September 15, 2021/CSL Research
Based on media reports, the Rivers State government has filed an appeal at the Supreme Court to challenge the ruling of the Court of Appeal in the Value Added Tax (VAT) dispute between the state and the Federal Inland Revenue Service (FIRS). This development follows the recent decision of the court of appeal directing the state to maintain the status quo on the collection of VAT pending the determination of an appeal filed by the FIRS. According to the Report, the Rivers State government is arguing that among other things, the Court of Appeal erred in law when it relied on the provisions of Section 6 of the Constitution to ask the parties to maintain status quo, an order which restores the parties to the position they were before the judgment of the Federal High Court in FHC/PH/CS/149/2020 was delivered on August 9, 2021.
Value–added Tax (VAT) refers to tax placed on value–additions for goods and services at each stage of the production or distribution chain. It is paid by the final consumers and collected by the end retailer. At each stage of the production or service, the seller collects a tax on behalf of the government from the buyer by adding the VAT fee above the price. VAT, which replaced the sales tax, was first introduced in Nigeria through the Value Added Tax act of 1993 and became effective on 1 January 1994. Under the VAT act of 1993, the revenue sharing formula was 20% to the Federal Government, 50% to the state government and 30% to the local government and the Federal Inland Revenue Service was given the responsibility to administer it in all the 36 states in Nigeria and the FCT.
The centralization of VAT administration was criticized by state governments given that the sales tax which the VAT replaced, was a major source of internally generated revenue for states and they argued that VAT should be collected and managed by the state governments. Over the years, there have been several amendments in VAT revenue sharing formula between the three tiers of government in Nigeria, culminating in the VAT (Amendment) Act, 2007, which states the current sharing formula that assigns 15% to the federal government, 50% to states, and 35% to local governments.
In our view, a look into the current revenue sharing formula is necessary. Recently the Revenue Mobilization Allocation and Fiscal Commission (RMAFC) began the process of sensitizing states on the need to review the revenue sharing formula in the country as it sought fiscal restructuring. The development was necessitated by the need to ensure more optimal fund allocation. The Federal Government (FG) currently takes 52.7% of the total revenue accruing to the country. Considering the current VAT debate and the steps being taken by the Rivers State government, the long overdue fiscal restructuring conversation may be happening soon.