Two of Nigeria’s richest and most populous states are pushing the envelope and daring the federal government.
After crude oil, Value Added Tax (VAT) is probably Nigeria’s biggest money spinner or biggest source of federal government revenue.
What is VAT?
Value Added Tax (VAT) is the tax you pay on the goods and services you consume. Government agencies, corporate organisations and individuals–all pay VAT.
The Lagos and Rivers State governments are ‘dragging’ the federal government over VAT. This dragging could have far reaching fiscal implications for the rest of the 34 states.
For the purpose of this explainer, we shall refer to this tax simply as ‘VAT’ in subsequent paragraphs.
VAT is essentially the tax you pay when you go grocery shopping, purchase petrol at the gas station, purchase beer at the bar, or recharge your phone. No one evades or escapes VAT. As long as you are shopping, you are paying VAT.
VAT is a consumption tax, simply put.
Which is why in 2020, the Buhari-led federal government of Nigeria racked up VAT from 5 percent to 7.5 percent.
According to latest data from the National Bureau of Statistics (NBS), Nigeria recorded an increase of N15.86 billion in VAT revenue from N496.39 billion generated in quarter one (Q1, 2021) to N512.25 billion in Q2.
The Governor Nyesom Wike-led Rivers State government has been fighting the federal government in court over who should collect tax in Rivers.
On August 9, 2021, a Federal High Court sitting in Port Harcourt, ruled that the Rivers State Government and not the FIRS (Federal Inland Revenue Service), is the rightful authority to collect VAT in Rivers.
The FIRS has appealed this judgment, as you would expect.
Probably emboldened by what’s transpiring in Rivers, and because state governors ideally won’t mind more cash in their coffers, a bill that would allow the Lagos State Government collect VAT, as opposed to FIRS collecting same, has scaled second reading in the Lagos State House of Assembly.
Events in Rivers and Lagos have understandably sent the federal government panicking, because these two states are among Nigeria’s richest, with the most in terms of GDP contribution and internally generated revenue (IGR).
To lose VAT in these cash cows would also dent the federal government’s revenue profile.
More states could join
A precedence has however been set. Osun, Ekiti, Benue, Akwa Ibom and Adamawa states, among others, could soon send VAT collection bills to their respective State Houses of Assembly.
These states are monitoring developments in Rivers and Lagos keenly.
Should Lagos and Rivers pull this off, with the courts ruling in their favour, best believe many more states will rush bills through their legislatures, in order to extricate VAT control from the federal government’s vice, big-brotherly grip.
And this will also mean that states who abhor alcohol or beer, and who smash alcohol or beer trucks with so much glee, will no longer benefit from alcohol or beer taxes.
States will benefit taxes from what their residents consume, and these consumption taxes will no longer be shared with other states at federal allocation meetings.
In an ideal federal system of government, this should be the case–and without obfuscation.