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Friday, March 24, 2023

Winners, Losers As 32 States Get More VAT Share Than They Generate —Investigation

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In what looks like a case of robbing Peter to pay Paul, 32 state governments in Nigeria get a higher share of the Value Added Tax (VAT) than they generate internally, investigation has revealed. In the past few weeks, Nigerians have been treated to intense legal fireworks over issues relating to the collection of Value Added Tax (VAT) in the country. 

From an ongoing legal tussle between the Federal Inland Revenue Service (FIRS) and Rivers State, more states have started agitating for the collection of the consumption tax. Rivers State governor, Nyesom Wike, had highlighted that Rivers State generated about N15 billion as VAT in June 2021 but received only N4.7 billion, Lagos State generated over N46 billion as VAT in June, but got just over N9 billion, whereas Kano State generated N2.8 billion and also got N2.8 billion as allocation. 

However, a Nigerian Tribune investigation has revealed that many states do not have the capacity and are likely to lose because under the extant formula, their share of the VAT revenue is huge, compared to what they generate within their respective states. 

Tax experts have therefore concluded that such state governments are already benefiting more from the current VAT sharing formula and may not be better off if the legal pendulum falls in their favour. According to Taiwo Oyedele, Fiscal Policy Partner and Africa Tax Leader at Price Water House Coopers (PwC) in Nigeria, states and local governments own directly or indirectly five out of the seven major taxes accounting for over 90per cent of total tax revenue. 

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Many state governments will likely feel the immediate brunt of the Federation Account Allocation (FAAC), should states be allowed to collect their value-added taxes. This is because the VAT revenue forms a significant part of the net federal allocations to states and most of the states rely largely on these funds. 

Under the current sharing formula, the federal government gets 15per cent of VAT revenue. 50per cent goes to the states and the final 35per cent to local governments. Furthermore, each state again, keeps 20per cent of the VAT derived from their states. 

Thirty per cent of the VAT is allocated based on the population of the states, and 50per cent is then shared equally. This is a major factor that would see Kano, a highly populated state, receive more than Rivers State and the Federal Capital Territory (FCT).

Meanwhile, 87 per cent of the total VAT revenue comes from only five states while the other 32 states account for only 13 per cent of the funds. 

States according to Oyedele, also own 100 per cent of Stamp Duties; 100 per cent of Personal Income Tax (excluding members of the force, foreign diplomats and non-resident persons); nearly 100 per cent of Property Taxes (excluding capital gains tax on companies, also shared with states); they get 85 per cent of VAT collected nationwide plus imports and international services. 

States benefit from Companies Income Tax; Petroleum Profit Tax; Customs & Excise are shared at least 47.32per cent to states and local governments; states have nearly 100per cent control over land and though natural resources belong to the federation, it is generally shared 52.68per cent to Federal Government, and 47.32per cent to states & LGs Oyedele disclosed. 

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Available records show that Lagos State accounts for 55per cent of Nigeria’s VAT, followed by Abuja with 20per cent, Rivers with 6per cent, Kano with 5per cent while Kaduna accounts for 1per cent of the fund. 

Findings show that states like Jigawa, Bayelsa, Yobe, Adamawa, Taraba amongst others rely almost solely on the federal allocation to fund their expenses. In the same way, states that are major producers of food generate little VAT as a result of exemption. Hence, they would likely be at the losing end, at least in the short term, if states are allowed to collect the VAT they generate. 

Oyedele stated in his position paper on VAT: “The sharing of VAT revenue seems inequitable. Sharing of three per cent of VAT to the North East Development Commission (NEDC) under section 14 of the NEDC Act may be unconstitutional. 

“It was an omission that VAT wasn’t mentioned in the 1999 Constitution despite being a major tax already in force.

“A lot of VAT is generated from alcohol which is prohibited in many states in the North yet they share in the VAT. 

“While the principle is valid, the actual contribution to total VAT is less than two per cent.” 

According to him, states do not have the capacity to implement VAT but this can be built over time; yet, other tax experts believe that the FIRS has over the years developed the experience, technology and manpower to handle all issues concerning the administration of taxes far better than the states. 

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The tax expert said options open to the country are: States should administer sales tax only; administer both federal and state VAT similar to Canada, Brazil etc or ; continue to administer centrally and revisit the sharing formula. 

“Any outcome that negatively impacts the majority of Nigerians is not the right solution just as we cannot claim to empower the subnational by weakening at least 32 states and all 774 local governments. 

“The current VAT revenue sharing formula among states is not equitable. This inequity should be addressed by allocating any domestic VAT collected from each state entirely to the respective state. 

“Only VAT collected on imports, international services and inter-state transactions should be paid into the VAT pool and shared based on derivation. This will address the current controversy without creating new problems,” Oyedele suggested. 

But speaking in favour of state governments, the former member of the National Economic Council, Emmanuel Ijewere said, “if we are running a federal system of government, we should also have a fiscal federalism. 

“It should be the states that will say ‘come and help us do it.’ So, whichever agency, be it FIRS or any other body working for the federal government, should be an agent to the state government concerned.” 

Actually, about 32 states appear to get more than they generate.

Bottom three states are Abia (SE), Osun (SW) and Zamfara (North)

Credit: Nigerian Tribune

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