Why the status quo on the collection of VAT must be maintained

Ifeanyi Omokwe

Over the past few weeks, Nigerians have been treated to intense legal fireworks on issues related to the collection of value added tax (VAT) in the country.

Of an ongoing legal standoff between the Federal Inland Revenue Service (FIRS) and Rivers State, a recent statement at the end of the Southern Governors’ Forum meeting showed that more states in the region will want probably start to fidget for the collection. consumption tax.

Nigeria, as a federation, has gone through a turbulent history of boom and bust, with collapse representing a larger part of the country’s development history. Indeed, the growing population of the country has seen the government adopt proactive measures to boost income generation due to its growing financial obligations. In all of these cases, the federal government supported the states, as seen when the government extended bailouts to state governments during the cash flow crisis that caused the price of crude oil to fall during the first term of President Muhammadu Buhari.

The creation and imposition of VAT was part of the federal government’s efforts to diversify the income base in Nigeria. The consumption tax was introduced into the Nigerian tax system by the Value Added Tax Act No. 102 of 1993 and entered into force in January 1994. At present, the consumption tax is administered under an arrangement that allows the federal government to collect 15 percent, says 50 percent, and local governments 35 percent. Under the existing arrangement, states and local governments levy about 85 percent of VAT proceeds.

VAT replaced sales tax with the rationale that the sales tax base in Nigeria was reduced because it only covered nine categories of goods plus sales and services in registered hotels, motels and similar establishments .

In addition, the sales tax only targeted locally produced products, which put these products at a disadvantage compared to imports.

When the VAT law was introduced during the military era, it was quickly realized that if practiced strictly, in control, compliance and enforcement, it would be cumbersome and create untold hardship for businesses. consumers, which is why the government has agreed to appoint FIRS as the collection agent. .

FIRS is the government’s main revenue-generating agency and, with this in mind, has positioned VAT as one of the main means of increasing tax revenue.

Aside from the fact that taxes have been administered by FIRS for some time; the federal agency has over the years developed the experience, technology and manpower to handle all matters concerning tax administration much better than states. This is reflected in the country’s tax revenues, which have increased over the years.

There is nowhere in the world where VAT administration is done at the sub-national level.

Clearly, since the creation of VAT under the administration of the FIRS, the consumption tax has remained one of the most stable sources of tax revenue for financing the annual budgets of the three levels of government.

Despite this, the constitutional validity of VAT has been a contentious issue contested in various courts, even up to the Supreme Court. Various judgments have reflected divergent points of view, leaving their political connotation in the imbroglio over the constitutional validity of the VAT law.

If the recent VAT ruling between FIRS and Rivers State stands, I can categorically say that the states will be the biggest losers in the judgment.

According to top tax expert and PwC partner Taiwo Oyedele, “Few states like Kano, Rivers, Oyo, Kaduna and Delta can experience minimal impact, while at least 30 states which account for less than 20% of fundraising. of VAT will suffer significant consequences. declining income.
It should be noted that if states enacted their VAT or sales tax laws, the guaranteed winners would be the federal government when it comes to import VAT and international transactions (whether kept by FG ​​only or paid into the Federation’s account and shared), and the Federal Capital Territory.

If the decentralization of the VAT administration system is adopted instead of the central VAT administration, different states will have the right to impose consumption taxes or sales tax in their territory. This might make sense primarily for some states like Rivers, Lagos, and FCT, but other states like Ebonyi, which are not geographically or naturally endowed with mineral resources, should be taken into consideration.

In addition, another issue to consider is the principal of destination, as the country adopts the principle of destination of the VAT administration system. With this, the state where the goods or services are consumed will benefit from the VAT revenue. This will create various administrative challenges such as each taxable person must identify the goods to be consumed inside or outside their state for the purposes of VAT invoicing. Another issue to consider is the entry-exit mechanism, i.e. when goods and services have to pass through several sub-national territories before reaching their final consumer, each state will likely levy VAT on the basis of the principle of destination which will not be considered as input VAT. in the other state. This means that the seller will bear taxes on the goods produced or sold in place of the end consumer, which will result in multiple taxes, decrease in the ease of paying taxes and discourage tax compliance.

In addition, those scrambling for states to start collecting VAT must also consider the effects of the refund system on their citizens. Indeed, a fundamental question is whether sub-nations have sufficient resources to cover VAT refunds. Currently several states do not have enough resources to meet their budget obligation, huge debt, inability to pay salaries etc. it follows therefore that responding to the reimbursement of taxes will be a mirage and create mistrust among taxpayers.

Likewise, proponents of state collection of consumption tax must also weigh the effects of hyperinflation, as the burden of transferring multiple taxes levied in various sub-nationals would weigh on end consumers, resulting in higher inflation as the prices of goods will reflect the various taxes borne by the supplier or producer at each stage of the state-to-state supply chain. If allowed, Nigeria’s ease of doing business and paying taxes would deteriorate due to multiple VAT compliance and Nigeria’s tax-to-GDP ratio would decrease.

“People will pay more, but the government will collect less because of inefficient collection and leaks. There will be a higher cost of goods and services resulting from input VAT claim and reimbursement complications in addition to items that are not exempt under state VAT law, such as rent , school fees, processed foods such as amala, suya, jollof rice, and ogbono soup. In addition, there will be an incidence of double taxation due to likely conflicts between the principles of origin and destination in different states. Worse still when the reality of the inability to implement VAT hits home, many states will inevitably introduce a sales tax with its cascading effect, ”according to a report.

It is certain that the collection of subnational resources for the benefit of all within the framework of fiscal federalism would be defeated if each subnational were authorized to administer the VAT. This means that only states endowed with natural resources or geographic location / affiliation will be developed at the expense of other states.

In view of the above, all parties involved should focus on how not to take measures that would stifle business and investment, which has been the benefit of the current VAT system as recently explained. Group Leader, Special Operations Group, FIRS, Mathew Gbonjubola.

Gbonjubola explained: “The VAT is not paid to the account of the federation but to the account of the VAT pool for distribution to the three levels of government. It is after the partition that the federal government’s portion is paid into the Consolidated Revenue Fund Account.

“VAT only works at the national level but not at the sub-national level. There is no country in the world where VAT operates at the sub-national level.

It is also interesting to note that the VAT law allows taxpayers to deduct their input VAT (authorized input VAT) from their input VAT, as this input VAT only concerned goods purchased or imported for resale or by taxpayers. ‘goodwill used for the manufacture of new products on which exit VAT would be levied.

And where the input VAT exceeds the recoverable input VAT; the taxpayer is expected to remit the excess to FIRS.

So, because the consumption tax depends on the input-output mechanism, it cannot work at the sub-national level.

Thus, Nigerians must continue to support the FIRS so that the federal wish has over the years developed sufficient capacity to collect VAT and ensure that its distribution among states is fair.

Mr. Ifeanyi Omokwe, student of information systems and network economics at the University of Freiburg, wrote from Germany.

About Natalee Broderick

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