Written by Anthony Inaede
Any discerning observer of what is happening with the VAT issue will recognise that there is a background to it. The facade of ‘fiscal federalism’ that protagonists are using is just a smokescreen for underlying causes.
Unfortunately, most people are unable to delve deeper into topical issues in Nigeria today because of a kaleidoscope of bigotry, tribalism, regionalism, sectionalism, religion and other divisive sentiments. The politicians who push these narratives understand so well that we suspend our thinking caps when these sentiments are thrown into the mix.
Furthermore, as a people, we are to shortsighted to even contemplate the medium and long term implications of some of the narratives we parrot.
Data is hard evidence, which cannot be controverted. Truth is a tyrant that doesn’t campaign for votes. In the end, we shall be confronted with its brutality when reality stares us in the face.
Let’s even start by examining what VAT means. VAT is an acronym for Value Added Tax. Operative word is ‘Value Added’. So in a chain of operation in the production of a good or service when value is added, or form changes there is an incidence of taxation. However, the protagonists of the imposition of VAT by state governments want us to believe that VAT is wholly a consumption tax. This is very disingenuous, and far from the truth. I will follow up this with the definition of VAT after posting this.
Matter of fact, is that VAT is collected at the point of consumption of goods and services but doesn’t make it wholly a consumption tax. In the chain of production, and for the purposes of taxation the point of consumption of a good or service is the end of the spectrum. In between, there are several levels of value addition and supply chain that must have taken place before the final end of the spectrum of consumption. So, for instance, a good consumed in Lagos that wasn’t produced in Lagos doesn’t mean that all the value and supply chains took place in Lagos. This is the fundamental principle underpinning value added taxation.
Why is VAT collected at the point of consumption? The reason is quite simple, and it is this fundamental principle that the protagonists want to destroy, which will have serious consequences for the economy and people of Nigeria. The reason for collecting VAT at the point of consumption is to prevent a situation of multiple taxation. If you consider a product or service with varying levels of value addition and supply chain, if taxed at every of these levels, the taxes will be unwieldy. Thus, every jurisdiction in the world where VAT is charged has an agreed formula for calculating value addition, which is then harmonised to come up with a single rate across board. Again, this is the principal reason why VAT in any jurisdiction is not imposed by Sub-Nationals or local authorities. I don’t know of any jurisdiction in the world where VAT is imposed by Sub-Nationals or local authorities. I challenge anyone who knows to tell me.
The divisive issues thrown into the mix are simply laughable. So a serious issue has been reduced into just the issue of the restriction of the sales of alcohol in some states. I am a beer man, and I truly love my beer. In all my years of drinking beer, the only times I have recalled paying VAT for beer was when I go to some highbrow hotels or clubs. The vast majority of beer sold and consumed in Nigeria is done at roadside bars, ‘abeigi’, street corner shops and in-house bars. I can also tell you for free that the volume of alcohol consumed in Sabon Gari in Kano will dwarf that consumed Ado Ekiti or Ijebu Ode.
Governor Wike says that he received 2billion monthly from VAT. He failed to tell you how much the local governments in Rivers State receives from VAT allocation from the FGN. For teasers, in 2020, Rivers State contribution to VAT coffers was 42 billion. The Rivers State Government and local governments got a total of 39 billion. That’s a difference of 3 billion.
Now to some data for us to have a better understanding of the issue. Proceeds of VAT is shared amongst the 3 tiers of Government after 4% collection charge in the following way:
Federal Government – 15%
State Governments – 50%
Local Governments – 35%
Of the proceeds of VAT the FG and the FCT generates about 61% via imports from the seaports and international airports while the States generate 39%
Of the 39% generated by the States, Lagos and Rivers State generates less than 70%
Now imagine a situation where the courts strikes VAT off the exclusive list. The Federal Government and FCT get to keep their 61% while the States will hussle for the remaining 39%. So, what now happens to the Local Governments where the transactions actually take place???
So, in the not too distant future, the States that are enacting their own VAT laws will realise that they were chasing a mirage. The version of ‘fiscal federalism’, of ‘food is ready’ mentality obtained from the courts is just a phyric victory. They don’t even have the structures the FIRS built over the last 20 years to even be able to collect the VAT.
What will be their reaction in the circumstance? Brace up for thuggish tax collectors. States will enact their own versions of the VAT law to include things like food that were exempt from the federal law. At the point of buying a goat VAT will be paid. At the point of slaughter VAT will be paid. At the point of eating it at a restaurant VAT will be paid. There will be multiple taxation, increased inflation, and the ease of doing business will be more difficult, as well as and cost of doing business will become higher.
Lagos and Rivers States pride themselves as the biggest contributors to VAT collection in Nigeria. This is another mirage. Lagos State for instance enjoys what you can term as ‘headquarters effect’. What this means is that for tax reporting purposes companies with headquarters in Lagos file their VAT returns there. For instance, a company like MTN which sells airtime and internet services all across the country file their VAT returns in Lagos. In Rivers for instance, NDDC has its headquarters in Port Harcourt. If it goes to Innosson Motors in Enugu to buy vehicles, it files its VAT returns from Port Harcourt.
Let me end by going back to the background I alluded to in the beginning.
There are two basic things making the state governments to react the way they are now.
1). Local Government autonomy is bitting hard on them. They are finding it increasingly difficult to corner the resources of the LGAs especially with the NFIU breathing down their necks
2). The Governors are angry that the 3% of COPEX in the PIA is going directly to the oil bearing communities. They want it to come to the state governments just like the 13% derivation.
Interestingly, in the agenda there are sub agendas. Some are being blind sided by the sheninighans playing out. Ultimately, there will be many losers, including those cheering for the faux fiscal federalism carved in the image and likeness of the key players.
‘Siddon look’ mode activated😃