VAT row, revenue and fiscal federalism


Fiscal federalism gained a toehold in Nigeria’s twisted federation on Tuesday when a Federal High Court in Port Harcourt, rejected an application by the Federal Inland Revenue Service seeking a stay of execution of the court’s earlier judgement affirming the right of the Rivers State Government to collect Value Added Tax within its territory. Consequently, acting on the landmark judgement delivered last month, Rivers, which had filed and won the suit, Lagos, Adamawa, and Akwa Ibom states began moves to legalise VAT collection within their various jurisdictions. This ruling and the ongoing review of the revenue allocation formula offer a pathway for state governments to work strongly to wrest their autonomy from the centre and end the culture of sharing and dependency that distinguishes Nigeria from other federations.

Ordinarily, there should be no controversy over VAT. Defined as a ‘goods and services’ tax, it is a consumption charge levied at every stage of a transaction, but ultimately borne by the final consumer of goods and services. Since the consumer resides in and enjoys public services in a state, naturally, the state should collect the tax. Similarly, states, as federating units, should not be dependent on federal allocations for survival as 33 of the 36 states are today as shown in data from the National Bureau of Statistics.

According to the Tax Policy Center, a joint research venture by the Urban Institute and the Brookings Institution, unlike in a unitary government, “fiscal arrangements —assignment of taxing and spending powers— are at the very core of the contract between the constituent governments which combine to form the federation.” While the central government must necessarily retain certain fiscal powers, they add that “the comprising units retain a sovereign right to conduct fiscal transactions of their own.” This is the core of federalism.

But since it was introduced in 1993 to replace the sales tax law of 1986 that was administered by the states and the FCT, the Federal Government has exerted a monopoly over VAT collection. The FIRS collects the tax and deducts 4.0 per cent as cost; the states receive 50 per cent, the local governments 35 per cent, and the centre 15 per cent. In 2020, N1.53 trillion was realised from VAT, higher than the N1.41 trillion from Companies’ Income Tax and slightly less than the N1.6 trillion collected by the Nigeria Customs Service.  The FIRS has been fighting furiously against the judgement, arguing wrongly that it is more equitable to administer VAT nationally.

As in the sharing of revenue from the Federation Account among the states and the 774 LGs, injustice, dependency and severe constraints on fiscal independence and development underline the VAT imbroglio. For instance, Lagos and Rivers contribute over 70 per cent of VAT, others contribute very little. As Nyesom Wike, the governor of Rivers State, put it, “In June, N15.1 billion was collected as taxes from Rivers, but N4.7 billion was given to Rivers; N46.4 billion was collected from Lagos, but Lagos was given N9.3 billion. Kano generated N2.8 billion and got N2.8 billion.” Assured of free money from this and oil revenues, the states are indolent, parasitic, and dependent.

That is not all. Kano, Jigawa, Kebbi and some other northern states routinely seize truckloads of alcoholic beverages to destroy in pursuit of exclusionary religious preferences, yet collect VAT, customs, excise and other charges and levies arising from the production and trade in the products. Wike thundered, “You can’t destroy beer in your state, yet share from VAT on beer. Free money has promoted laziness; if you want to be governor, grow your state’s economy.”

The ongoing nationwide sensitisation by the Revenue Mobilisation, Allocation and Fiscal Commission also offers an opportunity to revert Nigeria to true federalism. Currently, after statutory deductions and the 13 per cent derivation accruable to oil-producing states, the centre retains 52.68 per cent, the 36 states share 26.72 per cent, and the 774 LGs 20.60 per cent.

The NBS figures reveal that while the 36 states and the Federal Capital Territory received N2.29 trillion from the Federation Account in 2020, their combined internally generated revenue was N1.31 trillion. This translates to 174.8 per cent of non-debt revenue coming from the central pool. This is not sustainable. These figures hide troubling disparities: only two states, Lagos, and Ogun and the FCT had IGR higher than federal allocations in 2019. In 2020, Jigawa generated only N8.6 billion, Niger N10.5 billion, and Benue N10.4 billion, less than 10 per cent of their expenditure like four other states. Lagos generates over 50 per cent of CIT, 55 per cent of VAT and had an IGR of N418.99 billion in 2020, but received only N115.93 billion from the Federation Account. This is a gross injustice.

Most states, without lifting a finger, get the largest chunk of their revenue from federal allocation. In the United States, states raise revenue from income, sales, property and other taxes; and transfers from the federal government. There, funding from the central government comes in three ways. Categorical grants are federal transfers for specific programmes and projects favoured by the federal government: here, states and LGs have little discretion in applying the funds and include Medicaid, food stamp programmes; block grants are intervention funds for programmes that however give receiving states and LGs some discretion in applying for the money, while general revenue are funds given to states, cities, counties, towns, and villages as support which the recipients spend as they deem fit.

Crucially, the US federal funding support provides no more than 30 per cent of state revenues. States rely on property sales and consumption taxes while income taxes are jointly collected with the centre. Adopted to replace the GST in 2005, VAT is enforced by India’s 28 states under rules varying from state to state. In Canada, there are two types of sales taxes: the Provincial Sales Tax levied by the 10 provinces and the GST or VAT levied on behalf of all federating units by the federal government. Where a GST is undertaken, it is by consensus by the states and on an agreed sharing format, not by compulsion. The FIRS’ arguments on exclusive federal collection cannot stand. Australia’s states and territories receive all the revenue from GST; 23 per cent of all state revenue comes from this and 31 per cent from state-levied taxes.

Since the military rule started twisting basic federal principles, Nigeria’s Federal Government has been getting away with an outlandish violation of the rights of the states. As a natural federation, states should have control over resources and operate as autonomous economic units. Now, Wike has demonstrated that the judiciary can be relied on to reverse the Federal Government’s absurd violation of the 1999 Constitution. Other states should follow Wike’s example and widen the scope of federalism. Lagos, under Bola Tinubu, and Babatunde Fashola, had similarly used the courts to recover state sovereignty over lottery taxation and regulation, hotel/hospitality, sales tax inland waterways and telecoms installations. As Attorney-General of Lagos State, Vice-President Yemi Osinbajo led the charge. Other states should join and stop their beggarliness. Their current clamour for higher allocations from the Federation Account is misplaced; they should rather insist on 50 per cent derivation for natural resources, the surrender of federal monopoly over mining, railways, and power as well as ports.

As the forces of statism, privilege and domination rally, states should remember that vigilance is the price of liberty, they should dig in and pursue greater autonomy, state policing and resource control and end the prevailing anomalous system described by some as “feeding bottle federalism.”

Punch editorial


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