Many states in Nigeria may not be able to meet their financial commitments as the federal government could lose revenue from taxes amidst dwindling revenue in recent times with a court ruling assigning the collection of Value Added Tax (VAT) and two other taxes to states.
VAT contributes significantly to the total revenue generated by the government, accounting for over 16.2% of the Gross Domestic Product (GDP) in 2019.
Most states depend on funding from the Federal Allocation Account Committee (FAAC) due to their poor Internally Generated Revenue (IGR).
Lagos and Rivers states, which contribute over 70 percent of the VAT collectibles in the country, have decided to enact a law that will empower them and not FG, to collect VAT in their states.
Their action is based on the judgement of August 11 by a Federal High Court in Port Harcourt, which held that VAT collection was for the states and not for the federal government through the Federal Inland Revenue Service (FIRS).
VAT was introduced via Decree No.102 of 1993. It replaced sales tax operated under Decree No.7 of 1986, which was administered by states and the Federal Capital Territory (FCT).
Until now, the FIRS had the responsibility of collecting VAT on behalf of the 36 states and the FCT. Section 40 of the VAT Act requires that the VAT pool be shared 15% to the FG; 50% to states; and 35% to LGs (net of 4% cost of collection by the FIRS). Twenty percent of the pool is shared based on derivation.
The Federal Government generated over N2.5 trillion from VAT alone in the last 18 months as outlined in the 2020 Finance Act.
According to data filed by the Federal Inland Revenue Service (FIRS) from the National Bureau of Statistics (NBS), Nigeria may have earned about N2.5 trillion from January 2020 to June 2021 at a 7.5 percent VAT rate.