Legal Nigeria

Omooba Olumuyiwa Sosanya, renowned accountant and technocrat is founding president, Association of National Accountants of Nigeria (ANAN), one of the umbrella bodies regulating professional accountants in the country. In this interview with IBRAHIM APEKHADE YUSUF, Omooba Sosanya who doubles as a member of the Lagos State Governor’s Advisory Council, shares insights on the raging controversy over the Value Added Tax (VAT). Excerpts:

What is your view on the Federal High Court judgment in Rivers State?

The issue of the judgment by the Federal High Court in Rivers State on the VAT, I think the judgment was a divine intervention. This is because we have been talking of federalism and unfortunately, we have a system that is lopsided whereby every state has to look up to the federal government to run their economy. The Nigerian constitution allows for each of the states to make laws to run their economy. But unfortunately, we’re still running a unitary government which was the system put in place by the army. Fortunately, we have had civilian government in the last 20 years but I don’t know why none of them has been bold enough to put things properly. So this judgment, I think one can call it a revolution to restructure this country, especially the economy. In the first place, in 1993, to be precise the 26th of August, when the VAT law was promulgated by then president Ibrahim Babangida, I raised my objection about the discrepancies at the time when it was being managed by the Federal Inland Revenue because the law itself was not clear on who to manage it. But unfortunately, the FIRS quickly hijacked it and because we had a military government in place they set up a system whereby it was the FIRS that was operating it. Again, I raised some objections where I said there is no way the FIRS would be able to administer the VAT law adequately and efficiently because it is a very tight tax.

Can you share a background as to how the VAT regime started globally?

Yes, it all started in France to raise revenue and the British government also adopted it when they were going to join the European Union in 1973 and it has been a source of revenue to finance their economy. But in our own case, because the administration was lopsided we were generating peanuts. As at 2002, I suggested that the VAT administration should be centralised whereby all the states will administer the collection and this will bring in more taxpayers into the net of the VAT. But unfortunately, the powers that be at the top refused to listen. Even as late as 2019 before the passage of the 2020 budget, I presented a memorandum to the National Assembly when the VAT was increased from 5% to 7.5%. I suggested at the time then that once the states are allowed to operate their own VAT, they will find it convenient to reduce the VAT rate to a lower per cent below what is being charged by the FIRS. So, I’m happy that Rivers and Lagos states have begun the process and before you know it, other states would join the bandwagon. And I don’t envisage anything different by the Supreme Court. The thing is that the VAT law as an established law is not entrenched in our constitution neither is it on the Exclusive List of what the federal government can enact, so each of the states can make laws suitable for them. All the states need to do is to go to their State Houses of Assembly to enact laws. In fact, most people making comments against the state collection their arguments are misplaced and rooted in ignorance. The VAT is a consumption tax so it is the end consumer that pays. So if I live in Lagos and I consume in Lagos, it is logical and legal that the Lagos state government should collect the VAT and they will be able to do it efficiently. Right now, throughout Nigeria in the FIRS that is collecting the VAT; they have not been able to collect even up to 15% of the collectible because they cannot manage the process efficiently. So the argument that the states will not be able to collect or administer the VAT is misplaced. Rather, the states will be able to look inwards at both the formal and informal sectors, such that the latter can be brought into the VAT net. But now, it is only the organised private sector (OPS) that pays VAT. The informal sector is not paying and the informal sector is about 80-85 per cent of our economy and they’ve been left out of the VAT net. So now that the states have woken up to their responsibility following the judgment of the Federal High Court in Rivers State, you will find that most of the states now, especially Lagos and some other states that have high commercial activities in their capitals, can generate if not up to what the FIRS is collecting nationally may be collecting about 25 per cent of it. And if you take Lagos as example, I’m quite sure that in the next five years the state will be collecting over N60billion monthly from VAT receipts. This is because the chargeable persons are in Lagos. Apart from the corporate bodies, the informal sector is in Lagos and the activities of this sector will enable the Lagos state to generate up to about N60billion per month in another five years. This also will create employment via those channels and they have to put in place automated system. There is also a lot of intelligence to go into it. Administration of VAT itself is a challenging administration such that you have to put many new things in place which the FIRS administration has not been able to look at. They (FIRS) simply look at the VAT as a means of meeting their annual revenue target but they have not been able to expand it. But the states would be able to do that because the size of the economy is so limited to their area. Somebody cannot stay in Abuja and know what is going on at Ajegunle, Idumota, Alaba markets. All those markets are not involved in the VAT collections because nobody has reached out to them. But now, Lagos state will be able to reach out to them and generate VAT from their businesses and sales.

Apart from that, I have said that often the professionals are chargeable to VAT such as practicing lawyers, accountants, engineers, architects, pharmacists, including mechanics, barbers, supermarket stores, etc. As of now, they are out of the VAT net. These are the areas that will bring in more revenue into the VAT. So, it is a welcome development and I’m sure the Supreme Court will not think otherwise because the law is clear. This is a domestic tax not a national tax.  I say this because I think some officials of the FIRS have been claiming that there is nowhere in the world that the VAT is decentralised. That’s not true. America that we are copying their system, each of the states have VAT laws in place even though they don’t call it VAT, they call it sales tax. The VAT is a consumption tax. Each of the states in America collects their sales tax and the rate varies from one state to another. Therefore, those who are claiming that it is not done anywhere in the world, that’s not true. We have to compare like to like. You don’t compare Nigeria with Canada or Australia. We’re running a federal system so we can only compare Nigeria with America in this instance. However, one thing that gladdens the mind is that perhaps, this development is the starting of the restructuring of our economy. Each of the state governors should wake up and be alive to their responsibilities instead of going to Abuja every month to collect peanuts. There is no state that is not viable for VAT collection. The revolution has started so each of the states should look inwards.

Those states that are agitating that they may lose income I need to caution that all they need to do is to put their thinking caps on and in another one year, they will be better for it because this judgment gives them the freedom to administer the VAT themselves. So I’m recommending the administration of VAT by all the states.

Some schools of thoughts have also argued that the administration of VAT by the states may lead to inflation, high cost of living and double taxation. Are these fears unfounded?

That thinking is rooted in ignorance. VAT is a consumption tax. If you don’t consume, you don’t pay it. It is when you consume you pay it. If you’re a poor man, once you buy anything VAT-able, you pay the VAT. If you’re a rich man, you have more money to spend. Those are the people that will pay more VAT because they will buy very expensive things. But they will still pay the same rates based on the quantum and cost of the goods they’re buying. Then if you’re not buying anything, you don’t pay the VAT. In fact, my expectation is that as time goes on, the VAT may replace income tax in Nigeria because it is the most efficient taxation for collection, as such, you cannot evade it. Every individual pays the same rate the difference is the amount you’re buying. I don’t see how it is going to cause inflation. Rather, it is going to manage inflation. Inflation will either remain stable or even reduce. It is not that you pay VAT here and when you go somewhere else you will pay more. No. You’re not going to resell it, you consume it. That’s the mistakes many people are making. The argument is that if you buy goods from Lagos if you get to another state, you will pay more. It is not a purchase tax. It is a purchase tax that you add more tax or another once the goods moves across different jurisdictions. But with VAT, it doesn’t work that way. It is whoever that is consuming the goods that pays the VAT.

Read Also: Collection of VAT by FIRS remains – FG

There have been situations where tax officials cut deals with the VAT and all that, for instance at the airports. How can the issue of underreporting of VAT by unscrupulous officials at the airport and elsewhere be addressed?

Let me explain that area to you. That’s what you call zero-rate. If you’re not residing in the country, and you buy goods which you pay VAT on, because you’re going to leave that country within a certain period of time, the VAT you paid on the goods you bought is refundable subject to management charge. The management charge is collected by the organisation that is going to work on the revenue. In the UK for instance, once you buy goods you request for a document for your refund, where you will state the date of your arrival to the country, the date you’re leaving will be entered in their data. At the airport, you have to see the customs to confirm that you’re travelling out. In some cases, they want to see the goods you bought so they can ascertain that you’re truly taking the goods out. They also take their charges and pay you what is due to you at the end of the day. I won’t call it fraud but I agree with you that there are situations where some of the officials would shortchange you. That happens. But it has nothing to do with the VAT itself. Talking about the officials of the internal revenue understating the money to be collected it depends on the efficiency put in place by the state. And that’s why you need more hands to administer the VAT. At as now, what you’re suggesting that it could happen in Nigeria, I agree with you. Under the FIRS, in most cases, I want them to fault me on this; they only go to the companies at the end of the month or at the end of the period to collect the VAT returns, in most cases, they don’t ask for the sales ledger or audit their sales records because this one is based on your turnover. There is no thorough auditing so there could be underpayment. Nobody wants to pay tax ordinarily. But the tax officials have to be efficient and up and doing. I’m sure when the states start collecting it; the states would put in place checks and balances whereby even if there is going to be any underpayment, it’ll be minimal and not at the large scale that we’re having now under the FIRS. This may not happen in the states because the number of the chargeable persons that they want to deal with will be limited to their states and not the whole of 36 states of the federation. Let me inform you that as of now, the VAT being collected in Nigeria today under the FIRS is mainly from the corporate bodies and the informal sector are not inclusive. And like I said earlier, the informal sector account for about 80-85 per cent of our economy. So you can see the enormous amount of money for VAT that is not being collected. Of course, the states will collect it now because they should be able to have the capacity and capability to do so within their state jurisdictions. And I can tell for a fact that the VAT collection by the states is going to increase employment opportunities across the states. Graduates will be employed. That’s cheery news because you need to employ more people for the administration of the VAT. Once that is done, the leakages that one may anticipate will be minimal. There is no system that there is no leakages but it’s how you prevent it that is important.

If for any reason the federal government overrules the states at the Supreme Court what do you think will happen because I understand the FIRS is already lobbying the National Assembly to get the VAT under the Exclusive List?

I think that’s medicine after death. The National Assembly will not fall for that blackmail. I think I overheard the governor of Rivers State, Nyesome Wike, around July this year before the judgment was given that the FIRS wrote to the National Assembly specifically to the Chairman of the Senate Committee on Review of the 1999 Constitution, Senator Ovie Omo-Agege seeking their assistance to include the VAT in the constitution. To me, I think that’s fraud. You have a case in court and it is expected that you may lose that case, and now want the National Assembly to help you. This is not part of the law. The VAT law was promulgated by Babangida on the 26th of August in 1993. What were you waiting for all that while? So which means all along, you know what you’re doing was wrong. You don’t have absolute powers to administer the VAT except within the federal territory but you’re doing it all over states so which means you’re overreaching yourself. And now that you know that the judgment is going to be given against you, you rushed to the National Assembly to ask for help.  It’s not going to work. The fear that the Supreme Court may upturn the judgment of the Federal High is under probability; it’s not that it is sealed. It may. I think the chances of the Supreme Court upturning the judgment of the Rivers State is less than 25 per cent because this is a constitutional issue. I think the VAT is not in the constitution therefore it’s not in the Exclusive List of the federal government so the National Assembly cannot singlehandedly put it in the constitution. The review of the constitution still has to come to the states and I’m sure majority of the states will not support it and the case would just die a natural death.

Do you think a class action suit by the states against the FIRS in its quest to take over the administration of the VAT will assist their cause?

That won’t be necessary. All the states need to do is to pass the law in their states which now authorise them, and which the state assemblies have absolute powers to do. So it doesn’t have to be a collective. It can be done individually; you don’t have to go to court. Just go the State House of Assembly. Rivers and Lagos states have done that. The VAT Act has since been passed in both states (Rivers and Lagos). I’m sure Ogun, Oyo, Kano, and all others may follow suit. And those states that are agitating that it is going to affect their share of the revenue, they also will follow suit because they will soon find out that it is better for them to administer the VAT themselves. So there is no need to go to any court. The Rivers and Lagos states have led the way, so it’s now left for others to follow suit. Once the State Houses of Assembly enact the VAT law it becomes an Act and the states can start administering the VAT and the FIRS will now be restricted to collecting the VAT only within the federal territory.

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