How VAT Could Help States Create Value, Improve Business Environment

With Rivers State serving as a bellwether challenging and winning the federal government on the right to collect the value added tax (VAT), there is growing support among economists that the tax would help states create value and improve business environment among states.

With Lagos State Government said to be just a few steps away from actualising its move toward the VAT collection in its jurisdiction, and several other states in the south reportedly making similar move, NATIONAL ECONOMY has gathered from members of its board of economists, as well as other economists that the development, if actualised in more states would make the states more viable and more independently make decisions on their unique path to development.

Economist, research fellow, and member of the board of economists, NATIONAL ECONOMY, Dr. Bongo Adi said Nigeria needs the development to shake off complacency and for other states to reinvent and innovate on revenue collection and development.

He said the development will alter fiscal allocation and enhance decentralisation, as well as help states like Lagos, Ogun, Oyo, Anambra, Imo, Abia Enugu and Kano to determine their own development pace. He stated that the court ruling in Rivers State has settled the matter, which is a victory for democracy and fiscal federalism.

He also said with the ruling and subsequent development, states will be able to hold themselves accountable, and there will be reduction in the sharable revenue from the Federation Accounts Allocation Committee (FAAC), as well as inculcate the right incentive of accountability and efficiency.

Dr. Bongo Adi said the ruling in Rivers State is one of the most significant developments in terms of fiscal federalism in Nigeria’s modern history.

Economist and former director general (DG) of Lagos  Chamber of Commerce and Industry, Dr Muda Yusuf also told NATIONAL ECONOMY that the controversy over the jurisdiction of VAT  between the states and federal government is for the judiciary to settle. “It is a question of law and the interpretation of the law. There are legal as well as equity issues in the VAT question. But an expeditious hearing of the matter by the judiciary should reduce the risk of disruption and friction between the states and the federal government. However, In many jurisdictions around the world, VAT is essentially domiciled with the subnationals.  In some instances it is imposed as a consumption tax.

“The current allocation mechanism of VAT proceeds raises fundamental questions of equity and fairness.  The derivation factor in the distribution of VAT revenue should be much higher than what obtains presently.

“The reason is that there is a strong correlation between the volume and scale of economic activities,  VAT revenue generated and negative externalities to the host states.  Such economic activities generate proportionate negative externalities which the host states have to take responsibility for.  Such externalities include impact on the environment,  pressure on economic infrastructures such as roads,  pressure on social infrastructure such as schools and hospitals, social problems such as heightened criminality,  waste management,  urbanization challenges such as proliferation of slums, traffic congestion etc. These externalities put enormous pressures on the finances of the subnationals that provide the bulk of the VAT revenue.  A stronger derivative principle of up to 70 percent should be incorporated into the sharing formula for equity and fairness,” he said.

“What is unfolding in this conversation are the challenges of a unitary system which we wrongly characterize as a federal system.  This situation underscores the imperative of fiscal federalism.

“If the position of the federal high court in Port Harcourt is upheld by the appellate courts,  states currently generating high VAT will be the major beneficiaries while states with low generating capacity will be the losers. However, such a scenario would spur the states to be bullish in their quest to attract investors to their states.  It is investment growth that would boost VAT revenue, and other revenues for that matter.

The good news is that the revenue allocation formula is being tinkered with at this time.  The inequity in the distribution of VAT proceeds should be addressed in the context of the ongoing review,” Dr. Yusuf added.

Also speaking with NATIONAL ECONOMY in Port Harcourt, a financial analyst, Ignatius Chukwu, with the development, Rivers State will now be the one remitting to the federal government and not the other way round.

Chukwu said: “The state that collects the VAT will have extant value. As you are collecting the money and putting it in an account, there are values it will be creating before you even total it. That is why banks are struggling to be the one that will keep your money or be the one that will collect your money.

“That time the money is coming in it will be giving some interest, some form of accumulation. There are things that will happen that will make the person that keeps that money to have a lot of value.

“So, that state that is collecting it, while the collection is still in progress, will have a pool of money that will cushion its account. In sharing, it is no longer the federal that will share and give you your own, it is the state now that will follow the rule.

“When they collect, they will remit the one that belongs to the federal government to it. Instead of the federal government collecting and remitting to the state, the state has early access to money and time value of money. They now give accurate remittance because they are the one to collect and give to somebody his own share.”

International business & project development consultant at Ant Hill Concepts Limited, and member of the board of economists, NATIONAL ECONOMY, Dr. Emeka Okengwu caveated that Nigeria is a common federation, and physical and material infrastructure are of the consequence of the states or federation. He also said in the eventuality of a wider ruling of VAT being collected by states, states and the federal government would have to come to harmonization at points of entry.

Bolstering that concern, chief executive officer, Economic Associates, Dr. Ayo Teriba told NATIONAL ECONOMY that by the understanding of value added tax; it cannot be collected by the 36 states of the federation because the modus operandi would be chaotic. He stated that each state would have to receive and make payment of goods and services at entry and exit points.

He said that is the reason why payment of sales tax was abrogated at the adoption of the VAT in 1995, which consequently made the federal government the payment agent to distribute to the states. He said that states collecting such a tax would only be possible if the states reverted to the collection of sales tax.

However, retired lawyer Dele Farotimi, in an interview with Arise Television, supporting the ruling of the Federal High Court in Port Harcourt said VAT is a local tax and must benefit the localities in which they are collected. He said the argument put forward by the government that the VAT is contained in Decree No. 24 does not substantiate that claim. He cited that there is incongruity where VAT would be collected from him in Lagos and be distributed in another state where the item he consumed in Lagos is abominable in the other state that benefits from that tax. He argued that VAT must benefit the localities in which they are collected.

Before the 1950s, no country applied Value Added Tax (VAT). Today, more than 70 per cent of the world’s population lives in countries with VAT, also called goods and services tax (GST).

The first country to implement VAT as we know it today was France in the early 1950s.

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