VAT and fiscal federalism -GCFRNG

WE expect a major round of legal fireworks to commence very soon over the ruling of a Federal High Court in Port Harcourt last Monday voiding the powers of the Federal Government to collect the Value Added Tax, VAT, in Rivers State and by extension other states.

The ruling, therefore, transferred the VAT collection right to the states.

As the Federal Government contemplates appealing the judgement, we draw attention to the wider implication of the ruling on Nigeria’s federal system and Fiscal Federalism debate in particular.

Most observers would readily see the implication in terms of loss of revenue by the Federal Government against apparent gains or even windfall for states.

Nothing can be more misleading. The present structure of revenue from VAT does not support this perception.

Yes, currently the Federal Government takes just 15 per cent of the VAT revenue while the states get 50 per cent and the local governments 35 per cent. On the average, each state gets about 1.4 per cent. Even with the fraction that goes to derivation, this is clearly unjust to states that contribute more than 10 per cent.

But a further peep into the composition of the VAT revenue reveals that Abuja has emerged on the top three VAT earning territories, meaning that the Federal Government’s loss may not really be that huge.

On the other hand, states like Lagos and Rivers would definitely tank the bulk of the VAT revenue with another set of five states recording significant gains. What happens to the rest of the states is actually the main concern, but we see it as a learning curve in the quest for fiscal federalism.

We do not expect or support equality of states on the basis of robbing Peter to pay Paul. A situation where most states look forward to Federation Accounts Allocation Committee, FAAC, largesse for both recurrent and capital expenditure has been a big dent on both fiscal federalism and the viability of the states.

The judgement should be an eye opener and a wake-up call for states to take Internally Generated Revenue, IGR, more serious. A situation where more than half of the states in the country pass their annual budgets with over 70 per cent revenue expected from FAAC is very unhealthy for adequate governance.

We recommend that the states can be made to contribute relatively lower percentages of their VAT revenue to the Federal Government for the sake of federal system.

To deprive those states of the revenue arising from private sector economic activities and deploy same to the benefit of people of another state is unacceptable.

Related to this is the situation where VAT, a consumption tax, revenue from alcoholic beverages is taken from states where they are generated and distributed to states that have banned consumption of the product is also unconscionable.

Kudos for the court ruling’s support for fiscal federalism.

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