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Value Added Tax: The Economic Implications

The recent saga between Rivers State and the Federal Government on the collection of the Value Added Tax has opened the floodgates on various restructuring arguments that had lingered in recent years especially in light of struggle for power between the central government in Abuja and the State government. The issues that arise from this current VAT struggle has resulted in the need to examine the constitutional provisions as regards the collection of VAT which not until the recent dip in oil revenue was considered ephemeral. Thus, this article will assess the power to collect VAT and assess the possible implication of this decision on the restructuring efforts in Nigeria.

History of VAT

VAT in Nigeria is a tax that was first introduced into the Nigerian jurisprudence through the VAT Decree No. 102 of 1993 to replace the sales tax which was previously in operation and under Decree No, 7 of 1986. The use of the VAT was to prevent double taxation and to unify the taxation regime to make it easier for tax collection from companies with different operation across various states. VAT was a 5 percent taxation up until it was increased to 7,5 percent by the Finance Act of 2020.

VAT is administered by the Federal Inland Revenue Service and has a sharing formula where 15 percent goes to the Federal government, 50 percent to the States and 35 percent to local governments with a net 4 percent as collection cost by the FIRS. The distribution of VAT is also based on a derivation formula which 20% is shared back on the basis of where it is derived. The controversy surrounding the collection of VAT spells from the feeling that the states generating the VAT do not benefit enough from the sharing. About 30 states account for less than 20 percent of VAT collection while Lagos and Rivers contribute about 70 % of the current VAT pool, with Lagos contributing about 55%.

Lagos most notably had attempted to innovate past the VAT collection problem by the enactment of its sale tax law1 which was notably repealed by the Supreme Court in the case of AG Lagos State v Eko Hotels2 on the basis that it amounted to double taxation and based on the principle of covering the field. Despite its failure in collecting a sales tax, the Lagos state instead under a different heading enacted the Hotel Occupancy and Restaurants Consumption Law of Lagos State which has not also been without its own legal problems such as in the challenging of the law in Registered Trustees of Hotel Owners and Managers Association of Lagos (RTHMAL) v. Attorney General of the Federation & Minister of Finance and Registered Trustees of Hotel Owners and Managers Association of Lagos (RTHMAL) v. Attorney General of Lagos and Federal Inland Revenue Service.

However, with the recent case of Emmanuel Chukwuka Ukala v FIRS (hereinafter referred to as Ukala’s case)3, it was held that the powers of the National Assembly to make laws imposing

1 Cap 175, Laws of Lagos State, 1995

2 A. G Lagos State v Eko Hotels and Anor (2018) 36 TLRN 1 at 58.

3 Unreported Judgement delivered by Hon. Justice R. M. Aikawa of the FHC in Suit No: FHC/L/CS/360/201

taxes is limited to the profits/income of persons/companies, capital gains and stamp duties on instruments but does not extend to VAT.

This decision spiralled a constitutional discussion as to whether the states are entitled to VAT or the Federal Government through the FIRS. According to the Vanguard, the Federal Allocation Committee (FAAC) between January and August of this year showed that Lagos generated =N= 429.203 billion but received =N= 139.587 billion. Kano on the other hand generated =N= 24.492 billion but received the second highest allocation with =N= 47.082 billion, while Rivers state despite generating =N= 90.293 billion received about =N= 46.270 billion. Most notably is Zamfara state with a generation of =N= 598.133 million but  received

=N= 35.716 billion across the 8 months period. Kaduna recorded a VAT revenue of =N=

18.262 billion and received =N= 32.726 billion while Katsina in the same period generated

=N= 3.738 billion and received =N= 31.539 billion. The table below showing the reflection of VAT consumption and generation from January to August 2021.

From the above, it is clear that the concerns of states are indeed valid especially with regards to how much revenue is generated and how much revenue can be used for economic projects. The current case before the appeal court thus places the court in a precarious position as to the determination of not only the collection of VAT but a socio-political phenomenon that has been lingering in the shadows in Nigeria.

The current case has a bearing on the fiscal autonomy of the states and spells a basis for possible financial restructuring with different states already having differing opinions. It is clear however that the position of the law will remain debatable until the Supreme Court makes a pronouncement on the matter. Till then, we continue to remain spectators.[/vc_column_text][/vc_column][/vc_row]