Monday Column Opinion • Created September 27, 2021 09:35

A different VAT debate

But there are other lines of debate such as how states, individually and collectively, can increase…

A different VAT debate

The debate around VAT must shift to other more substantial issues around how states—individually and collectively—generate and spend their internal revenues, rather than the current tired talk about which states generate more VAT or how some states feed fat on revenues generated from other states. If our society were more adept at using data to inform policy, rather than get bogged down with the exhausting politics of north vs south and the federal government vs the states, then the National Bureau of Statistics data on the internally generated revenues points us towards a very different direction of debate than the one we are now having.

As I tried to show on this page last week, it is true that a handful of states like Lagos, Rivers, FCT and a few others are at significant disadvantage going by the current VAT revenue sharing formula. But whatever the Supreme Court decides in the end on the VAT controversy, a new VAT sharing formula that puts more weight on derivation than equality of states might well be enough as a political solution, which is far more useful than the strict points of law. The idea that each state can impose its own different version of VAT law and keep the proceeds therefrom is practically infeasible and not worth all the heat generated on it.

But there are other lines of debate such as how states, individually and collectively, can increase and expand their revenue generation beyond VAT, what units are used in the distribution and management of internal revenue generated—states and local governments or individuals and households, as well as the implications of all these for the new Nigeria that works, which is what we all crave. We only need to pay closer and systematic attention to the NBS data on Internally Generated Revenue (IGR).

As illustrated last week, Lagos State, with a population of about 13 million people, generated approximately N419bn, out of which about N279bn or 66.59 per cent of the total came from only one source: PAYE, that is, taxes deducted directly from those who earn salaried income in the formal sector. The remainder, N140bn or about 33.41 per cent comes from all four other sources including revenues from MDAs (N51.8bn), Direct Assessment taxes collected from the self-employed (N17.07bn), Road Taxes paid by commercial drivers (N12.13bn), and ‘Other Taxes’ collected from sources not listed above (N59.1bn).

This trend—where more than two-thirds of all IGR comes from the PAYE source alone—is true of all other states in Nigeria, including the FCT. It also remains true across NBS data for 2019 and 2018. Consider another ‘big’ state in the country, Kano. In 2020, Kano State generated a total of N31.8bn out of which about N15.6bn or 49 per cent came from PAYE sources alone. The reminder 51 per cent came from ‘Other Taxes’ (N8bn), MDAs (N7.05bn), N688m and Direct Assessment taxes (N485.1m). This is unacceptably lower than in Lagos, but the reasons are not a simple matter of Lagos is richer than Kano, although, of course, that fact is not in doubt.

When comparing the two states, the most important issue that a more productive debate can focus upon is that Lagos has a significantly larger formal sector than Kano, even though they both have a comparable population size. Thus, Lagos State collects much more PAYE taxes from this sector than Kano, both in terms of volume and as a percentage (N279bn or 66.59 per cent against N15bn or 49 per cent). Yet, a more useful way to look at this same point is to say that Kano State, with a large market, has simply been lazy in transforming its informal market into the formal sector to significantly increase its revenue.

Yet, the disparity in generation between Lagos and Kano remains constant across all the other four IGR sources: direct assessment, road taxes, MDAs, and other taxes. More significantly, the pitiable picture of Kano is also true of all northern states, and indeed, all the 36 states of the country, including Lagos itself. All of them can generate three, four, or five times more than they presently do if they look harder at the sources of their IGR. So, if Kano IGR, for example, is significantly lower than that of Lagos, the answer is simply that Kano has not been serious enough to explore ways in which its large population can turn into local tax naira. And I doubt if this has anything to do with the existing VAT sharing formula.

This leads us to the second important issue in this debate, namely, how each state can increase its IGR drive across the country. My core argument is that all the states are underperforming in IGR generation and looking at which states generate more simply befuddles the issue. Look again on the snippet of NBS data on states IGR above. Both Lagos and Kano, and all the 36 states, charge Road Taxes only on commercial vehicle drivers, which they presumably pass on to their passengers.

Now, a road tax is a tax payable by citizens for using roads built by the government. That tax could then be used to maintain the roads, and any surplus from it directed to other areas of public finance by the government—of a state or the federation in our case—such as for providing a more efficient public transport for all, for example. But commercial drivers are not the only road users. So one way to increase locally generated revenue is to extend Road Taxes to all road users, and on a monthly basis. A flat rate of N3000 and N6000 monthly for all vehicle owners will be a good place to begin, and will drive up each state’s IGR significantly.

But that is just one example. States could also tax properties more efficiently. I have always had a feeling that Nigerians, particularly those in the northern part of the country, are stealing from their governments in the name of being poor. I am very much aware of the implications of this statement, but I believe it to be true nonetheless. When I lived in Kano for many years, there were stories doing the rounds that Alhaji X or Hajiya Y owns more than 300 properties which other people rent. Some of these stories were probably false. But some may yet be true. It is perfectly within reason that one person could own 300 houses in Kano’s rather still unmodern property market.

How much does such a person pay in taxes monthly or annually? Everyday in Nigeria, billions of naira are exchanged in home-letting transactions across every state in the country, not to talk of home or land purchases. Yet, there is little evidence that state governments receive any significant revenues from these transactions, leaving room for rapacious agents and middle-men of all sorts to rip-off both landlords and agents alike. State governments could easily devise means to trap a large chunk of taxes from these transactions, while putting a cap on what agents can charge. The same goes for other transactions, such as the buying and selling of cars and other vehicles, lands, clothes, and luxury materials. All can, and should be taxed.

And what about the agricultural produce market? And inheritance tax? And a security tax?

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