VAT Judgment: 30 states may suffer revenue drop - Experts

Tax experts have said that the new judgment on the administration of Value Added Tax in Nigeria might adversely affect the revenue of states, hamper the ease of doing business in the country and repel foreign investors.

A Federal High Court sitting in Port Harcourt had on August 10 held that the Rivers State Government and not the Federal Inland Revenue Service was the rightful authority to collect VAT and Personal Income Tax in the state.

According to the experts, the judgment is on the premise that only the state is constitutionally entitled to impose taxes of the nature of consumption or sales tax in its territory.

A tax expert and the Africa Tax Leader at PricewaterhouseCoopers, Mr Taiwo Oyedele, who spoke to our correspondent in a telephone interview, said if the judgment was enforced or upheld on appeal, it would apply to other states.

“This means each state would administer VAT within their territory. By implication, FIRS will administer VAT within the FCT (Federal Capital Territory) and non-import foreign VAT, while the Nigeria Customs Service will continue to collect import VAT on international trade,” he added.

According to him, revenues are expected to decline significantly in at least 30 states as a result of the new judgement.

Oyedele said, “Ironically, the biggest losers will be the states, except Lagos. A few states like Kano, Rivers, Oyo, Kaduna, Delta, and Katsina may experience minimal impact, while at least 30 states, which account for less than 20 per cent of VAT collection, will suffer significant revenue decline.

“The Federal Government may in fact be better off, given that the FCT generates the second-highest VAT (after Lagos) in addition to import and non-import foreign VAT.”

Citing data on VAT pool from section 40 of the VAT Act, he said 15 per cent goes to the Federal Government; 50 per cent to states; and 35 per cent to local governments (net of four per cent cost of collection by the FIRS), while 20 per cent of the pool is shared based on derivation.

“In 2020, for instance, total VAT collection was about N1.53tn, with import VAT being N348bn (or 22.7 per cent) while foreign non-import VAT was N420bn (or 27.4 per cent) and local VAT amounted to N763bn (or 49.8per cent),” he said.

Nigeria’s VAT hits N1tn in six months, says NBSNigeria generates N512bn from VAT in Q2 According to Oyedele, the Federal Government is likely to retain more than the 15 per cent it currently receives, while states and local governments will have less to share.

He said the judgement might also have effects on taxes collectible by local governments which are currently administered by states, and the amendment through the Finance Act 2020, which introduced Electronic Money Transfer levy in place of stamp duties, among others.

Another expert and Chief Operating Officer and Risk Management Partner, KPMG Nigeria, Mr Victor Onyenkpa, said the new judgement would not improve the internally generated revenues of most states.

He added that VAT collection if left in the hands of states, would be fraught with inefficiencies and other administrative complications.

He said, “I don’t think it will help the revenue of states. There will be some states that are going to do a whole lot better because a large per cent of VAT collected is generated from states like Lagos, Rivers and other highly commercialised states. But if you look at it, there will be many more states that are going to lose out than those that will gain,” Onyenkpa said very few states would see their revenue improve.