Nigeria’s Restructuring Has Already Began

The judgment of the Federal High Court sitting in Port Harcourt on August 10th is one judgment that has far-reaching implications for Nigeria: by declaring that it is the Rivers State Government and not the Federal Government through the Federal Inland Revenue Service (FIRS) that has the power to collect value-added taxes (VAT) within Rivers State, it opens the door for states to increase their revenue streams by a large margin.

This, for me, is an exciting development, and I am hoping earnestly that when the appeal gets to the Supreme Court, the apex court will rule on the side of the Rivers State Government, or better put, on the side of all the 36 states since the implication of it will be that the FIRS will be able to collect VAT only within the Federal Capital Territory (FCT) as well as non-import foreign VAT while the Customs continues to collect import VAT on international trade.

Also, like Cheta Nwanze said here, the move by the FIRS to have the Constitution amended so that VAT will be added to the Exclusive Legislative List is insane: in a country where the FG is already overburdened with responsibilities, this is an attempt to further burden it the more and weaken states, the quite opposite of the federal republic we are intended to be.

A greater percentage for the state, a smaller percentage to the FG

By now, you must have figured out where my biases are: I believe strongly and passionately that Nigeria needs to be restructured by taking certain powers and responsibilities from the FG and giving them to states, and some from the states to the local governments. Revenue generation via VAT is one of those responsibilities that I believe should be the responsibility of states; after all, the goods and services produced which are being taxed are produced within definite territories that have incurred costs to make it possible — no reason that Peter should be robbed to pay Paul.

This judgment, for me, serves a few purposes, which I will explain thus:

1. It is possible to achieve at least, parts of desired restructuring by challenging the status quo in courts. This is very important considering how the attempt to achieve restructuring has so far been unsuccessful, which I see as a result of not defining in specifics what restructuring means, assuming that it can be achieved all at once, and a total lack of strategy — especially when you see people with the political capital to initiate the process for new laws or amendments to achieve some restructuring more content to call on the President to do it. It now remains for interested parties to challenge the parts of the law which the FG has overstepped in its assuming that it is exercising certain powers legimately.
2. It ties into my belief that the better way to achieve restructuring on the fiscal front is to go at it in parts. While many advocates of restructuring believe all should be done at once (such as states should live entirely on their own revenues immediately, whether it be income taxes, VAT or oil royalties), I believe such a cold turkey approach will hurt the vast majority of states and will still make them dependent on some kind of aid to survive. In allowing states to collect VAT, it allows the states to start working towards some sort of financial footing by generating more revenues. Perhaps the next one after this will be allowing for states to retain the bulk of royalties from mining in their states before we can come for the elephant in the room: oil royalties.
3. This is perhaps the most important purpose this judgment could have: it will could bring about a change in the behaviour of state governments, perhaps even a radical one, as they will look to increase their revenue from VAT. How? States can now make more effort to attract businesses to their domains, or possibly tinker with their VAT rates, or make certain kinds of businesses VAT-exempt to stimulate growth in those sectors. They also now have an incentive to work towards bringing the informal businesses in their domains into the formal economy and begin to properly tax them. With only 35% of the Nigerian economy in the formal economy, there is plenty enough informal economy to go round and bring into the formal economy.
4. Although states currently have taxes and rates that they collect from businesses, they often employ a predatory and rent-seeking approach where they try to increase their revenues without increasing economic activities i.e. they are increasing the tax burdens of those already paying a lot of taxes and levies. However, being able to collect VAT will likely force the approach to tax collection by seeing how it can impact economic activities and not just try to engage in rent-seeking.

Of course, even with this, states will still be receiving federal allocations, which in my opinion, is an enabler of bad behaviour and incentivizes unproductivity and laziness. But the ultimate goal will be to get federal allocations to the point that they only make a small slice of the revenues a state depends on — and with strings attached.

Also, a vital ingredient needed to get states in the same direction will be good and visionary leadership. Like a sauce that brings a well-crafted dish together and make it flavourful, all these ideas will be for naught if leadership is absent: whether it be from the state governors, federal legislators and individuals and organizations outside the government.

In conclusion, the Rivers FHC judgment will be watched slowly as it unfolds at appeal, but this is a judgment that can work to the interest of all Nigerians.

The forward-thinking ones, at least.