Worsening VAT War Between Nigeria’s Federal and State Governments May See Tax Revenue Drop

There is a looming danger that the federal and state governments might experience a steep drop in revenue accruing from the Value Added Tax (VAT) as some members of the Organised Private Sector (OPS) are considering withholding remitting the consumption tax until the controversy surrounding its payment is addressed.

They also suggested that a new formula for distributing the VAT revenue among the tiers of government has become necessary in order to calm the raging controversy.

The representatives of the OPS which included the Lagos Chamber of Commerce (LCCI), the Nigerian Employers’ Consultative Association (NECA) and the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA) have called on the federal government to act fast in addressing the raging VAT ‘war’ between the Federal Inland Revenue Service (FIRS) and some state governments.

The matter has been as subject of legal tussle between the FIRS and Rivers State which had enacted a VAT Law that empowered the state to start collecting VAT. Lagos State also followed its south-south counterpart by enacting its own VAT Law. Since then, some states had also expressed their readiness to also enact laws to enable them start collecting VAT as well.

But without hearing the application seeking to stay the judgment of a Federal High Court, Port Harcourt, Rivers State which had restrained the FIRS from collecting VAT in Rivers State, nor issuing a stay order, the Abuja Division of the Court of Appeal last Friday ordered the Rivers State Government to suspend collection of VAT.

But reacting to the development, Director General of the NECA, Dr. Timothy Olawale, said businesses should not to remit their VAT until the matter is finally dealt with in the court of law.

Olawale told THISDAY that, “in this regard, an employer (business firm) can open an Escrow Account for the money, which must be different from other accounts of the company. This should be remitted upon the final judgment of court, as it appears that the case could get to the Supreme Court,” adding that “the FIRS and the states’ Inland Revenue Services should be notified of this development officially.”

He said the concern of businesses, “is basically who to remit deducted VAT to due to the pending appeal in order to avoid penalties and double payment.”

He also advised that firms could, “approach the court by way of interpleader proceedings to determine who they should remit the deducted VAT to.”

An interpleader, according to Olawale, “is a process whereby somebody in possession of anything i.e. money, properties, etc, and he is not the owner. But two or more people are laying claim to that money or property. The person in possession approaches the court to determine who that money or property should be given to or how it should be handled or what should be done.”

Also, his counterpart at NACCIMA, Mr. Ayo Olukanni, told THISDAY that, “the contention over VAT has introduced uncertainty into the business space and it is our hope that it will be resolved definitively and quickly.”

Similarly, the Director General of LCCI, Dr. Chinyere Almona, stated that the first concern of the chamber, “is the confusion that businesses face as to who is in charge of VAT collection. This is not healthy for the business community and planning.”

Almona stated that businesses should not be subjected to unnecessary hurdles and made to pay the same tax twice from different agencies and urged “the federal government to urgently establish an understanding with states on what is best for the nation and businesses.

She noted that VAT was introduced in 1993 to replace the sales tax in the states. With an initial sharing formula original formula that allocated 50 per cent to the federal government, 35 per cent to the state governments, and 15 per cent to local governments.

But this was altered in January 1999 when the formula was adjusted to be 15 per cent to federal government, 50 per cent to state governments, and 35 per cent to local government.

“Presently, the states and local governments share their allocations using the factors of equality 50 per cent; population 30 per cent and derivation 20 per cent.

“We advise that the current sharing formula for the states and local governments be adjusted using the factors of equality 20 per cent, population 30 per cent, and derivation 50 per cent per cent going forward. This arrangement should be agreeable by all concerned parties.

“This can drive innovation on revenue generation in all the states towards increasing their internally generated revenue. It will also make the states more sensitive to the needs of businesses in their respective States, knowing that an enabling business environment is likely to boost tax revenues,” Almona said.

A Professor of Accountancy, Nnamdi Azikiwe University, Prof. Gloria Tochukwu Okafor, told THISDAY that businesses might withhold the remittance of the VAT.

Okafor said: “Currently businesses that should remit VAT are confused, especially after the decision by the court that Rivers State should collect the taxes. When two persons are struggling on who should receive the money you have been paying periodically at regular intervals, the normal thing a human being should do is to hold back that money and wait until he or she is sure who to collect the payment.

“The implication of this confusion is that the money would neither accrue to the federal or the state government because businesses would rather retain the VAT than remitting it to the wrong government.”

She also advised state governments to work hard on improving their internally generated revenue than relying on allocations from the federation account.

Dike Onwuamaeze

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