Nigeria: How Rivers Governor Wike’s VAT law sets a new precedent for Abuja

By Dele Yusuf
Posted on Tuesday, 7 September 2021 12:48

Governor Nyesom Ezenwo Wike of Rivers State, Nigeria (Facebook / @GovernorNyesomEzenwoWikeCON )

The controversy playing out in Nigeria over Governor Nyesom Wike's new value-added tax (VAT) law in Rivers State is not so much about the expected earnings from the tax, but rather about how other states will respond. The law has brought back the debate about restructuring in Nigeria and some see it as a wake-up call for states to become more independent of Abuja.

Governor Nyesom Wike of Rivers State in southern Nigeria recently took a step that might just change the status quo in Africa’s most populous country.

He signed a law allowing the administration of VAT following a court judgement that ruled that the state – not the Nigerian government – should collect such tax. The matter is still playing out in the court where the government-led Federal Inland Revenue Service (FIRS) has filed an appeal.

But this is not just an arcane move about a complicated tax procedure. It touches on a volcanic argument: who runs Nigeria, the centre or the states? How should Nigeria’s wealth be shared? And more obliquely, whether the South should subsidise the North; a complex of issues known in Nigeria shorthand as ‘restructuring’.

The court recently had ruled that the government-led FIRS has no business collecting VAT on intrastate transactions in the southern Rivers State. It also ruled that the federal government’s constitutional powers were limited to taxation of incomes, profits and capital gains, which did not include VAT or any of the other items provided for in Nigeria’s constitution.

  • VAT is added to a product at every point on the supply chain where value is added to it. It basically refers to the tax you pay when you buy goods or services. In Nigeria, VAT from states forms part of the monthly allocation distributed nationally via the federation accounts allocation committee (FAAC).

In the aftermath, Governor Nyesom Wike signed the state VAT law, effectively sidelining the federal government in the collection of VAT — which generated N1.53trn ($2.81bn) in 2020 – in Rivers. Some highlights of the Rivers VAT law are below:

  • The tax rate is 7.5%, just like the national rate, and the Rivers government shall receive 70% of the revenue while 30% is for the local governments.
  • Provides for payment of the tax on taxable imported goods before they are cleared and remittances must be made latest 21st day of the following month in a manner specified by the state government.
  • Provides for VAT registration as a condition for obtaining a government contract, and refusal to register for the tax within a given time is specified is a punishable offence.
  • Non-resident companies operating within the state are to register for the tax with the Board using the address of a person with whom it has a subsisting contract.
  • Requires taxable individuals to register for the tax latest six months after starting their business, or after the VAT law takes effect.
  • Good and services exempted from the tax payment are similar to Nigeria’s Finance Act and include all exports, basic food items, educational materials, medical services and services rendered by community banks and microfinance banks among others.

Can Abuja lose its grip on states?

In signing the controversial Rivers State Value Added Tax Law, Governor Wike said states in Nigeria have been “turned to beggars” and “hardly will any day pass that you will not see one state or others going to Abuja to beg for one fund.”

The move, when copied by other states, will correct Nigeria’s current system which “disincentivizes productivity and encourages feeding-bottle federalism where (states) just want to stay at the corner and go to Abuja to collect allocations,” says Henry Nosegbe, a Lagos-based chartered accountant.

While speaking last week on the Nigeria Politics Weekly podcast, Nosegbe added that the step could just be another step towards “a de facto restructuring, where it starts with seemingly small steps and goes on as more Nigerians begin to appreciate how unsustainable the current structure is.”

David Hundeyin, a journalist and founder of the West Africa Weekly newsletter also sees the development is restructuring playing out already. On the podcast, he said: “There are states in Nigeria that literally contribute a net amount of zero in the total economic performance of Nigeria. That only exists because they are subsidised by Abuja. And then, there are other states mostly in the south that effectively subside the rest of the country.”

But the law is also likely to lead to multiple taxation, according to Ese Oikhala, an economic expert with Lagos-based SBM Intelligence think-tank.

In Rivers, checks by The Africa Report shows that the state government – through the state internal revenue service – had already started directing businesses operating in the state to comply with the new law, around the same time when the FIRS is insisting that VAT must still be remitted to them.

The north-south debate: Revenue sharing

Oikhala adds that most Nigerians in the southern region believe that “northern Nigeria is eating from them” because “they [the south] are the ones generating the revenues and that has the oil.”

According to the latest data on internally generated revenue by Nigerian states, in the first half of 2020, only three states from the north featured among the top ten that generated the highest revenue. Expectedly, Lagos had the highest revenue at N204bn ($498m), followed by Rivers, at N64.6bn ($158m). And what’s more? Revenue from Lagos also surpassed that of at least 29 states put together.

Some, however, believe there is also strength in the numbers and points to the farm produce coming from northern Nigeria. Available data shows that agricultural activities in Nigeria are more widespread in the north than in southern states.

The formula is lopsided, it puts more resources in the centre, with fewer resources in state and local governments, while the burden of responsibility and daily need are at the local government and the state levels.

“83% of households living in the North East of the country declared to practice crop farming. Similarly, 68.6% of households in the same region owned or rose livestock. On the other hand, the South West of Nigeria recorded the lowest percentage of households participating in agricultural activities. In total, crop farming was practised by about 70% of Nigerian households,” a 2019 report from the data platform Statista read.

There have been arguments about how inequitable Nigeria’s current revenue sharing formula:

  • 52.68% to the federal government;
  • 26.72% to the 36 state governments;
  • 20.6% to the 774 local governments.

In the last two weeks alone, at least three governors – from northwest Katsina and southern Delta and Bayelsa – have argued that the formula be reviewed.

For Governor Aminu Masari of Katsina, “the formula is lopsided, it puts more resources in the centre, with fewer resources in state and local governments, while the burden of responsibility and daily need are at the local government and the state levels.”

Ifeanyi Okowa, Masari’s counterpart in Delta, did not mince words in his call: “We need to re-work the revenue allocation formula, we can’t continue to give the federal government too much power and allow the states to suffer.”

Away from the economy, more states take charge

The VAT law in Rivers is only a fraction of the bigger picture in Nigeria where more states are implementing new policies and actions in a growing trend that suggests they are charting their course independent of the federal government and under the administration of President Muhammadu Buhari, who has been accused of reneging on his promise to restructure the country.

“We Nigerians can be very impatient and want to improve our conditions faster than may be possible considering our resources and capabilities. When all the aggregates of nationwide opinions are considered, my firm view is that our problems are more to do with process than structure,” Buhari had told the country of about 200 million in a nationwide broadcast in 2018.

The president’s position, notwithstanding, the campaign for restructuring has continued to grow in Nigeria, where many believe that the country is practising more of a unitary system of government – with most of the governing powers residing at the capital Abuja – than the federalism it claims to practise as stipulated in the constitution.

Over the last week, a number of states have announced measures to protect their citizens, boost their economy and better respond to the coronavirus pandemic.

In the northwest and central parts of the country where hundreds of schoolchildren and travellers are being abducted with many residents also killed on a daily basis, governors appear to have slowed down on usual visits to Abuja to brief President Buhari of such security challenges. The trend has now changed to frequent announcements about actions taken in their states: Bans on weekly markets, heavy traffic, movements during night hours, sale of fuel in jerrycans, transportation of cattle and so on.

More southern states in recent weeks have been enacting laws to ban open grazing in a big to end the prolonged pastoral conflict in Nigeria – despite seeming opposition from the presidency.

Is Nigeria’s long-awaited restructuring here?

“When states like Rivers announce such decisions and take actions contrary to what we have been used to,” says Ezugwu Felix, an Abuja-based lawyer,  “final court judgements on the matter are eventually going to be the template for the long-awaited restructuring and not the constitutional amendment that we have all been clamouring for.”

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