Why Nigerian States Should Collect VAT

Would it be better if VATs were remitted to the State? Better put, would the increased revenue generated benefit citizens more if the State collected VAT? Well, let's find out. The focus of this article is on the reasons why Nigerian states should collect VAT.

On the 6th of September 2021, the Rivers State Governor made some changes to the Rivers State Law regarding VAT collection. He directed the Rivers State Internal Revenue Service to commence the implementation and enforcement of the Rivers State Value Added Tax (VAT) Law, 2021. The government of Lagos followed suit shortly after. Now, there's an ongoing controversy: should the State or Federal Government collect VAT?

A value-added tax (VAT) is a type of tax levied on the price of a product or service. This is done at each stage of production, distribution, or sale to the end consumer. Formerly 5%, the VAT rate in Nigeria was increased to 7.5% on the 1st of February 2020.

An increased VAT rate has been said to, in turn, increase the revenue generated in a country. In Nigeria however, VAT is collected by the Federal Government. It's then shared with the states according to the Revenue Allocation Formula.

The “but” in this is that majority of the revenue is taken by the Federal Government. This leaves state governments with little to work with to improve their states.

Below are 5 reasons why Nigerian states should collect VAT:

1. If states collect VAT, they can generate adequate revenue for development

If states are allowed to collect VAT, they can use it to generate revenue. This in turn can help with the development of the State. It wouldn't have to wait on the Federal Government's hand and foot. States get to keep what's theirs rather than collect peanuts from the Federal Government during revenue allocation,

Also, the inequity in revenue allocation would be dealt with. Under the current system, states producing more VAT get almost, if not the same, as states producing little VAT. Everyone knows this is unfair. Allowing states to collect VAT would solve this problem.

2. VAT can be collected efficiently and effectively

In Nigeria, taxes are mostly evaded. FIRS can't successfully apprehend every tax defaulter even though it tries its best. Hence, it concentrates mostly on big companies and businesses. With the State, however, things can be different. In turn, this might make VAT replace income tax totally. Why? VAT is a consumption tax. The rich and the poor pay so long as they consume goods and services. With this, it's possible that the revenue generated from VAT will be so much, income tax won't be needed.

3. VAT rate can be reduced if states collect VAT

“The higher the VAT rate, the higher the revenue” it’s said. What’s usually forgotten is that the burden of this tax might be heavier on the poor. Yes, the VAT rate is the same, goods or services notwithstanding. However, the rich can easily afford it but the poor can’t.

The rich can even consume luxurious goods and services but for the poor, it’s a no-no. If VAT collection is done by the State, the rates could be reduced. This will undoubtedly bring relief to many. Here, the State would be regarded as “putting its people first”.

4. Fiscal federalism can be achieved

Simply put, fiscal federalism means each level of government finances its operations without recourse to the Central Government. States are fiscally constrained in Nigeria. This isn't due to a lack of resources as virtually every state is blessed. It's due to the revenue allocation formula which is faulty.

The little revenue allocated to the States is inadequate. Hence, the fiscal constraint. If the States collect their own VAT, however, there’ll be no need to wait on the Federal Government.

5. States will be more accountable to the people

When the people pay taxes, they expect accountability. The state government knows this too. So, they'll be more inclined to stimulate job creation and enhance job security among others.

With great power comes great responsibility. While Nigerian state governments push to collect VAT, they should also remember that responsibility comes with it.