Akinloye James: Understanding VAT Administration in Nigeria: A Historical Perspective


An African proverb says that it takes someone who knows the history of a place to locate the limits of a territory. This is the reason why we should all be thankful that the teaching of history as a subject in high schools has been reinstated.

Knowledge of history is useful in the current conversation about VAT administration in Nigeria. It seems, however, antithetical that the people with the advantage of history on their side are the ones leading the agitation for states in Nigeria to start collecting Value Added Tax (VAT) instead of the Federal. Inland Revenue Service (FIRS), which under existing laws is responsible for collection. Looking further may unearth a whole other matter.

For the benefit of the doubt, VAT was introduced in Nigeria in 1993 by the federal military government. Recall that the initial reason for the introduction of VAT was dissatisfaction with the then existing tax structure, that is to say the sales tax. Prior to the introduction, the sales tax was under state jurisdiction and in general it was poorly administered with a marginal contribution in terms of revenue. Thus, after long deliberations on the matter, VAT was introduced as a federal tax by the VAT Decree of 1993.

With the advent of the 4th Republic in 1999, the National Assembly took the decree on VAT and legislated it thereby making it an act of Parliament. The VAT law has been in force since then. VAT has been imposed on certain goods and services at a uniform rate of 5%. In 2007, attempts were made to increase the rate to around 10% through the enactment of the Value Added Tax Act No.2 of 2007, but this failed because the Nigerian public resisted the increase. . However, the VAT rate was raised to 7.5% via the 2019 finance law and it entered into force from January 2020.

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Article 8 (1) of the VAT Act obliges businesses to register for VAT within the first six months of starting their activities. The business entity that wishes to do business with an agency of any level of government in Nigeria is required to show proof of VAT registration and previous VAT remittances. A registered entity is required to make monthly VAT returns and pay or receive from FIRS the difference between input VAT and output VAT.

Under the provisions of the law, VAT is administered on behalf of the federation and not on behalf of the federal government. This means that the VAT is administered on behalf of the three levels of government – that is, the 774 local governments, the 36 states and the FCT and the federal government. VAT revenues are shared between the three levels of government on the basis of existing arrangements. Currently, 35% goes to local governments, 50% goes to state governments, and 15% goes to the federal government. Through this device, 85% of the VAT collected goes to states and local communities while 15% goes to the federal government.

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It is instructive to note that the VAT receipts are not paid to the account of the federation at the origin but to a VAT pool account. It is only after its sharing and allocation to the three levels of administration that the share due to the federal state enters the corresponding consolidated revenue account.

While it is natural to be agitated, those who caused it or who are involved in it should not simply express their displeasure. It is more honorable to seek ways that the appropriate system of governance also addresses the plight. Sometimes it may be necessary to lobby the relevant authorities to get your point across and get the necessary action taken.

One of the criticisms leveled at the sales tax system before the introduction of VAT in 1993 related to its structure and administration. With hindsight, it has been argued that the mechanisms and procedures for implementing the tax system were inadequate and therefore explained the constant low returns and intergroup inequalities. In addition, there was the challenge of bigotry, regionalism, and other divisive feelings that were inconvenient, prompting the federal government to introduce value added tax in 1993 which came into effect on January 1, 1994.

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To those who claim that states collect VAT occurring in their jurisdiction, the question they should answer is whether there is the structure and administration necessary to properly launch such a business? Have issues of ethnic sectarianism, regionalism and other divisive feelings been addressed, as long as an overthrow of the old system is guaranteed?

The National Assembly resumed Tuesday, September 13, 2021, after their two months of annual vacation, to continue with the third year of the ninth Assembly. Are citizens turning to parliamentarians for a solution to the fiscal imbroglio? The situation, if not resolved, adds to the litany of challenges facing the country.

Akinloye James is the president and founder of the Initiative to Save Democracy. He can be reached on +2348122233309.