Value Added Tax (VAT) is a consumption tax levied on a product at every point of sale when value is being added. It is collected by the Federal Inland Revenue Service. At every stage of production up to the ultimate level of the final buyer, value added tax is paid.
VAT was introduced in Nigeria via Decree 102 of 1993 and implementation began in 1994. It replaced the Sales Tax introduced via Decree 7 of 1986.
According to official information on the Federal Inland Revenue Service portal, VAT percentage is 7.5.
The VAT law “requires that you pay VAT on all goods manufactured and assembled in or imported into Nigeria and all services rendered by any person in Nigeria except those specifically exempted under law. They include; basic raw/food items, baby products, medical services rendered by community banks, catering services, food bought in hotels, and restaurants will be ‘VATable etc’. The Nigerian Federal Inland revenue service stated that while VAT is not a multiple tax, it is a multi-stage tax.
VAT is also expected to be paid on services such as those rendered by lawyers, accountants, contractors, consultants, etc. A ‘VATable’ person is one who trades in goods and services for consideration.
The last buyer bears the brunt of VAT most, but VAT is paid at each level of added value except for goods and services exempted by the VAT law. Every time you buy a product, you ought to pay VAT.
In 2020, the VAT payment structure was put at; professional services- N162 billion, Non-Import VAT- N763 billion, Non-Import Foreign VAT N420 billion, Import VAT generated by NCS N347.7 billion, VAT from Transportation- N43.5 billion, VAT from Agriculture – N4.34 billion.
The Daily Trust recently published an exclusive report where it noted that Kano had more Value Added Tax (VAT) than the whole of South East. The report noted that Kano collected N24bn while the whole of South Eastern Nigeria accounted for N20bn.
Comparison with the Southeastern States
Daily Trust’s report declared that Kano is faring better than all the southeastern states combined and further said the “revelation” is in light of the VAT row between the federal government and some states, and allegations that some states, majorly in the North, benefit more than what they contribute to the central pool.
The data is as true as it is exclusive, Kano State earned far higher in VAT income than all three southeastern states in the first eight months of the year.
But beyond the headline figures of VAT income, how do these states compare to Kano?
VAT Per Capita Measure
Abia has a population of 2,845,380 and its VAT contribution is 2.25bn, Anambra has a population of 4,177,828 and its contribution is 3.97bn, Ebonyi has a population of 2,176,947 and its contribution is 17.2bn while Enugu has a population of 3,267,837 with a VAT contribution of 5.19bn.
If the population is a factor in VAT income, then a mere comparison (without other contexts) of each state in the southeast’s population to Kano says that it is entirely plausible that they all would have lesser VAT income than Kano.
None of the states in the southeast have even half of Kano’s population with the closest being Anambra with a population of a little over four million.
Economic Health
A look at figures released by the Nigerian Bureau of Statistics for instance shows that as of Half-year 2021, Kano State generated N15 billion Internally Generated Revenue, Enugu State generated N14.1 billion, Anambra N12.7 billion, Imo State N9.9 billion, Ebonyi generated N7.7 billion, and Abia N7.5 billion.
Since VAT is a form of internally generated revenue and internally generated revenue can be used as another measure of financial performance, Kano is not necessarily doing “far” better than states in the southeast nor did it make more than the entire Southeast in IGR in the first half of 2021 despite being riddled with conflicts.
But How Does Kano VAT fare with States With Similar Attributes?
Kano state is described as the Centre of commerce in Nigeria, it has an estimated population of over nine million persons and is the second largest state after Lagos. Kano is the commercial and investment hub of Northern Nigeria and largest non-oil and gas economy in Nigeria.”
Kano has the ideal mainstay of states that earn high Value Added Tax, its population and industrial capabilities which helps the multi-stage nature of VAT. Kano is in fact considered the trade and investment nerve centre of the entire north and boasts trans Saharan trade routes for centuries, the state’s potentials for import duties in form of VAT is considerable.
So how does its VAT revenue compare against a state with similar attributes?
Lagos State, with the highest population among states with 17 million persons, contributed a sum of N421.2billion in the first eight months under review in the form of VAT.
Since Kano is the second largest state with half of Lagos’ population, it may be fair to expect at least half or a quarter of Lagos’ revenue contribution in VAT.
But Kano’s VAT contribution is N24bn, significant, but only 5.9% of Lagos’s contribution.
Both states have a high population expected to help boost trade and services. Both states have been severally touted as Nigeria’s commercial hub, self-justifying their economic strengths as hinged on commercial capabilities and the presence of corporate establishments.
The value added tax of Lagos at N421.2 billion is over 18 times that of Kano at N24 billion.
How does Kano Compare with Fellow States with high VAT?
The State with the next highest contribution to VAT is the Federal Capital Territory with an extrapolated population of 5.67 million and a VAT contribution of 241.10bn. Again the Federal Capital Territory has a far less population than Kano and may be considered as having less real economic potential than Kano. Its VAT is 10 times the size of Kano’s.
Rivers state earned the most after Lagos and FCT with N92.3 billion. Rivers has a population of five million people, 4 million less than Kano.
The VAT of Rivers is four times bigger than that of Kano.
In fact, although Kano State is the 4th highest earner of VAT, the nearest state to it, Oyo State with a population of 5,580,894 earns a little over two and half of Kano State’s VAT.
These states are Kano’s contemporaries and perhaps will make for more advantageous comparisons.
Case for Who Should get What
In line with Section 40 of the VAT Act, revenue is shared 15% to the Federal government, states and FCT take 50% while Local Government Areas take 35%.
20% of the allocation to States is shared per each state’s contributions to the VAT pool, Another 30% is set aside for states with high populations and the remaining 50% is shared equally among all states.
Even though the VAT Act does not expressly define a sharing formula for states, it goes; 50% general share(all states), population 30%, derivation 20%.
Beyond what is stated in the law, what is the “ideal basis” for a change?
States with clear economic and other challenges that impact on their ability to take on their burdens should naturally receive more from a federal pool. But that is an ideal, and Nigeria’s reality is far from ideal.
This Daily Trust analysis, which is perhaps conceived as a response to the politically charged question of who should get what from the Federal VAT pool, might have opened up a whole other thread of arguments rather than a closed one.
A connect-the-dots argument from their analysis is this, if Kano is earning such higher revenues from VAT, it needs less from the central pool. This logic does not support or oppose either existing argument but creates the possibility of a third.
IF VAT is the only basis on which such decisions are made or should be made.
But VAT is not necessarily the best measure of the health of a State’s economy, things like comprehensive demography, Internal Generated Revenue, Gross Domestic Product on one hand and state of infrastructure, security, on the other hand, are other factors to consider.
If Nigeria is not riddled by sectional politics and power plays that have thus far not benefited the citizens of the country in any way but lent itself to further divisions with greater human consequences, these considerations should be collective. Each component should understand the importance of the other and make mutually beneficial policies, laws that make for collective growth.
Data aficionados may argue, but data is amoral and without careful consideration of not just nominalities but also real values placed in proper context; it may create more questions than answers, it may create more confusion and fan flame latent discontents.
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