Nigeria’s economy would be headed for trouble if states are allowed to collect Value Added Tax (VAT), Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, Taiwo Oyedele warned on Monday.
Recalling previous efforts of some states to challenge the legality of the federal government collecting VAT, Oyedele expressed concerns that allowing states to collect VAT could lead to a chaotic tax system that would harm the economy.
He stated this while briefing members of the House of Representatives on the Tax Reform Bills before the National Assembly.
VAT has been a contentious issue for years between the federal government and the states. Some states have previously challenged the legality of the federal government collecting VAT.
The Federal High Court in Port Harcourt, Rivers State, in 2021 issued an order restraining the Federal Inland Revenue Service (FIRS) from collecting value-added tax (VAT) and personal income tax (PIT) in Rivers State.
Rivers State argued that the FG’s powers to tax were limited to stamp duties and the taxation of incomes, profits, and capital gains, stressing that the power to administer VAT must be delegated to a state agency.
But while providing clarification on the contentious derivation-based model for Value Added Tax (VAT) distribution proposed in the new tax bill, Oyedele said states should stop being under the illusion that they would make more money when they collect VAT.
Part of the proposal in the new bill changes the sharing formula of VAT, reducing the federal government’s share from 15 percent to 10 percent.
However, the proposed legislation includes a caveat that the allocation among states will consider the derivation principle, a proposal that was rejected by the Northern Governors Forum.
Currently, under Section 40 of the VAT Act, VAT revenue is allocated 15 per cent to the Federal Government, 50 per cent to the States and FCT, and 35 per cent to Local Governments.
Oyedele recalled that VAT was introduced in Nigeria in 1993 by the VAT Act No. 102 of 1993 as a replacement of the sales tax.
He said that despite the states’ government collecting sales tax at that time, there was no meaningful progress.
Oyedele explained: “Some states believe that if they can make VAT a state thing, they will make a lot of money. We all know that states like Rivers state went to court. Lagos state has been to court so many times, and Lagos has a VAT law. Rivers too has a VAT law. When I read those VAT laws, my heart broke. Those VAT laws are worse than when we introduced VAT in 1993.
“In 1986, the military introduced sales tax. Sales tax was collected by states. Five years later in 1991, no progress. They were struggling. Then the military set up a committee and that committee considered and said VAT is a better consumption tax for Nigeria but can’t work as state tax, it has to be collected centrally.
“So if there is any state that is under the illusion that they will start doing VAT at the state level, they will lose more than half of what they are getting now. When states start collecting VAT, all of us will be in trouble”.
