By Tayo Ogunbiyi
It is no longer news that a Federal High Court in Port Harcourt has ruled that states, and not the Federal Inland Revenue Service (FIRS), should be collecting Value Added Tax (VAT) and Personal Income Tax.
Following the milestone ruling, the Lagos state government has rightly expressed its readiness to begin the collection of VAT in accordance with the judgment. The Lagos State House of Assembly yesterday, Thursday passed the Value Added Tax Bill and transmitted to the governor Babajide Sanwo-Olu for assent.
Already, the Rivers State Governor, Nyesom Wike, had signed into law the bill that authorizes the state to collect VAT.Unsurprisingly, the FIRS, an agent of the federal government has already filed an appeal against the judgment, while some northern states had expressed their preference for the status quo to be maintained.
Justice Stephen Pam, who delivered the judgment on August 10, 2021, also restrained the FIRS and the Attorney General of the Federation (AGF) from demanding the taxes from the residents of the Rivers State, which by implication affects other states.
VAT is charged on the supply of goods and services in the country, including those imported into the country, except the goods and services specifically exempted under the VAT Act.
By virtue of the Finance Act 2020, which took effect on February 1, 2020, the VAT charged on affected goods and services rose from five per cent to 7.5 per cent. Yearly, VAT contributes significantly to the total revenue generated by the government.
Until now, the FIRS had the responsibility of collecting VAT on behalf of the 36 states and the Federal Capital Territory (FCT). The sum collected is then shared among the three tiers of government, with the federal government taking 15 per cent, the states 50 per cent and local government 35 per cent.
No doubt, the Port Harcourt judgment truly reflects true federalism and it should be celebrated by every lover of democracy. In a true federation, that is the way to go. It is really a huge leap in our pursuit of true federalism.
Looking at it from this perspective, it is, therefore, not surprising that apart from the FIRS, some states in the north have conveyed fierce opposition to the judgment, given the impact it would have on their revenue.
VAT has been a major contributor to the consolidated revenue fund. In 2020, for example, total VAT collection was about N1.53tn, with import VAT being N348bn while foreign non-import VAT was N420bn and local VAT amounted to N763bn.
In the first quarter of 2021 alone, the National Bureau of Statistics disclosed that the country generated N496.39bn from VAT, which was an improvement on the N324.58bn it earned in the same period in 2020.
According to former Minister of Finance, Mrs. Kemi Adeosun, in August 2017, 55 per cent of the revenue generated by the federal government was from the VAT collected from Lagos State alone, while the remaining 45 per cent was generated from the remaining 35 states and the FCT.
The truth is that the collection of VAT by the states is the only way to assist states that are heavily dependent on federal allocations to be able to wean themselves and meet their fiduciary obligations. So, if there are areas where revenues can be exploited and extended, surely the state government will welcome it.
If the Lagos State government perfects its books for the VAT and followed it up by collecting the tax directly, then the state’s Internally Generated Revenue (IGR) may grow with about N400 billion yearly and the state’s annual revenue may be above N1 trillion.
A 55 per cent of the N763 billion that the federal government realised from local VAT in 2020 showed Lagos alone contributed over N400 billion as VAT last year.
In 2020, it was recorded that Lagos generated N418.99 billion as IGR and got N115.93 billion as federal allocation. So, if the state starts collecting VAT, Lagos IGR may exceed N1 trillion. Considering the huge financial outlay required by the state to constantly fix its infrastructure due to exerted pressure, Lagos surely needs every legitimate income it could get.
It is on this basis that Lagos has directed FIRS to stop issuing demand notices for payment of VAT in the state and demands that FIRS renders accounts, within seven days, of all sums it collected as VAT in 2021 in the state.
Legal practitioners have argued that the appeal by FIRS does not imply stay of action and state governments are the legal custodian of VAT until the Port Harcourt judgment is reversed by a higher court.
Besides, pooling VAT together to share among the states would continue to fuel idleness and leave the country perpetually poor. State and local governments could only be motivated to support an increase in economic activities if they take charge of the proceeds.
Originally published at Thisday