The recent VAT ruling in favour of Rivers State against the Federal Government is likely to trigger a vicious battle among State Governors across the country.
On Monday, August 9, 2021, the Federal High Court in Port Harcourt decided that the Rivers State Government (rather than the FIRS) had the authority to collect VAT in the state. This is based on the idea that only the State has the constitutional authority to levy consumption or sales taxes in its area.
This decision is not isolated as in another judgment delivered on December 11, 2020, the Federal High Court in Kala’s Case held that the powers of the National Assembly to make laws imposing taxes did not extend to VAT. The judgment on paper is likely to favour State and Local Governments who currently receive 75% of the revenues generated from VAT. However, this may not be the case.
READ: Court says State should collect VAT, income taxes, not FG
A recent PWC report explains that the judgement, if upheld by a higher court, could spell doom for some states which currently do not generate enough economic activities to boost their individual VAT numbers. According to PWC, states such as Lagos, Rivers and Kano might just be the only beneficiaries of this ruling, considering the significant level of economic activity in the states that can generate high VAT revenues.
“Ironically, the biggest losers will be the states except Lagos. A few states like Kano, Rivers, Oyo, Kaduna, Delta and Katsina may experience minimal impact, while at least 30 states which account for less than 20% of VAT collection will suffer significant revenue decline. The federal government may in fact be better off, given that FCT generates the second-highest VAT (after Lagos) in addition to import and non-import foreign VAT.”
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PWC also suggested the Federal Government could gain even more, considering that about 27% of the VAT revenues currently comes from foreign non-import VAT.
In 2020, for instance, 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%). The federal government is likely to retain more than the 15% it currently shares, while States and LGs will have less to share, especially if we consider VAT on FG contracts included in Local VAT which will also be due to the FG.
States will also need time to set up the machinery required to collect VAT, a luxury they probably cannot afford in the short term. This means they could be on the hook to lose significant revenue, putting them in a more precarious situation.
READ: FIRS appeals case awarding VAT collection to Rivers State
Sources inform Nairametrics that some states understand that the judgement may not augur well for state governments who are on the other end of the judgement. They are aware of the likely implication on their revenues if this judgement is allowed to remain, placing them on a collision course with their counterparts