The proposed administration of the Value Added Tax (VAT) by the states is an idea whose time has come.
This is the verdict of some experts on the quest by Lagos and Rivers state governments to administer the VAT.
Speaking in separate interviews with The Nation, the experts are of the view that the administration of the VAT by the states will boost their internally generated revenue.
Founding president, Association of National Accountants of Nigeria (ANAN), Omooba Olumuyiwa Sosanya, said the judgment of the Federal High Court in Rivers is a landmark one with implications for the administration of VAT going forward.
He described the verdict as a divine intervention “because we have been talking of federalism and unfortunately, we have a system that is lopsided whereby every state has to look up to the federal government to run their economy.
“The Nigerian constitution allows for each of the states to make laws to run their economy. But unfortunately, we’re still running a unitary government which was the system put in place by the army. Fortunately, we have had a civilian government in the last 20 years but I don’t know why it is difficult for them to put things properly. So this judgment, I think one can call it a revolution to restructure this country.”
Going down memory lane, the renowned accountant recalled that when the Sales tax law was promulgated by then President Ibrahim Babangida in August 1993, the law was not particular about who should administer the VAT but the Federal Inland Revenue Service (FIRS) took advantage of the situation at the time because the country was under a military rule.
While noting that the VAT has helped to shore up the revenues of countries like France where it was first raised and subsequently in British and other advanced economies, Sosanya however argued that Nigeria’s experience has been anything but pleasant.
“As at 2002, I suggested that the VAT law should be centralised whereby all the states will administer the collection and this will bring in more taxpayers into the net of the VAT. But unfortunately, the powers that be at the top refused to look into it. Even as late as 2019 before the passage of the 2020 budget, I presented a memorandum to the National Assembly when the VAT was increased from 5% to 7.5%. I suggested at the time that once the states are allowed to operate their own VAT, they will find it convenient to reduce the VAT lower than what is being charged by the FIRS. So, I’m happy that more states have joined the bandwagon after Rivers such as Lagos State and other states would join. And I don’t envisage anything different by the Supreme Court. The thing is that the VAT law as an established law is not entrenched in our constitution so each of the states can make laws suitable for them because it is not in the Exclusive List. All the states need to do is to go to their State House of Assembly to enact laws. In fact, most people making comments against the state collection, their arguments are misplaced and rooted in ignorance.”
FIRS not doing enough
According to Sosanya, the FIRS has only been able to collect just 15% of the collectible. “The argument that the states will not be able to collect or administer the VAT levy is misplaced. Rather, the states will be able to look inwards at all the formal and informal sectors that can be brought into the VAT. But now, it is only the organised private sector (OPS) that pays VAT. The informal sector is not paying and the informal is about 80-85 percent of our economy. But now that the states have woken up to their responsibility following the judgment of the Federal High Court in Rivers state, you will find that most of the states now, especially Lagos and states that have high commercial activities in their capital, can generate if not up to the FIRS.”
Lagos expected to generate N6b monthly from VAT
Lagos State has been projected to generate an estimated N6billion from VAT receipts on a monthly basis, other things being equal, according to Sosanya.
“Take Lagos as an example, I’m quite sure that in the next five years the state will be collecting over N6 Billion monthly which is what the FIRS is collecting across the country yearly. This is because the chargeable persons are in Lagos. Apart from the corporate bodies, the informal sector is in Lagos and the activities of this sector will enable the Lagos State to generate up to about N6 billion per month in another five years. This also will create employment via those channels and they have to put in place an automated system. There is also a lot of intelligence to go into it.”
VAT collection in other climes
On insinuations by officials of the FIRS that there is nowhere in the world that the VAT is decentralised, Sosanya debunked such claims.
“That’s not true. American that we are aping their system, each of the states have VAT laws in place even though they don’t call it VAT, they call it sales tax. The VAT is consumption tax. Each of the states collects their sales tax and it varies from states to states. So those who are claiming that it is not done anywhere in the world, that’s not true. We have to compare like to like. You don’t compare Nigeria to Canada and Australia. We’re running a federal system so we can only compare Nigeria with America.
“One thing that gladdens the mind is that perhaps, this development is the starting of the restructuring of our economy. Each of the states should wake up and be up to their responsibility instead of going to Abuja every month to collect peanuts. There is no state that is not viable for VAT. The revolution has started so each of the states should look inwards. Those states that are agitating that they may lose income. I need to caution them that all they need to do is look at what is available to them and in another one year, they will be better off because this judgment gives them the freedom to administer the VAT themselves. So I’m recommending the administration by all the states that have started. And if this is the gain of restructuring, I think it is a welcome development.”
Fear of inflation unfounded
On the arguments by some schools of thought that the administration of VAT by the states may lead to inflation, high cost of living and double taxation, with huge implications for the economy, Sosanya said it was unfounded.
“VAT is a consumption tax. If you don’t consume, you don’t pay for it. If you’re a poor man, once you buy anything, you pay the VAT. If you’re a rich man, you have more money to spend. Those are the people that will pay more VAT because they will buy expensive things. But they will still pay the same rates. Then if you’re not buying anything, you don’t pay the VAT. In fact, my expectation is that as time goes on, the VAT may replace income tax in Nigeria because it is the most efficient taxation for collection, as such, you cannot evade it. Every individual pays the same rate, the difference is the amount you’re buying. I don’t see how it is going to cause inflation.”
Echoing similar sentiments, Silas Okorie, an economist said the idea of VAT collection by the states was very welcomed. “What they need to do about this country is restructuring. That’s all. If you start destroying beer in your state that people should not drink beer and the people who are drinking beer elsewhere you’re collecting VAT from them, to me, that’s hypocritical.
“Seriously speaking, what the nation needs to do now is the need for decentralisation because things are getting disorganised. Over the years, some states have been collecting money from beer and other unholy products. The VAT from it you are using over there.”
In the view of Eben F Joels, General Partner, Stransact Chartered Accountants, a firm of chartered accountants in Lagos, if the Southern states impose their own VAT, then the current system of distribution of VAT collected by the FIRS will no longer hold.
He said: “States with a lot of economic activities and organised private sector players will grow rich very quickly while States with only a small number of businesses will become poorer because their VAT allocation will dwindle. States like Zamfara with very few organised businesses and a ban on sin goods such as alcohol will have their VAT cut significantly.”
But he warned that what some Nigerians call democratisation of VAT is bad for foreign investors in the country because there will be arbitrary state actions on collections from 38 State entities instead of one.
“That is the 36 States plus the FCT and the Federal Government. That means multiple VAT audits. That means businesses with a national spread such as the GSM companies and banks will get more harassed and will have even more costly compliance obligations.
“Our current VAT system is similar to what obtains in the UK and most countries where there is a single entity, typically the Federal tax authority charging and collecting VAT. However, in some countries such as Canada both the federal and state or provinces impose their own General Sales Tax (GST), a form of VAT that also allows for offsets of inputs. I suspect we’ll end up with this system, where both the Federal and state impose VAT. It is taxpayers and consumers who will bear the brunt, not the politicians.”
According to Eben, it could be a recipe for anarchy for taxpayers. “For example, Lagos State VAT laws want VAT on all imports passing through the state and you know Lagos State is the gateway for most imports into Nigeria. VAT on imported goods alone could easily double Lagos IGR. However, things will be worse for consumers. Goods are likely to become more expensive because even though VAT is an ad valorem tax, that allows for set off of input, in an opaque system with revenue authorities run by political appointees, it could easily become an additional tax imposed on goods by every state they pass through to get to the final consumers.”Previous article
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