taxes

VAT War Sparks Restructuring, Fiscal Federalism

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Wike & Sanwo-Olu VAT caricature

September 19, (THEWILL) – On Thursday, September 16, 2021, what has come to be known as the ‘VAT war’ assumed a larger dimension and achieved a significant mileage forward since Governor Nyesom Wike of Rivers State legally took on the Federal Inland Revenue Service (FIRS) over the right of his state to collect Value Added Tax and passed an enabling law.

That day the Southern Governors’ Forum met in Enugu and issued a communique, read by its Chairman and Governor of Ondo State, Oluwarotimi Akeredolu, SAN.

Among other resolutions that dealt with their renewed call for the presidency to be zoned to the region in 2023, the encouraging response by member states to the directive to pass anti-open grazing law and developments surrounding the Petroleum Industry Act, Akeredolu said with firmness that the Forum “reaffirmed its earlier commitment to fiscal federalism as resolved at the inaugural meeting of the Forum held on Tuesday, May 11, 2021 at Asaba, Delta State and emphasized the need for the southern states to leverage the legislative competence of their respective State Houses of Assembly, as well as representation in the National Assembly to pursue its inclusion in the Nigerian Constitution through the ongoing constitutional amendment.”

Then he added, “The meeting resolved to support the position that the collection of VAT falls within the powers of the states.”

Commitment to fiscal federalism and resolution to support the position that the collection of VAT falls within the powers of the states, is an open declaration that the pace set by Governor Wike would trend and achieve a life of its own until most member states own proprietary rights to VAT collection.

Akeredolu, a Senior Advocate of Nigeria should know the possible outcome of the ongoing litigation on VAT and its implication for fiscal federalism.

THEWILL recalls that Lagos State, the commercial nerve of the country and neighbouring Ogun state, one of the three most viable states in the country, in terms of Internally Generated Revenue (IGR) had passed the VAT law in tandem with Rivers, while the former had expressed its readiness to join Rivers in the FIRS suit at the Appeal Court.

The Appeal Court had on September 9, 2021 ordered the Rivers State and Lagos State governments, which had then passed VAT Law in their respective states, to maintain the status quo over VAT collection. The appellate court had also granted the prayer of FIRS for a stay of execution of the Port Harcourt Federal High Court judgment. But Rivers has gone to the Supreme Court to challenge the Appeal Court ruling.

OLD WINE IN NEW SKIN

The VAT matter is not entirely new. On the heels of the current ‘VAT war’, the Chartered Institute of Taxation of Nigeria (CITN) recalled that there had been previous judgments nullifying the VAT Act or part of it. It issued a statement signed by its Registrar/Chief Executive, Adefisayo Awogbade. CITN said it was waiting for the appellate courts to take a definite position on the matter before making their comments.

Similarly,  Professor of Finance and Accounts at Nasarawa State University and immediate past President, Association of National Accountants of Nigeria (ANAN), Mohammed Mainoma, told THEWILL that it was the economy of collection of the VAT that made the states allow the FIRS to play that role.

“The case has been determined before when Lagos went to court to insist that consumption tax falls within the jurisdiction of states and a court ruled in their favour. Maybe the Rivers State Government felt short-changed and they want to collect themselves,” he said.

According to Mainoma, the judgment has not said anything new. It was the ease of collecting the VAT that made FIRS to be the collecting agency for the states and the proceeds are distributed to the states in accordance to how it accrued from the state.

“If every state were to collect, the cost of collection to the states would have been higher.  It is the economy of collection that made the states to allow FIRS play that role, Mainoma said in a note to THEWILL,” he added.

Explaining further, a legal practitioner and tax expert, who spoke on the condition of anonymity because of his assignments from the government, said the claim that FIRS assumed the responsibility of collecting VAT on behalf of the states to save the states the cost of engaging in the exercise was false.

He told this newspaper that the issue for determination was the constitutionality of the VAT Act. “The Constitution is the grundnorm. Its provisions on taxes are clear and well spelt out. The VAT Act is also there with its provisions on taxes well spelt out. The issue at stake is whether the VAT Law should override the Constitution or whether its provisions contradict the Constitution which is the supreme document,” the tax expert explained.

He agreed, like many others, that the parties involved will not let go because of the volume of revenue generated through VAT over the years.

For Mr Taiwo Oyedele, Fiscal Policy Partner and Africa Tax Leader at PwC, an international professional advisory service firm, enforcement of the judgment has wider fiscal implications, which is the import of Wike’s move, actively supported by Governors Babajide Sanwo-Olu of Lagos and Dapo Abiodun of Ogun State who have passed the law and the wider body of the Southern Governors’ Forum.

According to him, in a published note he referred THEWILL to when he was contacted for comments; “If the judgment is enforced or upheld on appeal, it will apply to other states and not just Rivers State. This means each state would administer VAT within their territory. By implication, FIRS will administer VAT within the FCT and non-import foreign VAT, while the Nigeria Customs Service will continue to collect import VAT on international trade.”

BACKGROUND

Contrary to the tenets of true fiscal federalism, Nigeria’s states have grown increasingly dependent on the Federal Government for revenue in a manner that suggests the federating units have offered to be taken hostage by the centre.  The trend, which can be traced to the economic crisis of 1979-1980, was reinforced by the enactment of the 1999 Constitution, which launched Nigeria back to democracy after 16 years of unbroken military rule.

The civilian governments inherited 36 states and the Federal Capital Territory from the military. The Centre had over the years appropriated to itself the lion’s share of the resources meant for the federating units to cater for their needs and adequately address the grassroots development. It was a ruinous process that had its origin in the Nigerian Civil War years.

The structure of the 1999 Constitution empowered the Federal Government in a manner that aggravates the urge to deal with the states like fiefdoms, especially in the aspect of resource control. The Exclusive, Concurrent and Residual…

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