Should Nigeria’s VAT System be Decentralized?

Foremost international financial institutions have opined that Nigerians need to pay more tax to finance the country’s development drive. But Nigerian businesses have to deal with numerous macro-environment issues and multiple taxations. In the midst of the argument on not paying enough taxes, Rivers and Lagos states have championed a strategic offensive, challenging the federal government over Value Added Tax (VAT) collection and remittances.

This new drive by state governments is aimed at realising the bigger picture of true federalism in Nigeria. Nonetheless, it raises salient national questions. If granted, will the collection be effective? How do you resolve the dichotomy on VAT contributions? How does it affect the whole canvas of growth and development in Nigeria? How will this affect the common man?

Leakages and Evasion

Nigeria has a serious issue of tax leakages and evasion where all levels of government and collection agencies are complicit. An ICIR investigation revealed the multifaceted racketeering ongoing in tax collection and remittance in Lagos’ transport economy and this came at a time when informal taxes are not easily captured in Nigeria’s taxation framework.

Mohammed Nami, the Chairman of the Federal Inland Revenue Service (FIRS) revealed that the country has only 41 million taxpayers which is merely one-fifth of its total population, a case in point for tax evasion, avoidance or lack of an airtight tax collection framework. The 2016 #PanamaPapers investigation and recent expose from the #PandoraPapers show how wealthy and influential Nigerians avoid paying taxes.

Without a doubt, Nigeria needs a tax structure that increasingly includes more eligible people and plugs the loopholes being exploited to evade or avoid taxes.

Forbidden Taxes or Not

VAT has been implemented in Nigeria for twenty-seven years and still running. Over 500 food items are exempted from paying VAT including bread, cereal, fish, milk, fruits, yam, and water. Services such as rent, tuition, medical services, shared passenger transport, commercial air travel, and education books and materials are exempted too. But, professional services; telecommunication companies; breweries, bottling and beverages; other manufacturing services; commercial and trading services; transport, and haulage are the top sectors that pay more VAT in Nigeria.

In some parts of Nigeria, you cannot openly drink beer because the states operate sharia law, and alcoholic drinks are banned within their territory. But when VAT is to be shared, states that have forbidden alcoholic drinks to get more from VAT alcohol revenue due to the revenue-sharing formula, which is indifferent about the income source. This is the premise for why some states and their governors want autonomous control on VAT collection. But not all states have the capacity to collect, ensure auditing compliance, and finance the cost of collecting VAT. If certain parts are shaky [for states], it will be detrimental to the survival of the whole.

Double and Increased Taxes

For businesses and entrepreneurs that cannot evade or avoid taxes, the issue of double taxation sets in, as opined by the Financial Times. The Lagos governor has already signed the VAT bill into law, and this will create a double taxation problem when implementation begins because the existing consumption tax law in the state is yet to be repealed.

Nigerians thrive on a panic economy, inevitably, there will be higher costs of goods and services arising from input VAT claim and refund complications. This will spill onto items which are exempted from tax payment too. Rivers and Lagos are also proposing a reduced percentage from the federal government’s 7.5% but small businesses exempted by the federal tax law will have to pay taxes now including those with less than a ₦25 million turnover except they are exempted by the state.

Who Benefits More?

This is a debatable phenomenon, but one thing is quite certain, if states are granted autonomy to collect VAT, it will create a power shift, leading to more decentralisation. But, this redistribution would have significant implications for political stability and fiscal sustainability. For instance, it will definitely create a rift of VAT input among states when it comes to sourcing for raw materials.

Experts opined that the federal government will make more money if it stops collecting VAT on behalf of states but more states cannot break even if they have to collect VAT or any other tax by themselves, as they are still grappling with providing security and relative stability for the people.

To create a win-win situation for all stakeholders, the federal and state government needs to: create a balanced tax structure and system that plugs all the loopholes exploited for tax evasion and avoidance; address inequity with a to-each-according-to-his-contribution principle, and champion a citizen first economy.

Olakunle Mohammed explores the interlink of public policy, development, education, and being Nigerian. He tweets @Olakunile.

First appeared in Ominira Initiative.

Photot by AMISOM on Iwaria.com.