Tuesday, October 19

Akinloye James: Understanding Nigeria’s VAT administration: A historical perspective

An African proverb says that it takes someone who knows the history of a place to locate the boundary of the land. This is the reason we all should be grateful that the teaching of history as a subject in secondary schools has been restored.

The knowledge of history comes in handy in the current conversation on the administration of VAT in Nigeria. It seems, however, antithetical that the people who have the benefit of history on their side are the ones leading agitation that States in Nigeria should begin to collect Value Added Tax (VAT) instead of the Federal Inland Revenue Service (FIRS), which by extant laws is responsible for collection. To pry further may unearth a different matter altogether.

For the benefit of the doubt, VAT was introduced in Nigeria in 1993 by the Federal Military Government. Recall that the initial reason VAT was introduced was because of the dissatisfaction with the then-existing tax structure i.e. the Sales tax. Before the introduction, Sales tax was under the jurisdiction of the States and generally, it was poorly administered with marginal contribution in terms of revenue. Hence, after extensive deliberation on the matter, VAT was introduced as a federal tax by the VAT decree of 1993.

With the advent of the 4th republic in 1999, the National Assembly took the VAT decree and legislated on it thereby making it an Act of Parliament. The VAT Act has been in place since then. VAT was imposed on selected goods and services at a uniform rate of 5%. In 2007, attempts were made to increase the rate to about 10% through the enactment of Value Added Tax Act No. 2 of 2007 but it failed because the Nigerian public resisted the increase. However, the VAT rate was increased to 7.5% via the Finance Act 2019 and it took effect from January 2020.

Section 8 subsection 1 of the VAT Act compels businesses to register for VAT within the first six months of commencement of activities. The business entity that desires to conduct business with an agency of any tier of government in Nigeria is required to show evidence of VAT registration and past VAT remittances. A registered entity is required to make VAT returns monthly and either pay to or receive from the FIRS the difference between the input VATs and the output VAT.

By the provisions of the Act, VAT is administered on behalf of the federation and not on behalf of the Federal Government. This means that VAT is administered on behalf of the three tiers of Government – i.e. the 774 Local Governments, the 36 States & the FCT and the Federal Government. The revenue accruing from VAT is shared amongst the three tiers of Government based on extant provisions. Presently, 35% goes to the Local Governments, 50% goes to State Governments and 15% goes to the Federal Government. By this arrangement, 85% of VAT collected goes to the States and Local Governments while 15% goes to the Federal Government.

It is instructive to note that the VAT revenue is not paid into the federation account at inception but into a VAT pool account. It is only after it has been shared and allocated to the three tiers of Government that the portion due to the Federal Government goes into the relevant consolidated revenue account.

Whilst it is natural to agitate, those initiating such or are involved in it ought not to just ventilate their displeasure. It is more honourable to seek ways to get the appropriate system of governance look into the plight also. Sometimes it could require lobbying relevant authorities to get your point across and elicit the necessary action.

One of the criticisms levelled against the Sales tax system before the introduction of VAT in 1993 centred on structure and administration. By hindsight, it was argued that the machinery and procedures for implementing the tax system were inadequate and therefore accounted for the consistent low yields and intergroup inequality. Besides, there was the challenge of bigotry, regionalism and other divisive sentiments that constituted drawbacks, thereby prompting the Federal Government to introduce the Value Added Tax in 1993 which came into effect on 1st January 1994.

To those agitating that states collect VAT arising within their jurisdiction, the question they should answer is whether there exists the necessary structure and administration to properly embark on such a venture? Have the issues of ethnic bigotry, regionalism and other divisive sentiments been tackled, to extent that a reversal to the old system is guaranteed?

The National Assembly resumed on Tuesday, September 13, 2021, after their two-month annual vacation, to continue with the third year of the ninth Assembly. Do citizens look to the Parliamentarians for a solution to the tax imbroglio? The situation, if left unresolved adds to the litany of challenges in the land.

Akinloye James is the President and founder of the Initiative to Save Democracy. He can be reached via +2348122233309.

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