalism, anchored on significant devolution of powers and responsibilities to the states, adding that the state focused intensely on expanding its IGR, enabling it to increase its IGR from N13bn in 2015 to N50.2bn in 2020.
He added, “The Kaduna State Government is a champion of true federalism, anchored on significant devolution of powers and responsibilities to the states. Kaduna State has also focused intensely on expanding its internally generated revenue. The El-Rufai government has almost quadrupled IGR to N50.2bn in 2020, from N13bn in 2015.
“The state government is still studying the VAT judgment to understand its details, impact and ramifications.”