With a court ruling assigning the collection of sales tax (VAT) to the states, and with the states of Rivers and Lagos contributing more than 70% of the country’s sales tax collection assets and enacting laws that they, not the federal government, should collect authorize VAT in their states, many economically disadvantaged states in Nigeria may not be able to meet their financial obligations as Abuja is likely to lose tax revenue.
Although the Abuja Court of Appeal has temporarily suspended the Rivers state government From the collection of VAT to the settlement of all related legal disputes, the latest ruling by a federal court in Rivers against the federal government to levy VAT has sparked a supremacy battle between Abuja on the one hand, and Rivers and Lagos on the other.
This ruling is not New as the judge in another ruling by the 11th National Assembly to pass laws on the collection of taxes, did not extend to the value added tax. The Federal Inland Revenue Service (FIRS) opposed this decision and urged states to continue to reimburse sales tax.
The ruling on paper is likely to favor states and local governments that currently account for 75% of sales tax revenue.
However, this may not be the case as some state governments and municipalities with little economic activity have less to share as the sales tax on federal contracts, which is included in domestic sales tax, goes to Abuja.
It will also take time for some states to put in place the processes necessary to collect VAT, a luxury they are unlikely to be able to afford in the short term and a situation that could result in them losing significant revenue and putting them even more at risk of strait.
In 2019, VAT accounted for and contributed more than 16.2% of gross domestic product (GDP) thus contributes significantly to total government revenue. Most Nigerian states, however, rely on funding from the Federal Allocation Account Committee (FAAC) for their low internally generated income (IGR).
Also, residents of these economically disadvantaged states would not receive basic amenities from their state governments due to the lack of revenue from sales tax while businesses may be forced to pay multiple taxes in the various states in which they operate.
On the plus side, however, the federal government, according to a PricewaterhouseCoopers ( PwC) could gain more if you consider that around 27 percent of sales tax revenue currently comes from foreign non-import tax.
In 2020, for example, the federal government’s sales tax was 22.7 percent, while foreign sales tax was 27.4 Percent and the local sales tax was 49.8 percent.
As a result, w Abuja will likely keep more than the 15 percent it currently shares, while some states such as Lagos, Rivers, Kaduna, Oyo and Kano are likely to benefit from this given the sizeable economic activity in these states that have high VAT revenues
In addition, the biggest beneficiaries could only be those in favor of real federalism and restructuring.
So far, the federal tax authority (FIRS) was responsible for collecting VAT on behalf of the 36th States and the federal capital area.
This collection of sales tax under Section 40 of the Sales Tax Act is then at the rate of 15 percent to the federal government, 50 percent to the 36 states; and 35 percent to local governments (minus 4 percent of FIRS collection costs).
According to data submitted by FIRS to the National Bureau of Statistics (NBS), Nigeria could have earned around 2.5 trillion yen from January 2020 to June 2021 at a sales tax rate of 7.5 percent.
The breakdown shows that FIRS raised approximately 1.53 trillion yen in 2020, with import sales tax 348 billion yen (or 22 , 7 per percent), while non-import foreign sales tax was 420 billion yen (or 27.4 percent) and local sales tax was 763 billion yen (or 49.8 percent).
In the first quarter of 2021 the VAT collection was ₦ 496.39 billion, while it increased by 15.8 billion to 512.25 billion in the second quarter.
The breakdown of VAT generation for the second quarter of 2021 shows that 187 , 4 billion non-import VAT on foreign goods, while the balance of ₦ 117.1 billion from the Nigerian Customs Service’s VAT on imports.