Many states in Nigeria may not be able to meet their financial commitments as the federal government could lose revenue from taxes amidst dwindling revenue in recent times with a court ruling assigning the collection of Value Added Tax (VAT) and two other taxes to states.
VAT contributes significantly to the total revenue generated by the government, accounting for over 16.2% of the Gross Domestic Product (GDP) in 2019.
Most states depend on funding from the Federal Allocation Account Committee (FAAC) due to their poor Internally Generated Revenue (IGR).
Lagos and Rivers states, which contribute over 70 per cent of the VAT collectibles in the country, have decided to enact a law that will empower them and not FG, to collect VAT in their states.
Their action is based on the judgement of August 11 by a Federal High Court in Port Harcourt, which held that VAT collection was for the states and not for the federal government through the Federal Inland Revenue Service (FIRS).
VAT was introduced via Decree No.102 of 1993. It replaced sales tax operated under Decree No.7 of 1986, which was administered by states and the Federal Capital Territory (FCT).
Until now, the FIRS had the responsibility of collecting VAT on behalf of the 36 states and the FCT. Section 40 of the VAT Act requires that the VAT pool be shared 15% to the FG; 50% to states; and 35% to LGs (net of 4% cost of collection by the FIRS). Twenty per cent of the pool is shared based on derivation.
The Federal Government generated over N2.5 trillion from VAT alone in the last 18 months as outlined in the 2020 Finance Act.
According to data filed by the Federal Inland Revenue Service (FIRS) from the National Bureau of Statistics (NBS), Nigeria may have earned about N2.5 trillion from January 2020 to June 2021 at a 7.5 per cent VAT rate.
The breakdown shows that FIRS collected about N1.53tr in 2020 with import VAT being N348 billion (or 22.7%) while foreign non-import VAT was N420bn (or 27.4%) and local VAT amounted to N763bn (or 49.8%).
In the first quarter of 2021, VAT collection was N496.39bn while it increased by N15.8bn in the second quarter to N512.25bn.
The breakdown of VAT generation for Q2 shows that N187.4bn was from non-import VAT locally, N207.7bn from non-import VAT for foreign goods. The balance of N117.1bn VAT was from the Nigeria Customs Service (NCS) VAT on imports.