The boldness of the Rivers State government to challenge the federal government on the collection of Value Added Tax (VAT) and the judgment delivered in the state’s favour is not only important for fiscal allocations, but it is also a triumph for Nigeria’s federalism.
The judgment delivered by Justice Dalyop Pam granted all the reliefs sought by the Attorney General (AG) of Rivers States citing Item 58 and 59 of the Exclusive Legislative List of the constitution as the authority limiting the tax collection of the federal government to taxation of incomes, profits, and capital gains and this does not include VAT or any other sales or levies.
While Abdullahi Ismaila Ahmed, director, Communications and Liaison Department, FIRS has said the agency would appeal the decision made by the court, it is important to note that there is a Supreme Court judicial precedent on VAT involving the AG of Lagos State vs AG of the Federation. The apex court ruled that only the Federal High Court has original jurisdiction to entertain suits relating to federal revenues and not the Supreme Court.
Nigeria’s version of federalism is a defective anomaly of the true meaning of a federal arrangement. By definition, federalism is a mode of political organisation that unites separate states or other policies within an overarching political system in a way that allows each to maintain its own integrity. Unlike in a unitary state, sovereignty in federal political orders is non-centralised, often constitutionally, between at least two levels having final authority and can be self-governing in some issue area.
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Nigeria’s version is at best a unitary federalism. Over many years of misrule, the country has created a political system with a concentration of powers at the centre and underdeveloped states. The method by which Nigeria allocates revenue between the central government and states impedes the development of a truly federal polity.
Over many years of misrule, the country has created a political system with a concentration of powers at the centre and underdeveloped states
The current revenue sharing formula sees the federal government taking 52.68 percent, the states 26.72 percent, and the local governments, 20.60 percent with 13 percent derivation revenue going to the oil-producing states. And yet, the states and the local government are the closest to the people.
But the federal government justifies this by referring to its ballooning wage bill, an anomaly giving legitimacy by the constitution which allocated 68 items to the federal government leaving only 12 items to the state government. With 68 items reserved for one tier of government, other tiers automatically become subordinates to the central government.
This is why development in the country is lopsided and corruption rife because since the central government controls practically every important item that constitutes development, it then has the power to distribute resources the way it wants to. Many of the states depend almost entirely on the federal allocations that come to them every month as they have been rendered economically unviable by anomalous fiscal allocation systems and they cannot attract serious investors this way.
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Only four states in the country – Lagos, Ogun, FCT, Rivers – are practically carrying the revenue burden of the rest 32 states. According to a 2020 report by BudgIT, these four states contribute the highest VAT in the country. This does not bode well for the even development of the entire country.
The Federal High Court judgment should serve as a wake-up call for the government to right the ship. States’ collection of VAT would significantly improve revenue and the developmental work at the grassroots. In 2020, the total VAT collection was about N1.53 trillion with import VAT being N348 billion (or 22.7%) while foreign non-import VAT was N420 billion (or 27.4%) and local VAT amounted to N763 billion (or 49.8%). In the first quarter of 2021, VAT collection was N496.39 billion while it increased by N15.8 billion in the second quarter to N512.25 billion, according to data from the National Bureau of Statistics (NBS).
As significant as the amounts collected so far have been, there are many companies still not remitting VAT. This can be tackled by states collecting the tax. What Rivers State has started should be encouraged by other states and should come to stay. Hopefully, a constitution review will get the country on the right path to allocating its resources meaningfully.
