Nigeria: FIRS Explains Why It’s Against States’ Collecting VAT

The Federal Inland Revenue Service (FIRS) on Wednesday explained its opposition to the administration of Value Added Tax (VAT) by states in the country, saying it might stifle businesses and investments.

The federal agency insisted that the decision of the Federal High Court to grant powers to states to administer VAT would make it difficult for businesses to thrive.

This is just as it was gathered that the FIRS recently wrote to the National Assembly for an amendment of the constitution to accommodate VAT in the Exclusive Legislative List of the 1999 Constitution.

The development followed rising agitation by some states to collect and utilise proceeds of consumption tax, after Rivers State secured victory in court on the matter.

Notwithstanding, the Rivers State government announced the commencement of full implementation of its VAT law.

Also on Wednesday, the Rivers State governor, Nyesom Wike, alleged that he had been informed that some people in government are scheming to move the appeal hearing from the Court of Appeal in Port Harcourt, to the Court of Appeal in Abuja in the hope of securing a stay of execution of the judgment.

He stated this when THISDAY contacted him for a reaction to the alleged plan. “Well, I heard about the development while attending the Peoples Democratic Party (PDP) meeting in Abuja.

“I was told that the FIRS is working to move the appeal to Abuja, but I have not confirmed whether it is true or not. But let it be known that I am standing on the principle of justice and constitutionalism. What I feel is that the right thing should be done. Whether they want to hear the appeal in Kafanchan or in America, let the law take its course.

“I believe the right thing must be done at the right time. This country must move forward and justice must be done. This is an issue of constitutionalism, it’s not about Wike,” the governor declared.

THISDAY also learnt Wednesday that the Lagos and Ekiti State governments, have concluded plans to file application to be joined in the ongoing legal battle between the FIRS and Rivers.

Just like the Rivers State government, which recently enacted its VAT Law 2021 to regulate the effective administration of VAT in the state, Lagos and Ekiti states have taken steps to enact similar laws on VAT collection.

THISDAY learnt that some southern states were equally in the process of enacting laws in a bid to start collecting VAT.

On its part, FIRS has maintained that the decision of the Federal High Court to grant powers to states to administer VAT could be counterproductive.

The Group Lead, Special Operations Group, FIRS, Mathew Gbonjubola, insisted that there was nowhere in the world, where the administration of VAT was done at the sub-national level, adding that the service cannot afford to devolve such powers to states.

Speaking during a media briefing, he said contrary to speculations, the FIRS administers the consumption tax on behalf of the three tiers of government and not for the federal government alone.

He added that revenue from VAT was administered under an arrangement that allows the federal government to collect 15 per cent, states 50 per cent, and local government 35 per cent. He pointed out that the existing arrangement allowed states and local governments to take about 85 per cent of VAT proceeds.

Gbonjubola stated: “The VAT is not paid to the federation account but to VAT pool account for distribution to the three tiers of government. It is after the sharing that the portion of the federal government is paid to the Consolidated Revenue Fund Account.

“VAT works only at a national level but not at a sub-national level. There is no country in the world where VAT works at the sub-national level.”

He said the VAT Act differentiated between the Input and Output VAT, explaining that in the former, tax is paid to suppliers on the purchase of taxable goods and services, while output VAT is the tax received from customers on the value of taxable goods and services sold or rendered.

Gbonjubola further explained that the VAT Act allowed taxpayers to offset their input VAT (Allowable Input VAT) against their output VAT, to the extent that such input VAT only related to such goods that were purchased or imported for resale or form the taxpayers’ stock-in-trade used for the production of new products on which output VAT would be charged.

He said where the output VAT exceeded the recoverable input VAT; the taxpayer was expected to remit the excess to the FIRS.

In the instance where the input VAT exceeded the output VAT, he explained that taxpayer would be entitled to a refund of the excess after following the due process as contained in the FIRS Establishment Act.

But with the decision of some states to go ahead with the implementation of the court judgement, Gbonjubola said such refund might not be possible, because the administration of VAT would be done by different tax authorities in the states.

His words, “As to the incidence of VAT, VAT is practiced on an input and output mechanism. What it means is that for a business either importing or buying products, that business will pay VAT either at the port if it is importing or with the manufacturer if it is buying from a local manufacturer.

“And when that business pays VAT, it is accounted for that business as an input tax, such that if it begins to sell in any part of Nigeria, and charges VAT from its own customers, it is able to rescue the importers payment either by port if it is an imported item or to the manufacturer if it was obtained from local producers.

“And this works only at the national level, VAT can’t work at the sub-national level and there is no country in the world where VAT works at a sub-national level. This is because the VAT depends on the input-output mechanism

“For instance, if a business person buys an item in Osun State and paid VAT, takes the goods to Sokoto State to sell, remember this business person had paid VAT when purchasing the product in Osun State.

“So, when selling in Sokoto State, he will be charged VAT and by the operation of the input-output mechanism, this business person will deduct the input VAT payment in Osun state, from the output charged in Sokoto State, and remit any difference to the relevant tax authorities, in this case because there is a single tax authority handling VAT, it is the same authority that will receive the VAT in Osun and Sokoto states.

“It is easy to work out the input-output mechanism, businesses won’t be short-changed; there is no issue of consumers having to pay VAT more than once.

“However, if this is operating at a sub-national level, it will mean that when businesses are paying VAT at the state level, the business would have to pay VAT twice in two different states.”

James Emejo in Abuja and Blessing Ibunge in Port Harcourt

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