THE current face-off between the Federal Inland Revenue Service (FIRS) and state governments of Lagos and Rivers is sending wrong signals to investors on the ease of doing business in Africa’s most populous nation, analysts say.
According to financial experts, there is an urgent need for a proper harmonisation of Nigeria’s tax regime, with the Federal Ministry of Finance expected to wade into the VAT crisis to provide a lasting solution to the challenge.
“It is important that the Federal Government intervenes in this matter in order not to hurt our recovering fragile economy. This is already sending wrong signals to the rule of law and ease of doing business,” Chief Executive Officer of CFG Advisory Tilewa Adebajo said on Arise TV ‘Morning Show’ on Wednesday, arguing that most companies would pay their VAT to states for fear of being blacklisted by the government where they operated.
Nigeria ranked 131 out of 170 on the World Bank 2020 Ease of Doing Business. Investors are seeking environments with clarity on taxes and other rates.
Rivers State government had headed for the Federal High Court to seek clarifications on who should collect VAT. It eventually got a verdict favouring state VAT collection.
Rivers Governor Nyesom Wike described the collection of VAT by the Federal Inland Revenue Service (FIRS) in states where companies operate as injustice.
But the FIRS insists that it has the sole powers to collect VAT. It has headed for an appeal court, while urging companies to continue paying VAT into its coffers.
Lagos State is also in the process of domesticating a VAT law, which will empower it to collect the tax from companies.
The state accounts for an estimated 55 per cent of VAT, according to financial experts.
The FIRS, at a press briefing on Wednesday in Abuja, said VAT would not work at the state level.
Group Lead, Tax Matters at the FIRS Matthew Gbonjugbola said VAT revenues had three avenues from where they came from.
He listed the avenues to include, ”Port, which is a federal government agency; consumption taxes paid when things are bought, and the VAT from Ministries, Departments and Agencies (MDAs) of government specifically tied to contracts for constructions.”
“This is why when you look at the VAT collected, after Lagos, FCT comes second because the majority of contract awards are from federal agencies of government. At the end of the day, when we begin to do a critical analysis of what comes in, you will discover that in-country trading is not a substantial proportion of collected revenue.
“Notwithstanding, the VAT is shared 85 per cent to the state and local governments, and 15 per cent to the federal.”
Analysts have waded into the issue, saying that there is no justification for the Federal Government to collect VAT and distribute to states the way it wants.
Lawyer, and Senior Lecturer at the Legal Department of Baze University Abuja Sam Amadi told The ICIR that constitutional cases were contextual, noting that constitutions were designed to respond to issues.
“The question in Nigeria should be, why should you distribute what states get, and on what basis? If you look at the way we distribute resources in Nigeria following landmass and other contingencies, none of them aligns with productive efforts by states to create an economy that sustains consumption.
He said the VAT was tax built good governance.
“For instance, states that promote tourism had had someone work on security and other plans to make it attractive and create a flow. Now, that tax is poured together and shared on the basis of who is doing what?”
Amadi noted that states were becoming appendages, and would basically come to Abuja to collect money from VAT, saying that it was not a good constitutional incentive.
On his part, Adebajo, earlier quoted, said economically viable states were gradually pushing for fiscal restructuring, and companies would yield to their demands instead of the Federal Government in the impasse.
He noted that what was going to happen was that most people were going to stop paying VAT until they understood the direction.
“Most people won’t want to go against the state government where they operate. There’s already confusion,” he said.
Amidst dwindling revenue resources, the VAT, which is a consumption tax, has appreciated to the tune of about N1.53trillion.
This has prompted state governors, whose states make high VAT contributions, to question the Federal Government’s rationale for collection it.
Another issue is that states (like Kano), which break bottles containing alcoholic drinks, are also getting a chunk of VAT, which partly comes from alcohol taxes. This, analysts say, is unfair and unjust.
Economist Muda Yusuf said in many jurisdictions around the world, VAT was essentially domiciled with the sub-nationals.
“In some instances, it is imposed as a consumption tax. The current allocation mechanism of VAT proceeds raises fundamental questions on equity and fairness.
“Such economic activities generate proportionate negative externalities, which the host states have to take responsibility for. Such externalities include the impact on the environment, pressure on economic infrastructures such as roads, schools and hospitals.
“These externalities put enormous pressures on the finances of the subnational that provide the bulk of VAT revenue,” Yusuf said.
Former President of Abuja Chamber of Commerce and Industry Tony Ejinkonye told The ICIR that it was a good thing that laws were tested with this kind of development.
“This is a constitutional matter that will ultimately be resolved by the Supreme Court. It is a good thing for our country that laws need to be tested and we will be better for it.”
Harrison Edeh is a journalist with the International Centre for Investigative Reporting, always determined to drive advocacy for good governance through holding public officials and businesses accountable.