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Businesses May Suffer Double Taxation If States Start Collecting VAT—-FIRS

Oluwasina Phillip

The Group Lead, Special Operations Group, Federal Inland Revenue Service, Mathew Gbonjubola, has said the decision of the Federal High Court to grant powers to states to administer Value Added Tax will make it difficult for businesses to operate under the new dispensation.

He said this during a chat with journalists on Wednesday in Abuja.

A Federal High Court sitting in Port Harcourt, Rivers State, had dismissed an application by the Federal Inland Revenue Service, FIRS, seeking to stop the state government from commencing collection of Value Added Tax, in the state.

But speaking on the development, Gbonjubola stated that there is no where in the world where the administration of VAT is done at the sub-national level.

He said the that contrary to misconceptions in some quarters, the FIRS administers VAT on behalf of the three tiers of governnment and not for the Federal Government alone.

According to him, the revenue from VAT is administered under an arrangement that allows the Federal Government to collect 15 per cent, States 50 per cent and Local Government 35 per cent.

The implication of this, according to him, is that the State and Local Government takes about 85 per cent of VAT proceeds.

He said, “The VAT is not paid to the Federation Account but to VAT pool account for distribution to the three tiers of governnment. It is after the sharing that the portion of the Federal Government is paid to the Consolidated Revenue Fund Account.

“VAT works only at a national level but not at a sub-national level. There is no country in the world where VAT works at the sub-national level.”

He said the VAT Act differentiate between two kinds of VAT; Input VAT and Output VAT.

Put simply, he said the input VAT is the tax paid to suppliers on the purchase of taxable goods and services, while output VAT is the tax received from customers on the value of taxable goods and services sold or rendered.

According to Gbonjubola, the VAT Act allows taxpayers to offset their input VAT (Allowable Input VAT) against their output VAT, to the extent that such input VAT only relates to such goods that are purchased or imported for resale or form the taxpayers’ stock-in-trade used for the production of new products on which output VAT will be charged.

He said where the output VAT exceeds the recoverable input VAT, the taxpayer is expected to remit the excess to the FIRS.

In the instance where the input VAT exceeds the output VAT, he explained that taxpayer will be entitled to a refund of the excess after following the due process as contained in the FIRS Establishment Act.

But with the decision of some states to go ahead with the implementation of the Court Judgement, he said that such refund  may not be possible because the administration of VAT will be done by different states tax authorities.

He said, “As to the incidence of VAT, VAT is practiced on an input and output mechanism. What it means is that for a business either importing or buying products, that business will pay VAT either at the port if it importing or with the manufacturer if it buying from a local manufacturer.

“And when that business pays VAT, it is accounted for that business as an input tax, such that if it begins to sell in any part of Nigeria, and charges VAT from its own customers, it is able to rescue the importers pay either by port if it is an imported item or to the manufacturer if it was obtained from local producers.

“And this works only at the national level, VAT can’t work at the sub-national level and there is no country in the world where VAT works at a sub national level. This is because the VAT depends on the input-output mechanism

“For instance, if a business person buys an item in Osun State and paid VAT, takes the goods to Sokoto state to sell, remember this business person had paid VAT when purchasing the product in Osun state.

“So, when selling in Sokoto state, he will be charged VAT and by the operation of the input-output mechanism, this business person will deduct the input VAT payment in Osun state, from the output charged in Sokoto state, and remit any difference to the relevant tax authorities, in this case because there is a single tax authority handling VAT, it is the same Authority that will receive the VAT in Osun and Sokoto states. 

“And so, it is easy to work out the input-output mechanism, businesses won’t be short-changed; there is no issue of consumers having to pay VAT more than once.

“However, if this operating at a sub national level it will mean that when businesses are paying VAT at the state level, the business would have to pay VAT twice in two different states.”

ENDS

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