The move by the Lagos and Rivers state governments to collect Value Added Tax (VAT) in their states could serve as a starting point in achieving true fiscal federalism in Africa’s biggest economy.
Fiscal federalism demands that each level of government adequately finance its operations without recourse to the central government. But this is not the case in Nigeria.
Ayodele Shittu, lecturer at the department of Economics, University of Lagos said Nigeria will practice true federalism when every state exploits and harnesses its resources and then remit back to the federal government.
“We have a situation where states are fiscally constrained not because they don’t have resources but because they are standing aloof believing that resources will trickle down from the purse of the federal government,” said Shittu.
“But unfortunately, most of these resources are wasted on recurrent expenses, not even on capital expenditure that will facilitate the production of goods and services or lead to more fiscal resources for the states itself,” he added.
Similarly, Damilola Adewale, a Lagos-based economic analyst said that the legal tussle between some states and the Federal Inland Revenue Service (FIRS) on VAT collection could be the beginning of the long-awaited economic and political restructuring of Nigeria.
Read also: VAT: Matters arising from the Federal High Court ruling
“It’s instructive to note that this agitation for restructuring goes beyond revenue, it basically entails making sub nationals more powerful in critical decision making,” Adewale said.
Proper allocation of revenue should achieve rapid economic growth but the country’s current sharing revenue formula which has been in use since 1992 has not achieved that but rather led to weak and fragile economic growth.
Nigeria uses the vertical revenue allocation formula which shows the percentage allocated to the three tiers of government. Under this current sharing arrangement, the federal government gets 52.68 percent; states get 26.72 percent while local governments get 20.60 percent.
Oil producing states further get 13 percent derivation revenue. But this formula benefits the Federal Government at the expense of the other tiers of government.
Last month, the Revenue Mobilisation Allocation and Fiscal Commission (RMAFC) said it started reviewing the existing Revenue Allocation Formula and the new formula before the end of the year.
Muda Yusuf, former director general, Lagos Chamber of Commerce and Industry (LCCI) said that fiscal federalism is generally more equitable than the current arrangement.
“We should have a stronger model of deviation in all these taxes. If it is VAT, the derivation component should be as high as 80 percent, while the remaining 20 percent, you can share between equality of states and administration of FIRS. The same thing should go for other taxes too,” Yusuf further added.
The general economic theory of fiscal federalism states that the provision of services should be located at the lowest level of government since they are closer to the people and are better suited to meet the needs of the people.
In large federations like the US, Canada, and Australia, both financing and supply of basic services are primarily determined locally, with few instances of general sharing of revenues collected by higher tiers of government.
“If states are given the power to collect their own VAT that might give them the incentive to fashion out innovative ways to stimulate job creation, make the business environment more conducive to stimulate consumption, and enhance job security,” Gbolahan Ologunro, senior research analyst, Cordros Securities said.
Some of the benefits of fiscal federalism include lower planning and administrative costs, competition among local governments’ favors organizational and political innovations, and more efficient politics as citizens have more influence.
Recently, the government of Lagos and River states expressed their readiness to begin the collection of VAT due to the gross injustice done in the revenue sharing, issues of infraction of the constitution, and issues of illegality.
For example, in June 2021, VAT collected in Rivers State by FIRS was N15.1billion but what was shared was N4.7 billion and for Lagos, the VAT collected was N46.4 billion but N9.3 billion was shared to them.
Pascal Odibo, a vision catalyst & business recalibration specialist, advised that it is good for states to collect their revenue but they should also be prepared to take on the fiscal responsibilities that come with revenue collection.
“There should be a national conversation about fiscal responsibilities. If the federal government does not want to champion this, the states will only be interested in collecting income,’ Odibo said.