On Monday, the Federal High Court ruled that the collection of value added tax (VAT) sales taxes, education tax and levies by any Federal Government agent in Rivers State was illegal.
The Federal Inland Revenue Service FIRS the tax agency of FG, has been the state generated VAT collector for years, until Rivers State Government decided to throw a spanner in the works.
This is a groundbreaking judgement by Justice Stephen Pam, which will rock the financial accounts of the FG, and create a ripple effect across all 36 states, particularly the Northern region – The translation of the Concurrent Legislative List changes the status quo.
According to Justice Pam, the Concurrent Legislative List provisions of items 7 and 8 of the Part II of the Second Schedule of the Constitution limits the powers of FG to claim VAT, Personal Income Tax, amongst others in any state within the territory of Nigeria.
Impact of the landmark judgement by Justice Pam
Judgement to wipe about N1.64 trillion off FIRS annual revenue target
Prior to the judgement, the Senate increased the revenue target of the FIRS to N7.61 trillion in 2021 from N5.07 trillion target in 2020, which it failed to meet.
COVID-19 had impacted business activities across the country, cutting down revenue and government gains from SMEs and corporate turnover, hence, limiting the ability of FIRS to generate N4.9 trillion in 2020.
The 2021 annual target expects the tax agency to generate N5.645 trillion from non-oil components and N1.964 trillion from oil components.
VAT is split into two segments under non-oil components, Nigerian Custom Service import VAT and Non-import VAT, which is generated across states, and it is a major revenue pool for FIRS compared to other tax segments of the agency, queuing behind Petroleum Profit Tax and Company Income Tax.
With state governments given the power to demand and collect non-import VAT, the judgement will wipe about N1.64 trillion [which is the target for Full Year 2020] of FIRS revenue, thereby, affecting its turnover to the Federal Government.
FIRS has already generated about N500 billion in the First Half of 2021, but the Justice Pam judgement now gives the states the power to generate the remaining VAT income for Second Half of this year.
Revenue from FAAC to three tiers of governments to drop
The allocations disbursed monthly by the Federal Account Allocation Committee (FAAC) will be cut down following the judgement as the FIRS remits the VAT to the FAAC.
This will impact the gains of FG from the FAAC as an average of N20 billion is received monthly with the states and local government getting the lion’s share.
It is yet to be known if the Federal Government will appeal the judgement, but if it does.noy, going forward, earnings from VAT collection within states will go to the state government.
Sharia law to cost Northern states non-import VAT revenue
The Sharia law in the Northern states forbids the sales of alcoholic drinks and beverages in the region, but the Northern state governments have been collecting VAT from sales of these drinks in other states.
Out of the six regions that benefit from the FAAC allocation, North West, North Central and North East are the second, fourth and fifth largest beneficiaries.
With states now entitled to VAT from alcohol sales, regions that prohibit the production and selling of alcoholic products will miss out on the revenue generated from the such sales.