VAT collection can only be done at the national level, not at the state level, according to FIRS

The Federal Inland Revenue Service has warned that value added tax collection in Nigeria can only be done at the national level, not at the state level. Issues such as the input-output mechanism and multiple tax rates, according to the agency, will obstruct VAT collection at the state level.

This was revealed in a statement made by Muhammad Nami, FIRS’ Executive Chairman, in a meeting with journalists on Wednesday evening.

What the FIRS boss had to say
“VAT is based on an input-output mechanism,” he explained. What this means is that a company importing or purchasing products will have to pay VAT, either at the port if importing or to the manufacturer if purchasing from a local manufacturer.

“And when that business pays VAT, it is accounted for as input tax in the business, so that when it starts selling in any part of Nigeria and charges VAT to its own customers, it is able to recoup the input tax paid either at the port if it is an imported item or paid to the manufacturer if it is a locally purchased item,” he added.

He stated that VAT can only be applied at the national level and not at the subnational level, in order to avoid consumer confusion and multiple payments.

“It only works at the national level,” he explained. VAT cannot be implemented at the subnational level.

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“And there is no country in the world where VAT operates at the subnational level, for the simple reason that VAT is based on an input-output mechanism.”

“For instance, suppose a business person purchased an item in Osun state and paid VAT, and then took the item to sell in Sokoto state. Remember, he paid VAT when purchasing the product in Osun state, and when selling in Sokoto state, will charge VAT, and by the operations of the input/output mechanism, the business person will deduct the input tax paid in Osun state.

“In this case, because the VAT is handled by a single tax authority, the same authority that receives the VAT in Osun State will also receive the additional VAT due in Sokoto State.

“As a result, figuring out the input/output mechanism is simple, and there is no risk of a business being shortchanged or a consumer having to pay VAT more than once.”

He went on to say that the current system makes it simple to figure out the mechanism, and that there is no risk of the business being shortchanged or the consumer having to pay VAT twice.

“However, if this is done at the state level, it means that when a business person pays VAT in the state of origin, such as Osun, the state will collect the money, and when that person sells the item in Sokoto, the state will charge VAT.

“Here’s the conundrum: how does the company recoup VAT it has already paid?

“One of two things will occur. Either Osun state will have to refund the VAT collected, or Sokoto state will have to absorb the loss, which creates additional uncertainty.

He went on to say that another issue that could arise is the disparity in rates. “If Osun charges 10% VAT and Sokoto charges 5%, the businessman would have paid 10% VAT when purchasing the goods and will charge 5% VAT when selling.

“As a result, the input is greater than the output.” “Then who is responsible for the 5% shortfall?” he enquired.

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In case you missed it, here’s a reminder.
1. A Federal High Court in Port Harcourt ruled that Rivers State, not the Federal Inland Revenue Service, should be responsible for collecting Value Added Tax (VAT) and Personal Income Tax (PIT) in the state.
2 On August 9, Justice Stephen Dalyop Pam issued an order of perpetual injunction prohibiting FIRS and the Attorney General of the Federation, the first and second defendants in the suit, from collecting, demanding, threatening, or intimidating residents of Rivers State to pay FIRS personnel income tax and VAT.
3. However, a Federal High Court in Port Harcourt, Rivers State, dismissed an application by the Federal Inland Revenue Service (FIRS) to prevent the Rivers State Government from collecting Value Added Tax this week (VAT).
4. Following the court defeat, the FIRS urged taxpayers not to be alarmed by a recent court ruling on Value Added Tax (VAT) by the Federal High Court in Port Harcourt, which directed taxpayers to continue to honor their tax obligations under the VAT act to the agency.
5. Rivers State Governor Nyesom Wike has stated that the state government will continue its efforts to prevent the federal government from collecting VAT from the oil-rich state.