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August 15, 2021.


Tax revenues have been of great importance to many governments of the world, especially in developed countries compared to developing countries like ours in Nigeria. Before the return to democracy in Nigeria, tax revenues had not been a significant contributor to the Government revenues, and minimal attention had been paid to it. The shift to take to critical consideration to increasing tax revenues in Nigeria became more interesting in the 4th Republic from 1999. Still, the concentration has not reached this height until the oil revenues accruable to the Nigerian Government started to dwindle in the last decade, and most especially in the current administration. Even with the recent development, the Nigerian statistics regarding the ratio of tax revenues to Gross Domestic Products (GDP) has not exceeded 6%, far-fetched from the global and African averages. Nigeria as a country ranks in the lowest quartile within African.

The OECD average was about 34.3% in 2018, while the highest ratio in Africa is by Seychelles (32.4%). Nigeria’s tax-to-GDP ratio in 2018 (6.3%) was lower than the average of the 30 African countries in Revenue Statistics in Africa 2020 (16.5%) by 10.2 percentage points and lower than the Latin America and the Caribbean (23.1%). Source: OECD

Though the personal income tax is the highest tax contribution head across the globe, followed by property taxes and the likes, but the global practice is shifting towards more indirect taxes such as the consumptions or sales taxes (i.e., VAT and GST), property taxes, as indirect taxes are easy to administer, collect and the follow of the revenues is consistent and matches the timing to which Government requires such for meeting up with its social contract with their citizenry.
Here we come!

Consumption taxes are now gaining waves across the Global. It is well referred from what is considered Sales Tax in the early days of tax administration across the Globe, as some thought it a form of trade levy in the Nigeria context during our 1st Republic. During the military regime in the ’80s, various military administrations across states adopted Sales Tax in Nigerian states. To integrate its administration and effectiveness, the former Military Head of State regime, General Ibrahim Gbadamosi Babangida, via a Decree in 1993, enacted the Value-Added Act (VAT), which came into force on 1 January 1994.

Value Added Tax (VAT) is the last baby of the Consumption Taxes that has continued to gain wider acceptance across the Globe. However, it was first introduced and adopted by the Government of France in 1954 in Ivory Coast (Côte d’Ivoire) colony. Though, VAT has continued to gain the utmost popularity. However, many developed and developing countries still maintain a slightly different consumption tax before introducing VAT. This consumption is a modified version of the long-dated sales tax, known as “Goods & Service Tax (GST)”.

In Comparative Tax Policy and Administration, we could conclude that VAT and GST, as they belong to the same family of ‘Consumption Tax’, are used interchangeably. Still, they portray some level of differences slightly.

The Goods and Services Tax (GST) is a consumption tax levied on most goods and services sold for domestic consumption. Consumers pay the GST, but it is remitted to the Government by the businesses selling the goods and services.

Olumuyiwa Adebayo, CFA Group Head, Tax and Financial Control, Sahara Group during a session at #StartUpNation
Olumuyiwa Adebayo, CFA Group Head, Tax and Financial Control, Sahara Group during a session at #StartUpNation in 2019.

The under-listed are the common factors binding VAT and GST as consumption taxes:

1. VAT and GST are consumption taxes imposed on the sales of goods by businesses at each stage of production and distribution.
2. VAT and GST are charged on the value of goods and services (with or without profit).
3. VAT and GST are indirect taxes on consumer expenditures and, in theory, should not fall on business activities.
4. VAT and GST are taxes included in the final price and paid by consumers at the point of sale and passed to the Government by the seller.
5. Thresholds for the administration of VAT and GST are usually defined.

Likewise, the practice and application of a GST vary slightly with VAT in its administration and final effects. The under-listed are the observable differences:
1. VAT is more administered centrally, while GST in most jurisdictions is administered at the States level or a combination of Central Government, State Government and Local Government (Municipal).
2. Each State has the constitutional right to impose its consumption tax.
3. The tax rates vary across states and types of goods and services.
4. It is more demanding in its administration processes because of the non-standardization.
5. It is time-consuming, especially for businesses that have a presence across the states and inter-state business activities.
6. Also, some countries like the Indian Government have moved a step ahead with the re-enactment of the GST, which was rolled out on 1 July 2017 with the need to address fiscal federalism concerning tax revenues and thereby how GST categorized into four as follows:

a) Integrated Goods and Services Tax (IGST): The Integrated Goods and Services Tax or IGST is a tax under the GST regime applied to the interstate (between 2 states) supply of goods and/or services and imports and exports. The IGST Act governs the IGST. Under IGST, the body responsible for collecting the taxes is the Central Government. After the collection of taxes, it is further divided among the respective states by the Central Government. For instance, if a trader from West Bengal has sold goods to a customer in Karnataka worth Rs.5,000, then IGST will be applicable as the transaction is an interstate transaction. If the rate of GST charged on the goods is 18%, the trader will charge Rs.5,900 for the goods. The IGST collected is Rs.900, which will be going to the Central Government.

b) State Goods and Services Tax (SGST): The State Goods and Services Tax or SGST is a tax under the GST regime applicable to intrastate (within the same State) transactions. Both State GST and Central GST are levied in an intrastate supply of goods and/or services. However, the State GST or SGST is imposed by the State on the goods and/or services purchased or sold within the State. The SGST Act governs it. The respective state government solely claims the revenue earned through SGST. For instance, if a trader from West Bengal has sold goods to a customer in West Bengal worth Rs.5,000, then the GST applicable on the transaction will be partly CGST and partly SGST. If the rate of GST charged is 18%, it will be divided equally into 9% CGST and 9% SGST. The total amount to be charged by the trader, in this case, will be Rs.5,900. Out of the revenue earned from GST under the head of SGST, i.e. Rs.450, will go to the West Bengal state government in the form of SGST.

c) Central Goods and Services Tax (CGST): Like State GST, the Central Goods and Services Tax of CGST is a tax under the GST regime applicable to intrastate (within the same State) transactions. The CGST Act governs the CGST. The Central Government collects the revenue earned from CGST. As mentioned in the above instance, if a trader from West Bengal has sold goods to a customer in West Bengal worth Rs.5,000, then the GST applicable on the transaction will be partly CGST and partly SGST. If the rate of GST charged is 18%, it will be divided equally into 9% CGST and 9% SGST. The total amount to be charged by the trader, in this case, will be Rs.5,900. Out of the revenue earned from GST under the head of CGST, i.e. Rs.450, will go to the Central Government in the form of CGST.

d) Union Territory Goods and Services Tax (UTGST): The Union Territory Goods and Services Tax or UTGST is the counterpart of State Goods and Services Tax (SGST) which is levied on the supply of goods and/or services in the Union Territories (UTs) of India. The UTGST applies to the supply of goods and/or services in Andaman and Nicobar Islands, Chandigarh, Daman Diu, Dadra, and Nagar Haveli Lakshadweep. The UTGST Act governs the UTGST. The Union Territory government collects the revenue earned from UTGST. The UTGST is a replacement for the SGST in Union Territories. Thus, the UTGST will be levied in addition to the CGST in Union Territories.

The Conundrum and Hullabaloo!

What is the hullabaloo all about?

Value Added Tax (VAT) Act, Chapter VI of the Laws of the Federation of Nigeria (LFN) 2004 (as amended by the various provisions, including that of Finance Act 2019 and Finance Act 2020) provides detailed guidance and requirements on the administration of VAT in Nigeria, and conspicuously bestowed the statutory powers to collect and administer everything aspect of the Act on the Federal Inland Revenue Service (FIRS). The FIRS has carried out and improved upon these responsibilities since its implementation dated back to 1994.

In the time past, the Lagos State Government, especially when it was in dire need of funds due to a blockage by the Federal Government during the administration of President Olusegun Obasanjo, GCFR had adopted its ingenuity look inwards to self-generate revenues, and the focal point was tax revenues. Various revenues tax revenues stream was created amongst effecting compliance on the existing tax laws to which taxes and levies are accruable to both the State and the local governments, including the local government development areas. As time progressed, the successes recorded in the fiscal arena of the state revenue generation policy provided it more comforts to expand in its revenue drive, which gave birth to the enactment of state sales/consumption tax. This was in a bid to increase the revenue of the state vis-à-vis further a medium of addressing the perceived injustice and inequitable distribution of the VAT revenues to the states that contribute more significant percentages to the federating purse as VAT collections. This development caused an uproar concerning multiple taxations and/or double taxation to businesses as both the State’s sales tax and the VAT address the same tax base, the value of goods and services consumed. The Lagos State Government (LASG) lost at the Apex Court but later re-invented the wheel. LASG thereby resolved to enact a new law introducing a consumption tax specific to hospitality and recreational business under the Hotel and Restaurant Consumption Tax. Due to the re-characterization of this tax and the further expansion of the Taxes and Levies (Approved List for Collection) Act, Chapter T2, Laws of the Federation of Nigeria, 2004 (as now amended by the Schedules to the Taxies and Approved Lists {Approved List for Collection} Act {Amendment} Order, 2015), the Lagos State Government was able to win the court case instituted by the umbrella association of hoteliers and recreational facilities in Lagos State.

Now, the Rivers State Government (RSG) introduced a twist by challenging the constitutionality of the VAT Act as adopted as Laws of the Federation of Nigeria (LFN) as a result of the return to the 4th Republic. However, VAT Act pre-dated the enactment of the 1999 Nigerian Constitution. Furthermore, my submission is that it may have been erroneously omitted from the Exclusive List and not included in the Concurrent List, making it a residual item within the purview of the States to legislate. The position of RSG was different from that tabled by LASG concerning its Sales/Consumption Tax, where it was said it has the right to levy such charges side-by-side with the VAT.

The Federal High Court (FHC), sitting in Rivers State, made a declarative judgement which declared the administration of VAT by the Federal Inland Revenue Service (FIRS) as unconstitutional and such powers are not conferred in the Constitution. Though the VAT Act granted such powers, but is a nullity and invalidated to the extent, it contravenes the provisions of the Nigerian 1999 Constitution. The FIRS has since appealed the Judgement at the Court of Appeal and has sought ‘stay of execution’, but the stay of execution was not granted, making the judgment a subsisting judgment pending when a superior court upturn same.

Here comes the ‘Conundrum’!

This Judgement may be considered the beginning of the test of ‘True Fiscal Federalism. It may serve as the advent of opening the eyes and thoughts of leadership across states and regions to look inwards in revitalizing and rejuvenating state mercenaries and policies towards promoting a conducive and business-friendly environment. Then, it brings about economic prosperity, which bequests more tax revenues through increases in tax bases, employment, infrastructural and related development, and competitiveness amid comparative advantages.

In the interim or immediate, there are more challenges and onerous administrative bottlenecks and possible negative economic impacts that this development can expose our fragile economy into, and some of them are itemized below:

1. Many Nigerian states numbering up to about 30 will find it difficult to survive. This economic shock arising from losses of share of tax revenues may portray a total collapse of the affected states.
2. How do the Federal Government create stability amid instability in states’ economic situation if the superior Court upholds this decision?
3. How do businesses content with the multiplicities in the administrative processes regarding the non-standardization of VAT across states?
4. How do businesses with input VAT at the point of import with Nigerian Customs or those attributable to Inter-State transactions easily offset such input Tax with the Output Tax?
5. What happens where Input Tax is suffered in the Rivers States with an existing VAT Law at the rate of 7.5% recover its Input Tax in full if such goods are sold in Lagos State with its proposed VAT of 6%?
6. How will States conduct VAT Audits to know the fair portion of the VAT accruable to them in a situation where companies like the Telcos sell all their data and mobile credits remotely through various online point-of-sales across the 36 states and the FCT?
7. Since most goods consumed in Nigeria are imported, and there are limited ports of entry, or I can say mainly the ports of entry are based in Lagos; hence, whom does the Import VAT be paid to? ‘Not forgetting that what facilitated the import are Federal Structures and Resources’.
8. How do businesses deal with variations in the list of VAT exempts goods and services?
9. Will this conundrum bring about capital flights?
10. How do we quantify the negative impacts in the immediate regarding the uncertainties and administrative bottlenecks associated with this development on Foreign Direct Investment (FDIs)?

There are endless questions, concerns, and unexpected contagious effects the whole of this saga may portend for us as a Nation. But my perspective is can we have a WIN-WIN Situation?

I believe that there can be a light at the end of the tunnel if the sincerity of purpose and unity that bind us together are re-evaluated and taken seriously. Also, in my quest to postulating what seems to be a solution, we must bear in mind that a conundrum does not necessarily have a lasting solution! The turn of events and changes in our social, political, economic, and cultural environments may evolve alongside other issues. It then connotes that any proposed solution should be dynamic and flexible to accommodate future changes and situations.

The under-listed are alternative solutions:
A. Can we have a ‘Political Solution’ to this in the interim pending the re-write of our Constitution to reflect ‘True Fiscal Federalism?
B. Can we allow the position of the Court to stand given that the superior Court (s) validates the Judgement of the Federal High Court?
C. Can we painstakingly develop a workable fiscal regime that takes into consideration the uniqueness, natural endowment and other factors that will provide the federating units (the Central Government, States Government and the Local Government) the sustainable sources of tax revenues that will allow them to deliver on their social contract to the citizenry and their respective states?

Olumuyiwa Adebayo is Group Head, Tax and Financial Control at Sahara Group

Credit: ThisDay Live


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