Is the VAT War a Strategy of Political Restructuring?

The Federal Republic of Nigeria has often been described as a federation only by name, as the components that make up the country operate more like feeder-states instead of federating units. The national system is designed in such a manner that huge responsibilities are concentrated in the center (mostly through the large powers vested in it through the exclusive list); while state governments operate majorly as appendages to the central government. This is manifest through the revenue generation, collection and allocation model, control of resources and the vast political powers inherent in the central government which make most states to be as its mercy.

At various times in the past;  most especially since the return of democratic rule in 1999, there have been persistent calls from both political and socio-economic interest groups in the country towards a need to urgently restructure the nation’s governance model. The advocates allude to the overall stagnation in our national development as an apparent indicator of the current system’s failure. They make nostalgic reference to the period when the 1963 constitution viz-a-viz regional government was in place, an era marked by relative growth and prosperity of all parts of the country which is in sharp contrast to what is obtainable presently. Decrying the backward regression that the country has been witnessing with this current unitary or neo-unitary model of government, which has made many federating units to be largely dependent on the central government for funds, the proponents of restructuring posit that future progress and national prosperity can only be attained through a recalibration of our current system through the devolution of powers to states, resource control, state police, fiscal federalism, amongst others. 

Past governments at different times have tried to assuage these agitations by convening one national conference or the other to proffer lasting solutions for this dilemma. But it has proven to be futile endeavours, mere money-gulping jamborees that provided no result as the political will is often low among the principal actors to translate those lofty recommendations into reality.

Compelled by the rising wave of insecurity and falling standards of living in the country, social agitations in Nigeria reached an all-time high in recent times with different forms of secessionist agendas enjoying the backing of some Nigerians who believe that only a total disintegration of the country will be the panacea to its multifarious maladies. There is also rising sentiment in some quarters that, regardless of who is President, the existing political system in Nigeria will always result in grievances and one agitation from a major ethnic group or the other leading to persistent economic and ethno-social crises. They postulate  that the country is just too enormous to be micro-managed by the central government who control the major levers of security and the economy. In as such, something drastic needs to be done to reconstruct the foundations of our union.

Southern Nigeria remains the major center of these recent agitations; with militancy and social unrest in the Niger Delta failing to totally subside, IPOB also emerged and gained a major foothold in the South East with its attendant social disorder; some Yoruba Nation groups also causing disquiet in the South West have blossomed lately. This ineluctable reality jerked all the Governors of the seventeen states from the region into action, making them sideline political affiliations in coming together to form an unprecedented Southern Governors Forum in May 2021.

The forum has met twice since its formation and has made their positions known on some national issues to douse spreading tension. In a landmark move, the Forum amongst many other demands categorically declared that before the 1st September 2021 deadline, all states in the region are to domesticate a law banning open grazing in their respective domain. This particular declaration was met with controversy and protests from certain sections but the Forum was unwavering in its resolve. It maintained that activities of roaming herders have proven to be the source of communal crisis in the South in recent years; with the search for land and fertile pastures leading to a large influx of nomadic herders and pastoralists into the region. These herders often encroach and invade farmlands and homes of rural dwellers in agrarian communities resulting in violent confrontations and bloodletting in most cases. The Federal Government have been called upon many times remediate the issue, but nothing was forthcoming; a major factor that spurred the governors to take these decisive actions. Before the outright ban on open grazing, governors in the South-west had created a regional security network called Amotekun in 2020 to help improve security in the region. The initiative was met with stiff resistance from the Centre which claimed only the Federal Government can authorise the establishment of any public security outfit and it made many attempts to subvert and frustrate the process. The governors however persevered and prevailed eventually.

The actions of the Southern Governors in recent times have drawn encomiums from many advocates of restructuring who enthused that the actions of the Forum has breathed a new lease life to the prospect that the country can indeed be rehabilitated from the political front. Especially with the reality that agitations of ethnic separatism by non-state actors is an unwise and unviable approach to no beneficial end; it is an errant model that will only precipitate needless face-offs with the central government bringing more misery and violence on deprived and suffering citizens. There is therefore the need for citizens to unite and seek political solutions to the myriad of challenges confronting the country and hold elected representatives at all levels accountable.

In meeting the 1st September deadline, many states in the region passed the bill into law while few other states had it undergoing adequate legislative and public hearing processes for subsequent lawmaking. Many of the governors have read the riot act to the public and promised to implement the legislation to the letter.

The thorny issue of fiscal federalism has been a raging debate for many years, with many economists declaring the existing revenue sharing formula as limitative and stagnating. During the days of regional government and before oil became Nigeria’s main revenue driver, most regions generated their revenue from within, making remittances to the central government and using the rest to strategically develop their regions. It was a model that encouraged competitive rivalry amongst all the regions in the quest for financial stability and development. Since the advent of oil, however, and the accompanying system of consolidating revenue and apportioning money from the centre to the component units, many states have lost the zeal to be productive and creative in getting revenue. Many states in Nigeria depend majorly on FAAC (Federation Account Allocation Committee) allocations to run their daily operations. This unsustainable and unprogressive nature of  fiscalism have been analysed and established by many authorities as injurious and counter-developmental but the Federal Government appears contented with the dysfunctional system.

In 2016 when the economy was plunged into a brutal recession triggered by the fall in the price of crude in international markets and the disruptions to volume of oil sales occasioned by the resurgence of armed militancy in the Niger Delta, national revenue plummeted dramatically and the usual money-grabbing was affected. Many states languished and toiled financially to meet basic needs like payment of salaries and daily expenditure of government machineries and the opportunity was used to re-champion the call for urgent reconstruction of our fiscal system but the government was uninterested. It instead provided succour to states in forms of financial bail-out packages and other interventions to ride out the storm. Normalcy soon returned to the crude market and government business continued as usual.

Past agitations by states in the Niger-Delta  led to the 13% derivation from oil revenue specially reserved  for the states that make up the region; with the remaining been shared among the three tiers of government. But even this derivation is just another government trick to keep the region on leash while the center continued to fully milk its resources. Governors from the region have embraced the derivation package and have shown little or no dispute to the arrangement; but it is against the principle of federalism and works against the economic interest of ordinary citizens in the region. If the Niger-Delta states are authorised to manage these resources themselves and remit an agreed and reasonable portion of income to the central government through taxes, it is generally believed that the states will do better in introducing innovations and creativity to getting more value and income from these resources. With the states being the major beneficiaries of the income, they will be motivated to properly utilize these resources and create a massive value chain that will be beneficial to common citizens. This is not to exculpate past and present political leaders of the region from deserved blame for their gross incompetence and mismanagement of funds that the region got via derivation, NDDC and other means. But it is to establish that essentially, the faulty revenue structure from the centre is the genesis of the regional conundrum.

More specifically; the internally generated revenue (IGR) portfolio of states in Nigeria over the past 5 years has proven that without Federal Government bottle-feeding. Only few states out of the 36  in the country are economically viable, which is a fiscal calamity for our federation. All the states in Nigeria are endowed with productive mineral resources but apart from the Niger-Delta crude oil. No other resource brings in substantial income for government. The massive potential in coal have been ignored in Enugu because they know money will flow in from Abuja by month end. The Steel and iron industries in Kogi are comatose because of same reason. The cocoa plantations in South-west have been forgotten. The groundnut, cotton and rubber plantations in the North are now distant memory. The mineral resources littered all over Nasarawa remain unexplored. The agribusiness that the fertile middle belt is known for has declined badly that even local consumption cannot be met, let alone exporting them. All these resources can bring in massive investments and industrialisation as they have the capacity to change the economic fortunes of each state in Nigeria. But the leaders are indolent as they prefer the easy luxury of grabbing monthly allocations from the centre.

The VAT (Value Added Tax) system have been talked about many times in the past and opinions often divided on its structure and model in the country, with generation, administration and allocation of the fund proving controversial at times. Few years ago, the Finance Minister revealed that only 5 states generate 87% of the country’s VAT revenue. Lagos comes first with 55% generation, the FCT followed with 20%, Rivers comes next with 6%, while Kano & Kaduna make up the top five with 5% & 1% respectively. This means that the remaining 32 states when combined together only generate 13% of VAT. The VAT sharing formula is however designed not to factor in state contribution. It is predicated on a fixed sharing formula of 50% to be shared among the states, 35% for the local governments and 15% for the central government. This denotes that the Federal Government and some states with many local governments tend to get more from this fund than the units that generated them.

Debates have been endless on the correctness of this VAT regime; especially as certain states that get huge VAT revenue are fond of discouraging or prohibiting the sales of certain products whose manufacturers constantly remit into this same VAT. Rivers State Government recently entered into a running-battle with FIRS (Federal Inland Revenue Service) on the legality of the central government collecting VAT from transactions and businesses conducted within the State. The State Governor, Nyesom Wike maintained that VAT should henceforth be paid into its State Internal Revenue Service. The Rivers State House of Assembly subsequently enacted a legislation to that effect which was signed into law by Wike. The FIRS challenged that move and dragged the State to a Federal High Court but the State triumphed, an occurrence that motivated Lagos, the largest earner of VAT revenue into similar action.

Many times in the past, Lagos State Government have serially lamented that in spite of being the biggest contributor to VAT in the country, the state has not reasonably benefitted from it. The state explained that the huge VAT coming from it is because the state is home to national ports and some of the largest corporations, industries, businesses and multi-nationals in the country. As such, it is faced with the economic externalities and attendant costs of these massive business operations which include population explosion, social crisis, environmental pollution, congestion and infrastructure deficit. It has therefore pleaded in the past that a certain portion of VAT derived within should be held by the State to fund some government responsibilities and the rest remitted to the FIRS but the plea was to no avail.

Following the Rivers template; the Lagos State House of Assembly also passed a VAT Bill into law and the State Governor promptly gave his assent to the bill. The major highlight of the bill was that a 6% rate payable to the State Internal Revenue Service will be charged on goods and services produced in the State. It also created a sharing formula for the VAT earnings which allocates 75% to the State Government and 25% to the Local Government Areas in the State. The wave is having ripple effects already as some other States especially in Southern region were also initiating legislative moves to join the moving train and domesticate VAT collection.

Expectedly, the actions of Lagos and Rivers were met with mixed reactions. It was hailed in some quarters as a move in the right direction geared at entrenching fiscal federalism in the country and a good trajectory towards an eventual restructuring of the national governance model. There is the belief among some that making states administer VAT will enhance efficiency in its collection since they will now be properly motivated to strongly enforce it and it will further galvanise many States to look inwards for means to generate income which will propel industrialisation and boost their IGR significantly.

Some others decried the move to domesticate VAT as insensitivity to the plight of many economically disadvantaged states that rely on VAT income to augment their finances, and called for a more balanced approach to solve the quagmire, other than outright decentralisation. It is to noteworthy that in the current tax regime, agricultural products are mostly exempted from paying VAT. The exemption put in place to ensure food security and keep prices of food items in check creates a disadvantage for some states that are predominantly food producers as they can’t charge or generate VAT on their major economic activity.

Some analysts have also expressed cynicism that if VAT administration was ceded to the states, it will breed confusion, complications, conflicts and instability because of its complex intricacies and unique dependence on input-output mechanism. Some others maintained that the raging battle is about the interpretation of a law and the judiciary should be allowed to settle the dispute.

Reeling from its defeat at the Federal High Court, the FIRS took the matter up to the appellate court; a Court of Appeal sitting in Abuja which reversed the previous court order permitting Rivers state to collect VAT. The appellate court ordered both Rivers and Lagos to maintain the status-quo on the VAT pending the determination of an appeal lodged before it by the FIRS. The order effectively re-instated FIRS as the only legitimate authority to administer VAT in Nigeria until it hears the matter in detail and the court also deferred hearing the application which Lagos filed to be joined as an interested party in the matter till September 16. Lagos State through its Attorney General protested against the issuance of an order maintaining status quo and insisted that such order could not be binding on it, since it was yet to be joined as  a party in the appeal by FIRS. It therefore maintained that it was ready to pursue its newly domesticated VAT law into full effect. After the judgment, the Rivers state government also inaugurated a new tax commission saddled with the responsibility of ensuring compliance with the rules of its new VAT law, and while we patiently wait for the Appeal Court to hear the matter substantively, the actions of both states and FIRS have shown that the Appeal Court verdict may not be the end to this running battle and the matter may well eventually climb all the way to the Apex Court for a final resolution.

The VAT imbroglio is multi-dimensional and almost all the various views to it are correct and factual to an extent. The legal fisticuff may not be the best way to resolve the impasse and for the sake of an amicable resolution, the central government needs to wade in and make necessary and decisive concessions. Our fiscalism is highly faulty and deficient; the existing structure for VAT needs urgent re-visitation to give back fixed and fair portion to the generating units based on volume of remittance while the rest will be pooled and shared. This will address grievances in the interim while more lasting situations are in the works, but an outright return to the status-quo will only breed more resentment and animosity in the already fragile union. Holistic solutions will that douse rising tension and benefit all federating units needs to be explored immediately. The initial VAT law enacted in 1993 is the work of humans. It is therefore imperfect and overdue for modifications in light of emerging realities.

The VAT saga between the FIRS and the states further took a new twist as the 36 states of the federation, through their Attorney-Generals dragged the Federal Government to the Supreme Court over alleged failure to remit funds generated from stamp duties into respective state accounts. The states are contending that they are legally vested with the authority to administer and collect stamp duties on all transactions involving individuals and persons within their territories. Upon the determination of the legal questions, the states want the court to declare that they are the sole authorities to stamp duty collection involving individual transactions within their domain and also direct the Federal Government to pay back sums amounting to N176 billion which represents stamp duties on individual transactions for the period between 2015-2020. The apex court has not fixed a date for the matter to be heard.

While it may breed ruckus, inconveniences and controversies currently, the political will displayed by the states to boldly assert their executive powers in driving needed actions towards reshaping our ill-formed fiscalism and curbing  instances of insecurity in their respective states is commendable. In addition, many other federating units may follow suit by intensifying different efforts aimed at getting more control over their finances and resources instead of ceding it totally to the centre while going cap in hand to seek hand-outs by month end. The recent wave of actions also enhances hope and optimism that the political class may yet be the means through which the national landscape is redefined and an avenue wherein our failing governance system may be rescued and rebirthed.

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