A court ruling in one of Nigeria’s oil-producing states may cost the federal government control of a major source of tax revenue, to the detriment of the West African nation’s poorer regions.
A judge on Monday dismissed an application by the Federal Inland Revenue Service to delay the execution of an order issued last month that allows the government of the southern Rivers state to collect value-added tax within its territory. FIRS said it’s appealing the ruling.
VAT accounted for 1.53 trillion naira ($3.7 billion) of the federal government’s 4.95 trillion tax take last year, data from the National Bureau of Statistics show. The kind of VAT that the nation’s 36 states could administer following the ruling would account for almost half that amount.
The federal court decision will help Nigeria’s states “reduce the outdated over-reliance on pitiable federal allocation and other handouts,” Nyesom Wike, the Rivers state governor, told a media briefing. “The benefit derivable from this case by all the states in the long run far outweighs the immediate revenue loss that some states may presently suffer.”
The commercial hub of Lagos, the country’s wealthiest region, plans to follow Rivers’s example, with its legislature in the process of passing a law enabling the state government to take control of VAT collection, Gbenga Omotoso, the state’s information commissioner, said by phone.
“We are putting everybody on notice about the law,” he said. “We are going to obey the court order.”
FIRS currently manages VAT in Nigeria, distributing 85% of the funds to state and local governments. As long as the judgment isn’t overturned, “it will apply to other states and not just Rivers state,” accounting firm PwC said in a note last month.
The “biggest losers” of any permanent change will be the 30 states that cumulatively generate less than 20% of Nigeria’s VAT and “will suffer significant revenue decline,” PwC said. While Lagos is by far the largest contributor, a few other states including Rivers and the northern trading hub of Kano “may experience minimal impact,” it said.
Consumers and businesses in Rivers state are caught between the directives of the federal and local authorities.
FIRS urged taxpayers to continue paying their VAT to the agency “until the Court of Appeal, or even the Supreme Court, determines the matter,” according to a statement Monday. “Failure to do this would put them on collision course with the law,” it said.
Rivers state’s government “will not tolerate any further attempt by the FIRS to sabotage or undermine our authority to freely administer our tax,” Wike said.