Wike’s VAT battles: Fiscal federalism loading…

The recent ruling of 9 August 2021, in favour of the Rivers State Government as plaintiff, and the Federal Inland Revenue Service (FIRS) as defendant, by a Federal High Court which upheld the rights of state governments to collect Value Added Tax (VAT), instead of the federal government through the FIRS, has not only attracted […]

The recent ruling of 9 August 2021, in favour of the Rivers State Government as plaintiff, and the Federal Inland Revenue Service (FIRS) as defendant, by a Federal High Court which upheld the rights of state governments to collect Value Added Tax (VAT), instead of the federal government through the FIRS, has not only attracted a torrent of reactions. It has also launched a new impetus for the drive towards true fiscal federalism in the country as the real dividend from the dispensation. Not surprisingly, the reactions have dovetailed mainly into two main streams—with one supporting the ruling, while the other indicts the states for being complacent and sleeping over their rights for so long. Hence, just as it qualifies as one big legal victory for the Rivers State Government and its iconic  governor Nyesom Wike, the real deal translates into a major leap by the country towards a more prosperous future. That is if the proper lessons are to be learnt, and soon enough.

In the first place, the story of VAT in Nigeria’s fiscal firmament fits into the picture captured in the song by Jamaican Reggae musician Jimmy Cliff that “You can’t be wrong and get it right, no matter how hard you may try”. For a considerably long time, the argument over which entity between the federal and state governments should collect VAT had been raging, with the former deploying its humongous weight to muscle the latter into acquiescence and out of the largesse. This is even as it had never been in doubt that going by the provisions of the Constitution, VAT remained the exclusive preserve of state governments since it is a tax that is collectable at the point of local purchase of a good or service.

However, courtesy of the warped fiscal culture in the country, it had been collected centrally by the federal government and distributed to the states on the questionable principle of unjusticiable inequity. Hence states that contributed more VAT revenue to the federal coffers where denied the full measure of their due, while states with sub-par contributions enjoyed a mark-up in the largesse from the federal government. The situation led to a prolonged protest by the higher contributing states as they complained of being short-changed by the federal government.

This state of affairs attracted several implications. Firstly, it reeked of grave injustices as it manifested the sin of ‘robbing Peter to pay Paul’. Granted that the country’s fiscal regime provided for federally generated revenue to be be shared among the tiers of governance, VAT became subsumed unlawfully into the matrix of distributable federation revenue. This ‘feeding bottle economics’ dissuaded many state governments from exploring and exploiting even the loose hanging grapes of opportunities in their domains, to generate internal revenue through promoting tax yielding business enterprises, as they depended wholly on the dole from the federal government. Meanwhile, this situation runs in the face of countless studies and assurances that no state in Nigeria was too indigent to be able to fully fund its statutory obligations, if the leadership actually paid attention to own resources and endevoured to exploit such.

Interestingly, the VAT breakthrough by the Rivers State Government now offers an irresistible opportunity to all state governments in Nigeria to look towards claiming their due in respect of revenue from the option. While a few of them raised reservations over stripping the federal government of the powers to collect and centrally distribute VAT, it is believed that their position will depend on the success or failure of the FIRS to win its appeal against the High Court judgment barring it from VAT.

Meanwhile some states are already keying into the gains of the ban on the FIRS, with Lagos leading the trail of followers. Just before the end of last week the Lagos State House of Assembly was in the process of passing the bill to empower the state government to collect VAT in all areas within its constitutional jurisdiction. As expected, the ultimate drama shall playout when all or a majority of states shall converge on asserting their rights to collect VAT.

The foregoing notwithstanding it may not also be automatic ‘uhuru’ for the states if and when they all win the rights to collect VAT unhindered, especially in their presently, mostly, unprepared operational status. For in the final analysis, their successes and dividends from taking over VAT collection will depend on the innate absorptive capacity which each of them will manifest individually. For even at the best of times, tax collection has never been a tea party. And with VAT being a consumption tax that requires complicated valuation requirements, there is the need for the states to ensure that a wholesale take-over of VAT collection from the federal government does not turn into a Pyrrhic victory, whereby they spend a naira to earn a few kobo.

As needs not be emphasised, setting up the legal framework by states with the passing of relevant laws, is only the starting point in the journey of taking over VAT collection from the federal government-owned FIRS. The transition of VAT collection from the federal government to the states, will enjoy effective implementation when and only if the three arms of government at all the equally three tiers, work together as one to usher in the desired state of affairs.

As for the Rivers State Government which kick-started the revolution (as some have dubbed the dispensation), the favourable high court ruling has imposed on it the responsibility of leading a national fight in which it stands to be targeted by net beneficiaries of the extant on-going bazaar of enjoying unearned, nationally inequitably shared largesse. It therefore needs to work towards upgrading its own innate capabilities for VAT collection across its local governments and state structures, even as it mobilises support from the other states to its cause. For in the strength of unity of purpose by it and its peers, lies the ultimate victory in consolidating fiscal federalism across the country.

[Repeat] First published September 12, 2021