Most of us are feeling elated about the current VAT arrangement that is being challenged in court by some state governors. We have become careless in our utterances and less circumspect in our outlook on what is available around the world.
Many southerners see it as the start of a much-touted restructuring. We see it as a fight against President Buhari and the Northern States, with no regard for the impact on business operations. The business side of this issue will be discussed another time.
We erroneously believe that the federal government will suffer and that the states at the forefront of the fight will continue to generate the same amount of VAT if they win the ongoing battle.
While Rivers and Lagos States would most likely benefit more from VAT if they secure the right to VAT generated from their states, the Federal Government would have access to over 50% of what is currently generated.
The centralized VAT system that some states are trying to change has two components: the local VAT component and the foreign VAT component.
The foreign VAT component is currently on the exclusive legislative list. It is the sole property of the federal government. If the ongoing case results in a favorable outcome for the states, they will no longer be entitled to a share of the foreign VAT component. For the fiscal year 2020, foreign VAT accounted for more than half of total VAT generated in the country (N1.53 trillion).
The federal government's meager 15% will inevitably grow and become a source of contention once more. Those who believe the federal government will twist the legal system if and when the case reaches the Supreme Court are in for a surprise. If we are to think in accordance with the usual human standard of behavior, the Federal government would ensure that the Supreme Court rules in favor of the states.
We must reconsider our pursuit of VAT decentralization. It does not appear to be a well-thought-out goal because it provides more resources to the center. The VAT war is a bad idea if one of the goals is to reduce the VAT revenue that goes to the federal government.
Given the facts about foreign VAT and the legitimate concerns of the states of Rivers and Lagos, a legal battle is not the best way to seek redress on this issue. Seeking a political solution would be the best and most effective way to address their concerns; a solution that will increase their pool take. Could this be the unspoken reason Governors Nyesom Wike and Babajide Sanwo-olu launched the VAT war? To put it another way, they intend to use the legal battle to bring stakeholders to the table.
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