A Value Added Tax (VAT) system controlled by State governments will slow the growth of Micro, Small and Medium Enterprises, MSMEs, who are the drivers of the Nigerian economy.
The West African Tax leader for Deloitte, a global audit and consulting firm, Mr. Yomi Olugbenro, expressed this opinion while discussing the subject of “VAT & The Pathway to Fiscal Stability in Nigeria”.
The opinion was in response to the ongoing legal tussle between Rivers State and the Federal Government of Nigeria over the collection of VAT. The Supreme Court is expected to give its verdict.
According to him, it will not be potentially advantageous to states at the short-term
He argued that a decentralized VAT system is not suitable for Nigeria’s economy. It will harm businesses because of the cost implications and potential trade disputes.
Speaking further, he said if States fully administer the VAT system, taxpayers will have the burden of payments, and there will be the possibility of inter-state trade disputes. In contrast, businesses will have to put up the structure to do proper reconciliation on tax payments.
He noted that the VAT law signed by Rivers state followed by Lagos did not exempt MSMEs as provided in the Finance Act of the federation. The tax expert believed the states need to revamp their tax system from capacity to technology to achieve fiscal stability.
Olugbenro called for a constitutional review of the VAT system. He decried that so much uncertainty was not good for Nigeria’s tax system, especially concerning attracting investments.
Apart from the constitution, he agreed that there should be a balanced allocation formula for VAT so that more states can derive value from the business activities in their territory.
He added that the VAT is now a significant line item in Nigeria and raked in more revenue to the government in 2020 (N1.53trn) than the petroleum profit tax.
VAT is a tax payable on the supply of goods and services at different stages of the product supply and service delivery value chain. The burden of the tax ultimately falls on the final consumer.
Nigeria’s current Value Added Tax is 7.5% and States with the highest derivation are Lagos (50.5%), FCT (13.2%), Oyo (2.9%), Rivers (2.7%), and Kano (1.4%).