VAT

VAT Collection: How History, Law Favour States

Although the Sales Tax Law which metamorphosed into Value Added Decree of 1993 was not repealed, when the government of General Ibrahim Babangida saw the tax as a veritable source of revenue from the states, they did not bother to lay the necessary legislative foundation but rather promised the states that they will be better off in a centrally administered Modified Value Added Tax, MVAT, regime.

Initially, the idea was to have a Modified Value Added Tax Commission which was to be constituted by representatives from each of the states of the federation. Consequently, a civil servant was released by the government of Rivers State in 1993 after a series of examinations to be part of the MVAT commission representing Rivers and Bayelsa states. At the time, Mr Olashore was the Minister/ Secretary for finance, but Professor Sam Aluko, who was the lead consultant was in charge of the selection of representatives of states had complained about limited time to build the needed infrastructure for the take off of the MVAT Commission.

Consequently, a bargain was struck to use the facilities of Federal Inland Revenue which were readily available nationwide. Then 15% was approved as cost of administration of the tax which was to be paid to Federal Inland Revenue, while 50% was for the states and 35% was for the Local Government Areas. What each state got was shared based on the formulas of derivation, population, land mass and equality. Unfortunately, these indices robbed the states like Lagos, Rivers Delta, Ogun etc. where the VAT was actually generated but had less population while Kano, Kaduna, Sokoto etc that have more population figures and land mass but forbid some VATable activities such as drinking of alcohol benefited more.

It is important to clarify that Value Added Tax is collected at different stages – from the process of manufacture, to wholesale, distribution to final stage of consumption. So it is the final consumer that bears the burden of the tax. Ironically, while alcohol is consumed in the south, with the associated burdens, including sicknesses, taxes arising from the consumption is shared with states where alcohol is prohibited. In the constitution of Nigeria, sales tax is strictly meant for the states. The trick of promising to set up an MVAT commission and recruiting one staff from each state was to corner what rightfully belongs to the states to pass on to the Federal government. VAT has input output mechanism. It is collected at different stages whereas sales tax is collected at one point. The tax element in sales tax cascades since there is no refund mechanism. Again input Output are not taking into consideration under sales tax regime.

 

Our candid opinion is that, it will be necessary for the Rivers state Government to corroborate with Lagos and other Southern states in this struggle to get back what rightfully belongs to the states. It is obvious that some states even in the south will fight against this effort because they feel that they are making more from a central administration, while others will complain of lack of administrative capacity and infrastructure to run a VAT regime.

It is important that states begin to strengthen their Revenue boards, and in the case of VAT, they can constitute a commission to properly manage the tax instead of lumping it up with other tax types. Nigerians have a very high marginal propensity to consume and there is no doubt that consumption taxes will be veritable sources of raking in more revenue to the state governments. We commend the bold initiative of the Rivers State government under the leadership of Barr. Ezenwo Nyesom Wike for taking a good step to activate the principles of fiscal federalism in this sector  in Nigeria.

 

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