13th September, 2021
Proffering solutions to Nigeria’s VAT quagmire
Published By: Kazeem Ugbodaga
By Seun Bisuga
I have read and listened to many arguments on the VAT debate. While some people have spoken from an informed point of view, others have exhibited sheer ignorance on the VAT matter. As I am no tax expert, I do not expect my position taken as gospel but I think we have finally begun restructuring ourselves, by ourselves.
Permit me to start from what I think should be the resolution to this VAT matter if we really want equity and fairness across Nigeria. For me, there are two major resolutions as things stand now. The first is that the Federal Government of Nigeria, the Federal Inland Revenue Services and the State Governments must agree on a new sharing formula for VAT. While the existing 50% to the State, 35% to the local government and 15% to the federal government –which is the existing arrangement – is more than fair, there is a need for a review.
Like we have 13% to oil producing states because that is where Nigeria gets oil from, we should have a new arrangement for VAT. The top states will get special VAT derivation while others will get an equal share of VAT. For example, if we agree that Lagos gets 75%, the Federal Capital Territory could get 65% while Rivers could get 58%; Kano and Kaduna can get 55% respectively while other states get let’s say 40% each.
This way, the top six states will get a fair share given that they spend money on infrastructure within their states, they have encouraged Ease of Doing Business in one way or another plus there are other environmental and economic liabilities that they have to manage.
Secondly, the Federal Government might want to help develop certain states by making some conscious policy decisions. For example, if Nasarawa is not contributing enough VAT, it could be that the Federal Government’s presence in the state is very low. The Federal Government might want to look at some of its money making agencies and decide that it wants to domicile their headquarters across Nigerian states fairly.
For example, the Federal Government can establish the headquarters of immigration services in Nasarawa. So instead of Nigerians waiting for passport booklets from Australia, Switzerland, etc, the factory that will be producing booklets will be set up in Nasarawa. This will invariably mean that certain companies will have to set up shop in that state and this will impact accommodation, food consumption and ultimately the economy of the state in one way or another.
Mind you, the six states that already contribute fairly to VAT as of today should not make any noise about the FG abandoning or ignoring them, there must be an agreement that the 31 states that are not contributing enough should be given priority.
Then there is the argument of how Kano has banned mannequins, alcohol, cigarettes, etc from operating in the state yet collects from VAT. Again for fairness, Kano should be excluded from benefiting from the proceeds of these products because as it is, it appears that they are eating their cake and having it.
For clarity, it is important that Nigerians know that there are certain items that we do not pay VAT on. I have seen people make up very funny arguments about paying VAT on agricultural produce, I do not think this is true.
The 2019 Finance Act excluded VAT on the following items; all medical and pharmaceutical products; basic food items; books and educational materials including educational performances and tuition from nursery to tertiary education.
Other items are baby products; all exported goods and services; imported machines for use in the Export Processing Zone (EPZ) or free trade zone; fertilizer and locally made agricultural medicines and agricultural equipment; life insurance and transportation services for public use.
Also excluded are lease on residential property; equipment for utilization of gas in down-stream petroleum operations; microfinance banks, people’s bank and mortgage institutions services; and locally manufactured sanitary towels.
The VAT argument from state governments which is akin to what is practiced in the United States will promote localization that will be both positive and negative. My safe forecast is that it will largely impact some states especially those 30 states at the initial but subsequently things might improve.
If every state were to implement its own VAT regime, then that means some companies will have to pack up shop. What do I mean? Let us take the telecommunication companies as an example. Telecommunication companies will look at their revenues in certain states and determine that it is not profitable to continue to pay VAT in this state given their return on investment, so they might decide to leave. But how do they move their base stations, masts, etc.
Instead of spending money uprooting all this heavy equipment, they can reach a deal with a local investor who might want to invest in the tech sector locally. The new company might be looking to invest in maybe one, two or three states only, but they will have roaming facilities on their technology that will allow their users continued access to their services even after they have left their area of coverage.
There is no doubt that the VAT debate will force state governments to look inwards. The days of living in Abuja while you are governor of a state are over. You must reside in your state and know what is going on in there. And the days of free money from Abuja while you do nothing is also over.
I expect governors to appoint some of the finest economic experts they can find to source for investors vigorously. These economic experts will look at what the state possesses and how they can maximize the potential there.
With investors come job creation and with jobs come a decent standard of living. The basic economics that have eluded us in the past must be revisited and implemented.
VAT is only the beginning of our restructuring, we need to wake up and realise that this is 2021. Corruption must be checked, cabals must be sacked and the interest of the people must be put first.
-Seun Bisuga is a journalist and political analyst