As some States lock horns at the courts with the Federal Government to assert their democratic collection and distribution rights on Value Added Tax (VAT), we seem to have lost our way on a journey we started some three decades ago. This piece contributes to our efforts to retrace our steps.
1. Components of VAT
a. VAT on Intrastate/Intra-LG Transactions
Should the States win the battle to collect VAT within their jurisdictions on behalf of themselves and their constituent LGs, they can only collect VAT on intrastate transactions. Nothing should stop the LGs or major cities from following suit.
b. VAT on Interstate Transactions
VAT on interstate transactions, including Corporate VAT payments at headquarters, that transcend intrastate transactions are legitimately collectible and retainable by the FG and redistributable among all States based on equality of States/LGs and population.
c. VAT on International Transactions
VAT on international transactions that transcend interstate and intrastate transactions are legitimately collectible and retainable by the FG and redistributable among all States based on equality of States/LGs and population.
The total VAT receipts at issue were about 1.5 trillion Naira or one percent of GDP in 2020. There seem to be a presumption in some circles that the bulk of the VAT are generated from intrastate transactions.
VAT receipts have never been broken down into federally generated international/interstate components on the one hand, and sub-nationally generated or ‘internally generated’ intrastate component on the other hand, or even intra-LG/intracity components that may well become an issue as our democratic quest for devolution take root. It is important to have such breakdown now.
a. The Federal Government has been collecting all components of VAT on behalf of all tiers.
b. Two states now seek court rulings to collect VAT on behalf of themselves and LGs within their domains.
c. Some LGs/Cities may well seek court rulings to collect VAT within their jurisdictions in the future.
3. Distribution of VAT
The formulas for vertical and horizontal distribution of proceeds of value added tax (VAT) across the three tiers and within each of the two lower tiers of government are summed up as follows in the Keynote Address delivered by the then Honourable Minister of State for Finance, Mr Remi Babalola, at the National Workshop on the Review of the Revenue Sharing Formula of 6th May 2008:
“The Value Added Tax (VAT) was introduced in 1993 and it replaced Sales tax in the states. The formula for the distribution when it was first introduced was 50% to FGN; 35% to the States; and 15% to LGAs. With effect from January 1999, the formula was adjusted as follows: FGN 15%, States 50% and LGAs and area councils of the FCT 35%. The share of the States and that of the local Governments is shared amongst them using the factors of Equality 50%, population 30% and derivation 20%.”
Dispassionate resolution of the VAT distribution debacle calls for the following action points:
a. Publish Breakdowns of Proceeds from International, Interstate, and Intrastate VAT Components
It is important to know how much VAT accrues from intrastate, interstate, and international transactions.
b. Scrap the Vertical and Horizontal Distribution of Intrastate/Intra-LG/Intra-city VAT Components
The vertical and horizontal distribution formulas should not be applied to VAT receipts on intrastate transactions to allow each State/LG/City to retain the entire proceeds using only the principle of derivation, to effectively scrap the principles of ‘equality’ and ‘population’ which should have no place in distribution of value added tax on intrastate transactions that are ‘internally generated revenue’ of States/LGs/Cities.
c. Vertical Distribution Formula should apply to Interstate and International VAT Components
FG, States, and LGs should continue to share proceeds of VAT collected on Interstate and International Transactions based on the vertical allocation formula.
d. Horizontal Distribution Formula should apply to Interstate and International VAT Components
Once States/LGs are allowed to retain the full proceeds of VAT on intrastate transactions, horizontal distribution of the proceeds of VAT on interstate and international transactions should be based on equality and population as the only two guiding principles, derivation should no longer apply to these components.
e. It should not matter who collects, once agreement is reached on who gets what from which components.
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