VAT WAR: PYRRHIC VICTORY FOR STATES — 1
VAT WAR: PYRRHIC VICTORY FOR STATES — 1
“In this world, nothing can be said to be certain, except death and taxes.”
Benjamin Franklin, 1706-1790, VANGUARD BOOK OF QUOTATIONS, p 241
Irrespective of what it is called — levies, rates, duty, surcharges, fees etc –everybody pays taxes, directly or indirectly, in one form or another. Since taxes involve money taken by law from citizens in any jurisdiction – federal, state, local government, county etc – it is not also surprising that there are unending disputes regarding which tier of government can or should impose certain classes of taxes; who should collect them; how they are to be collected and disposed of.
The Value Added Tax, VAT, War ignited by the Rivers State when it approached its own High Court to claim the exclusive right to collect the VAT generated within the state should therefore be seen in that narrow context. Rivers is not asking for the right to determine the VAT rate or alter it from the existing 7.5 per cent imposed by the Federal Government. The state government is not even requesting for the abolition of VAT within the state; neither is it proposing another state-based tax system. The state is only demanding for the right to collect the VAT; keep 50 per cent of the proceeds for itself in the spirit of true federalism and send the balance to Abuja for sharing.
Before going forward, it is pertinent to reveal that I was one of the instigators of VAT in the 1980s. The reasons for its adoption over the previous state-based Sales Tax, ST, will soon be explained – because they are even more pertinent now than when the measure was introduced. Secondly, I am not a lawyer; and this article will not question the judicial verdict. Although, it is obvious that the state government approached a court which stands to benefit from the decision it reached. The state figured, quite correctly, that it would increase its internally-generated revenue if it can collect the VAT. Nobody can blame the government for using all legal means to increase its revenue base and improve the welfare of the people. Governor should be commended for trying his best in this regard.
The reader might then be wondering what then is the basis for concern?
“The road to hell is paved with good intentions.”
What to Rivers appears to be a straight forward case, even if unchallenged at a higher court, will effectively repeal the VAT. The consequences of that will be so devastating to the Nigerian economy as to call for caution before moving forward. Rivers is not the largest contributor to the VAT pool which now drops about N130-140 billion into the Federation Account monthly. Lagos state is responsible for about 48 per cent of VAT revenue. As a Lagos state indigene, I should be among the first to give total support to the Rivers High Court judgment. If you then add the fact that Lagos contributes close to 60 per cent of company taxes, then it is obvious that Rivers will not be the biggest beneficiary of this legal victory. So, why am I not fully supporting it?
The short answer is: paradox of economics. Sending VAT collection to the states will not increase the aggregate VAT revenue collection. Most likely, it will drastically reduce it. Here are some reasons why.
“VAT judgement: 30 states may suffer revenue drop, say experts.”
It is sometimes a blessing; and sometimes frustrating to live long to observe what had happened to an idea one fought for against strong opposition, being fought over again – now that the measure had been vindicated. Nigeria is one of 166 out of 193 member countries of the United Nations which now implement VAT in one form or another. Most of the rest are either island nations, eg Fiji, which don’t need the elaborate mechanism for collecting VAT or nations which have been destabilised by war eg Afganistan.
Most federated nations, with multiple layers of government have adopted it because it solves a monumental task of tax collection in the best way known to them despite its known defects. The first lesson we better learn is that there is no perfect tax collection and disbursal system when multiples government tiers are entitled to their share of the funds generated.
NIGERIA BEFORE VAT
Thousands of Elder Corporate Managers, leaders of the Organised Private Sector, OPS, are still alive today who can testify to what happened in the 1970s to late 1980s when Sales Taxes were collected by states. Few would confess to what we did to evade correct payment of Sales Taxes to states. Calculating the Sales Tax due to four regions was a daunting task without computers. It became an increasing nightmare when four regions became twelve states, which rose in number to nineteen, 21 and 30. No company in the OPS could have been able to cope with the load of Sales tax calculation to so many states – especially when the tax rates were not uniform. They ranged from 3 per cent to 7 per cent. And each time a state was split into two, the two new states sometimes introduced different rates from the former state.
Burdened by so many different Sales tax rates, it did not take many in the OPS, as well as Small and Medium Scale enterprises, to find two loopholes to crawl through. The Sales Tax laws applied to goods and services consumed within the state. Companies were required to provide the sales figures – which state tax auditors were expected to verify by checking on the major distributors and dealers. With frequently less than a dozen staff to monitor over three hundred thousand products, it did not take long for the states staff to get tired. Thereafter, the more responsible companies paid what they chose to. Invariably, this was a fraction of the actual tax due to the states.
The more unethical firms took a shorter route to rob states of their tax collection. They took a look at the penalties for failure to pay tax. They were so light, few of us in companies could resist the invitation to evade paying taxes altogether. Thus, a company which should have paid one million in taxes is fined N50,000 for tax default. The states were mercilessly robbed by business people.
Finally, even those who paid received kick-backs from state tax officials, after bribing to pay less than they should. It was an inefficient and corruption prone system. The States seldom generated anything close to the amount they should and could not have discharged their obligations to the people.
As the Sales/Marketing Manager/Director for five major companies during those years, I was fully aware of what was going on.
THEN CAME THE CHANCE FOR VAT
“The economist, like everyone else, must concern himself with the ultimate aims of man.” Alfred Marshall, 1842-1924, VBQ p 45.
By 1985, when the price of crude oil tumbled to as low as $9.90 per barrel; the country was highly indebted and there was urgent need for new ideas to help us recover. I was no longer involved in Marketing brands and in cheating state governments. I was already compiling the book of quotations; when I came across these words by Marshall, the great Economist. I felt like a traitor to Economics, my profession, and to Nigerians. I had participated in grand larceny for several years while working for companies. I needed to do something to repay the people. But, what will it be? Suddenly, the idea of VAT to replace the ST came up. I knew that, despite its few deficiencies, the centrally-collected VAT was best for us. I jumped into the battle. Incidentally, we were thinking of VAT contributing about N60 billion per annum. VAT contributed about N1.56tn to actual Federally-collected revenue in 2020, or 28.5 per cent of the total.
I admire Governor Wike a great deal. I will urge him to re-think the decision to pursue the idea of states VAT collection. It is an ill-wind; it will blow all away.