Ignited barely two months ago, ruled in favour of Rivers state by a Federal High Court in Port Harcourt, Rivers State pronouncing as illegal the collection of Value Added Tax (VAT) by the Federal Inland Revenue Service (FIRS), challenged at the court of Appeal to favour FIRS and now has suddenly become an issue before the Supreme Court.
Above is a brief timeline of matters arising from the recent VAT controversies for the collection right of VAT between the Federal and State level of government. Not to preempt the outcome of the legal tussle, let us dive into exploring 3 possible realities if either the state or federal government is finally named by the supreme court as the legal collector of VAT.
Here is what it will mean for states
- Due to its novelty, states will experience a challenge in building up collection capacity compared to FIRS in the collection authority for over 20 years. States also have to deal with difficulty in auditing compliance, report complications, and higher costs of collection.
- Double taxation ensues especially with states like Lagos and Edo with an existing consumption tax. The affected states will have to forgo one of the taxes to boost proper compliance.
- With state collection of VAT empowered, the state IGR would increase if properly managed. VAT collected by FIRS would reduce, depleting the current 4% commission as cost of collection on VAT revenue. This way, the state will force the federal government to further improve its operational efficiency to sustain current capacity or seek additional legislative backings and allocation from the National Assembly. The whole idea of allowing states to collect VAT hinges on the reduction of revenue accruing for sharing to all levels of government, making states more autonomous.
On the flip side, these are the possibilities for the federal government:
- The federal government will not lose out completely as it will continue as collectors of VAT on all imported items at the port and international transactions will be retained by the arm of government.
- Some of these states have little or no incentives for small businesses like the federal government. For instance, small businesses with turnover not more than ₦25m under the federal setting enjoy a 100% waiver on VAT. With the federal government’s continuous stay at the helm of affairs, it means the prices of products and services will be prevented from increasing as a result of a change in the administration of VAT.
- With the FIRS retaining collection, the national drive for clamouring ease of doing business in the country is retained as it takes off all remittance complications if states are empowered to collect.
The above are possible outcomes as the tussle for VAT collection continues to rage but the supreme court’s ruling will certainly be the ultimate in the matter.