Jide Akintunde, Managing Editor/CEO, Financial Nigeria International Limited

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  • Fiscal Policy

Nigeria’s VAT brouhaha 06 Oct 2021

Added to the worsening Nigerian fiscal crises, featuring a deep plunge in government revenues, high debt-service-to-revenue ratio (which currently hovers at 98 percent) and rising public debt, is now a controversy over the collection and sharing of the Value Added Tax (VAT) among the three tiers of government. The consumption tax is centrally collected by the Federal Inland Revenue Service (FIRS) and shared in the ratio of 15: 50: 35 percent, respectively in favour of the federal, state and local governments of the federation.

The collection of VAT is not on the Exclusive List of the 1999 Constitution. This renders the FIRS as an impostor in collecting VAT, one of the many flaws of the constitution. However, revenue sharing is ingrained in Nigeria’s federalism, as it is elsewhere. The current effort at amending the constitution should have been appropriate for fixing the shortcomings, except that public confidence in the amendment process is low.

To address perceived inequity in the country’s VAT administration, vis-à-vis the amount of the tax revenue generated in Rivers State and what is remitted to it due to the federal sharing formular, the state governor, Nyesom Wike, went to court and obtained a decision restraining the FIRS from collecting VAT in the state. The subsequent VAT law passed by the state’s legislature provides that the state government would be responsible for collecting VAT generated in the state and only share the revenue with the local governments in Rivers.

The Rivers State’s VAT law is at once an effort to affirm and undermine federalism. In a federal structure, the federating units legally exercise the power to make laws insofar as the enactments is in accordance to the federal constitution. Prominent among the revenues that are pooled and shared in federal states among the tiers of government is the Value Added Tax, which is generated from the consumption of goods and services, whose value-chains often span internal boundaries and borders.

The conventional wisdom was that the Rivers State Government had begun to drive the country willy-nilly towards “fiscal federalism”, whereby the states are to have “control” over the resources within their boundaries. The Lagos State Government grasped at the straw to quickly pass its own VAT law, vesting itself with the authority to collect and retain the goods and services tax (GST) – as VAT is known in some other countries – in Nigeria’s commercial hub that attracts hordes of visitors and traders who make their money in other states.

For the avoidance of doubt, the overriding legal framework for VAT in a federation is central, partly to ensure ease of collection. In the European Union, VAT laws in the 27 member-countries are in accordance with the framework specified by the bloc. In Germany’s efficient VAT system, the sharing formula for the pooled VAT revenue is reviewed every two years to reflect current realities and ensure that the relatively poor states have the resources they need. The poorer states, which are further supported by federal grants, are not viewed as sponges, or parasites.

Quite contrary to their swagger, Governors Wike of Rivers and Sanwo-Olu of Lagos symbolise how unprepared most of Nigeria’s elected officials are for their responsibilities. The former is generating the VAT tantrum after the sixth of his maximum eight years of office. The latter, elected in 2019, and despite the history of litigations by Lagos State on VAT, apparently needed a cue to address what he would like us to believe he considers as a major fiscal issue in Lagos, where about half of the total VAT revenue in the country is generated.

As a presidential candidate, Muhammadu Buhari campaigned against the removal of petroleum subsidy. But as president, he presumed he could make a U-turn and remove the subsidy. But without a blueprint, government policies can hardly succeed, as the “total removal” of petrol subsidy since 2020 has continued to prove.

Revenue sharing has been a sore point in Nigeria’s fiscal federalism. The country is divided and weakened by the very framework that should unite it and make it strong. We have been saying monthly sharing of federally pooled revenues in Abuja serves as disincentive to productivity. In the same vein, extractive oil revenue is a “curse.”

Both appear to be true in Nigeria. But evidence from elsewhere indicate the contrary. As part of one prosperous Germany now, Eastern Germany – a separate country prior to its reunification with its wealthier Western neighbour, is better-off in the union and the country stronger as a whole. Dubai is built with petrol dollar and Norway has built over $1.4 trillion assets from fiscal saving from its oil and gas revenues.

British historian Paul Kennedy had observed that the politics of the time is going towards fragmentation, while the economics is towards integration. In today’s Nigeria, both have continued to fragment. The nepotism of the current power-that-be is deepening division in the country and, as a backlash, whipping up sentiments against the north for the action of its ruling oligarchy. That’s why the VAT brouhaha was conjured and the anti-open-grazing laws as a response to the perceived state protection for criminal herders and bandits.

Despite the grievances, and in search of sustainable solutions, we have to realise that a patchwork would not suffice. The overall fiscal framework of the country should be reviewed in a credible constitutional reform process. Victory secured by one state, or region, against the rest of the country is a non-starter. No part of the federating units should seek to dominate the rest and the entire country should be economically strong together.