Decree 34 of May 1966 promulgated by the slain Major-general Johnson Thomas Umunnakwe Aguyi-Ironsi, Nigeria’s first military ruler, is at the root of the simmering brawl between Rivers, Lagos states and the federal government over the right to collect VAT.
Decree 34 effectively demolished Nigeria’s fiscal federalism and replaced it with a system where the federal government collects revenue from the federating units and distributes it through a skewed sharing formula.
Fiscal federalism was the magic behind the groundnut pyramids in the north and Nigeria’s domination of global palm oil and cocoa markets with products from the east and west.
Now, the sharing formula has rendered the federating units so lazy that they have to wait for manna from Abuja at the end of every month.
Nyesom Ezenwo Wike, Rivers state cantankerous governor, whose names sum up to the acronym NEW, kicked up the storm over VAT when he felt that his state was something of a gold mine for perceived lazy states.
Wike sued the federal government and prayed the Federal High Court in Port Harcourt to give the state the right to collect VAT which is hitherto collected by the Federal Inland Revenue Service (FIRS).
Justice Stephen Pam generously granted Wike’s prayers. The governor promptly signed into law, a bill passed by the House of Assembly empowering the state to collect VAT.
Wike’s victory torched off a chain reaction as Lagos state promptly enacted a law to empower it to collect VAT. Ogun state has joined the fray.
Wike’s complaint is that Rivers state generated N13 billion in VAT in the month of June but was allocated something less than N3 billion. Lagos state generated N45 billion during the same period and got back a paltry N9 billion, while Kano state smiled home with N2.3 billion from the N2.8 billion it generated during the period under review.
The current VAT sharing formula is what fuels the simmering constitutional brawl. It gives the federal government 15 per cent of the proceeds while states and local governments share 50 and 35 per cent respectively, no matter their contribution.
Ironically, the population factor still gives Kano an edge over Lagos in the sharing formula. The 2006 census dubiously gives Kano’s population an edge over Lagos even as everyone knows that the reverse is the truth.
Gombe state commissioner for finance added a human angle to the VAT duel when he appealed to the combatants to be their brothers’ keepers rather than fighting to monopolize VAT proceeds. None of the litigants is listening to him.
Lagos state generates 55 per cent of VAT proceeds because it hosts the highest number of companies and busiest ports in Nigeria.
The truth, however, is that states deserve the right for a lion share in the proceeds of VAT generated from their domains. They host the firms that pay the tax and provide amenities they use to provide the goods and services on which the tax is paid.
In the case of manufacturing firms, they generate a lot of waste which is managed by the state governments. That probably explains the rational for the demand by the states generating the jumbo chunk of the tax for total control of the proceeds of VAT.
However, VAT is a consumption, rather than production tax. Ironically, its architects in Nigeria made its deduction effective at the point of production of the goods and services on which it is paid, apparently for the ease of collection. So, VAT is paid as consumption tax but collected as production tax.
Consequently, Nigerian Breweries and Guinness pay VAT on each of the millions of bottles of drinks they brew in Lagos at the point the drinks are produced. Most of the drinks are consumed in states hundreds of kilometers away from where they are brewed, which is where the consumers reside.
FIRS does not bother about where the product or service it collects VAT on, is consumed. It collects its tax at the point of production for the ease of collection.
That factor knocks off the logic behind the demand by the producing states to keep all the proceeds of VAT. The states where the products and services are consumed have a right to a chunk of the proceeds of the tax because there would be no VAT without consumption.
Less than 40 per cent of the drinks produced in Lagos are consumed in Lagos. The rest are consumed in states outside Lagos. Chivita produces virtually all its products in Lagos.
However, the products are consumed everywhere in Nigeria while the VAT on them is paid in Lagos where they are produced. That explains why Lagos generates the highest chunk of VAT proceeds even as it does not consume half of the products and services on which VAT is paid.
Ironically, if VAT is collected at the point of consumption, Lagos input to its proceeds would reduce drastically. Conversely, the contribution of the consumption states would rise sequentially. VAT Collection litigants ignore the consumer state factor.
VAT would be ineffective and very expensive to collect at the point of consumption given the level of corruption in Nigeria. That is why it is collected at the point of production. The states hosting the production companies get all the credits. Consuming states are disparaged as lazy.
While the states hosting the production companies on which VAT is collected deserve to collect a bigger chunk of the proceeds of the tax, simple economic logic dictates that the states where the goods and services are consumed deserve a chunk of the proceeds for providing the facilities that make it comfortable for its residents to consume what the tax is paid on.
If the consuming states decide to import the goods and services on which the producing states claim total right, the companies producing them would simply pack up for want of patronage. The states consuming the goods and services deserve a chunk of the proceeds for consuming what the tax is deducted on.
That is why the states hosting the producing companies cannot take everything from the proceeds of VAT. The proceeds of the tax simply have to be shared in a formula that gives the producing states a bigger chunk of the proceeds than what it is now.
The solution to the simmering VAT scuffle may not be in the court rooms. The combatants should return to the negotiating table and draw up a fresh sharing formula that would give the producing states a bigger chunk of VAT proceeds.