By Taiwo Oyedele
“Currently, VAT is Shared 50% to states, 35% to local government, and 15% to the federal government. The federal government will not lose money if this position is sustained for States to start collecting, reason being that last year, FIRS collected N1.53 trillion from VAT. Out of that amount, import and International Services VATs was about 51%. FCT collected 202 Billion Naira (13%), and only got about N35 Billion to its local government, so FCT donated 166 Billion to the federation. If everyone starts collecting VAT within their territory, the Federal Government will actually be collecting over 60% of the VAT (Import & international Services & FCT VATs; and if you add VAT on federal government contracts then they will collect nearly 70%) even though they’re taking only 15% now. So actually, the biggest winner will be the federal government.
“But the question is whether that is the right thing for us to do as a country. Even if you decide to share the amount that the federal government collects (60/70%) using the federation account ratio you will have federal government taking 52% of that 60% (or 70%), which is more than 30%, a percentage twice what they’re taking at the moment. So really, the conversation, in my view is that the way the VAT is being shared is not equitable because only 20% is shared based on derivation, 50% is shared based on equality, and 30% is shared based on population. So that is why you find the likes of Rivers and Lagos and a few other states feeling like they’re contributing so much but they’re getting so little.
“But at the end of the day we have to think about what is the best format for VAT system in Nigeria. Like the FIRS said, there are so many federations around the world that have VAT, and they do not operate at the state level. Countries like Canada and Brazil have a federal VAT, the US does not pay VAT. So it is not a question of copying and pasting from somewhere, we have to look for what is the most appropriate structure for Nigeria that does not create problem for small and large businesses and more importantly for the people. And to my mind that format is a format that we legislate the tax centrally, we collect it centrally, but we use data and information to ensure that all the VAT collected from a particular state is given to that state 100%, and the only thing we’re going to be sharing is VAT on import, VAT on international services, and VAT on federal government contracts.
Question: If the states collect VAT, which state will collect less?
“Unfortunately, all the states will be getting less, and this is very simple. Lagos state is credited with receiving about 60 to 65% of VAT collection within the Nigerian territory. But Lagos State has what I call the Headquarters effect, so which means all the largest companies in Nigeria are mostly headquartered in Lagos, they remit all their VAT nationally in Lagos. So take MTN for example, if you start collecting by every state you won’t be able to do that, you will have to breakdown VAT from where the activities took place, so even Lagos State would be surprised that its own contribution will go down significantly from what is being reported at the moment. Last year, about 42 Billion was generated from Rivers State, and shared to Rivers State and its local government was N39 Billion, so the balance is just like cost of collection. So the states that are likely to be neutral will be Rivers and Lagos States, but unfortunately, their collection efficiency cannot match the level of FIRS in the next 2 to three years. It has taken FIRS 28 years to get to the level where they are today, and I can tell you VAT is a complicated tax to administer.
“So if the states are looking at data in terms of what is in their best interest, they’ll take it easy. The fact that you have won a case does not mean you should immediately pass a new law. You can wait for finality by the Supreme Court, have time for engagement and analysis, so that if we need to amend the constitution we can amend it in a way that is equitable and fair to everybody, but without creating confusion for the system.”
© Oyedele, Tax Expert, V/Island, Lagos
