5 Implications of VAT Collection by States in Nigeria

On August 19, 2021, Nyesom Wike, the governor of Rivers State, resurfaced the former public discussion on Value Added Tax (VAT) that: should the state government be allowed to collect VAT, by signing into law a bill that allows Rivers State government to collect its own VAT? This article highlights 5 implications of VAT Collection by States in Nigeria

The executive order by Governor Wike was backed by the federal high court in Port Harcourt earlier that same month; the court ruled that the State government is constitutionally authorised to collect VAT and not the Federal Inland Revenue Service (FIRS).

While FIRS took the case to the Court of Appeal, Governor Wike yet again received another backing from Lagos State when on September 10, 2021, Governor Babajide Sanwo-Olu signed into law a bill that allows Lagos State to collect its own VAT. At that point, the public discussion gained more popularity, with the elites, economists, and concerned citizens engaging in the debate.

First, let us address the big question: what is VAT? 

VAT is a levied tax on the price of a product or service at each stage of production, distribution, or sale to the end consumer. Simply put, it is a consumption tax that is charged on the "value-added" at each stage of production or each value (supply) chain, with an exemption of some products.

The need for VAT has been questioned times without number, with many critics calling it a regressive tax, which implies that the poor pay more in tax than the rich. But nonetheless, it is impossible to argue the fact that VAT serves as revenue for the government. 

Nigeria introduced VAT into its tax system in 1993 with a rate of 5%. In 2019, under Buhari's administration, the VAT rate increased to 7.5%, (FIRC.gov.ng) which resulted in more revenue for the government. But the unfair allocation of the VAT revenue between states has majorly fueled the VAT war between some states and FIRS. 

The Court of Appeal is yet to pass a verdict on the ongoing case, leaving the hard question unanswered: what are the implications of VAT collection by states in Nigeria?

Below are 5 implications of VAT collection by states in Nigeria:

1. VAT is not generated at the point of sale alone. VAT is generated at stages of production, distribution and sales. If a state collects VAT, companies might be forced to pay multiple VATs because production, distribution and sales might be carried out in different states. 
2. Even if the State government is able to develop a mechanism to avoid double taxing, States that depend majorly on agricultural products will get hurt more than expected. This is because agricultural products are exempt from VAT. 
3. Though for a few states like Lagos, Rivers and Oyo State, collecting VAT will mean more money for them in revenue, as they currently receive less than what they generate. But to many other states, that will result in loss of revenue. 
4. State like Ondo and Kogi that find it hard to currently pay civil servant salaries, despite collecting more than 5 times in allocation from VAT than what they generate, will find it more harder to pay civil servant salaries when individual states start collecting VAT.
5. These disadvantaged states will find it hard to provide any form of development in the state which might cause a massive migration from the disadvantaged state to the advantageous state that will have more than enough to provide every form of development. 

Nigerian citizens' fingers are crossed, waiting for the Court of Appeal's decision. Will the Court of Appeal allow states to collect their own VAT or will FIRS be told to continue the assumed good work?