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VAT: Which states will benefit from court ruling?

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The battle to restructure Nigeria took an interesting turn of events this month as a Federal High Court in Port Harcourt ruled that the Federal Inland Revenue Service should not be responsible for collecting Valued Added Taxes in Rivers State. Nigeria’s VAT which rose to 7.5% in 2020 is fully collected by the Federal Government, which leaves most states without the means of accumulating proper sales tax on their residents.

The ruling comes at a time when states have started clamouring for more resource control in a bid to have more economic control over their affairs as Abuja faces dwindling revenue and higher debt service ratios.

Rivers State Governor, Nyesom Wike moved swiftly to sign a bill granting the right to the collection of VAT in the state, not wasting time in the enforcement of the court judgement which the FIRS says it will appeal.

The “restructuring” of Valued Added Taxes in Nigeria opens up the federation to “economic battle” between states as some states will obviously benefit more than some on this front, as some may even have less access to VAT.

So which states will benefit?

Socioeconomic research firm, SBM Intelligence revealed in a report that if the states are victorious at the Supreme Court, this may also be a victory for the Federal Capital Territory, adding that economically, the biggest losers will ironically be the states except for Lagos.

“A few states like Delta, Kaduna, Kano, Katsina, Oyo and Rivers may experience minimal impact, while 30 states which account for less than a fifth of present VAT collection will take significant revenue hits.

“Aso Rock may in fact be better off given that the Federal Capital Territory (FCT) generates the second-highest VAT (after Lagos) in addition to import and non-import foreign VAT. The law currently requires that the VAT pool be shared by Abuja (15%), the states (50%) and local government councils (35%) with 4% allocated to the FIRS as the cost of collection. Thus, in 2020, total VAT collection was N1.53 trillion with import VAT comprising N348 billion, foreign non-import VAT was N420 billion and local VAT was N763 billion.

“With the new ruling, Abuja is likely to retain more than the 15% it currently receives while states and LGAs will have less to share, particularly if VAT on federal contracts which is currently included in local VAT is excised as that will now solely enure to the federal government,” they said.

They added that due to a previous Supreme Court decision which stated that VAT covered the field of all consumption tax in Nigeria, a state cannot impose a consumption tax in addition to VAT, meaning that any state intending to collect VAT will have to repeal its existing consumption tax(es).

However, not all Valued Added Taxes would even be collected by the states, as the Nigeria Customs Service will continue to collect import VAT on international trade. The ruling however has set the ball rolling for a new kind of negotiation for states government as a new Vat structure needs to be negotiated to give states more economic opportunities in a period of falling oil revenue affecting monthly FAAC allocations which have gradually dropped for the states.

Ikemesit Effiong, Head of Research, SBM Intelligence says he does not expect the local government to mount a separate challenge during negotiations as he expects them to lobby together with the states. He said, “they (local governments) might be requested to be joined as parties to the suit when it goes on appeal but I don’t anticipate a separate suit by local governments”

On the possibility of states negotiating a shared VAT with the FG, he said, “This is certainly a possibility but it will be one that will be explored outside the courts. For one, the National Assembly will have to amend the enabling tax laws (as well as have states pass their own laws) to reflect any change in the sharing composition of the tax.”

“For another, all the states without exception would have to assent to this new model in addition to the central government,” he adds.

Effiong also insists that it would certainly be helpful for further restructuring processes to the states because it shores up their balance sheets but it will take copious amounts of political will to pass such reforms.

Bottomline

If successful, the changes would be felt harshly by the states and progress will take time, as some states contribute way more to VAT than some. However, it brings economic governance closer to the masses as governors will have more tools and resources needed for revenue generation to absolve and boost Human Development Indexes in their respective states. The road to restructuring will not likely be an event but multiple events leading to a respectable and fair federation.

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