Companies are caught in the middle of Nigeria’s VAT dispute

Companies in Nigeria are caught in the middle of an ongoing tax dispute about which arm of government should collect VAT. The federal government is on one side and the state governments of Lagos and Rivers are on the other.

Last week (10 September), Lagos followed Rivers’ example and became the second Nigerian state to enact a VAT law. Both states have taken inspiration from a recent high court case in which Rivers successfully argued that its own agency should collect VAT and not the Federal Inland Revenue Service (FIRS), which centrally collects VAT and then reallocates the revenue among the three tiers of government. The court ruled in August this year that it was unconstitutional for FIRS to tax consumption within a state.

It is not yet clear how (or if) the tax regime will be restructured in the long term because the case is still under appeal, but the subject of this dispute is 40% of non-oil revenue and any redistribution would have significant implications for political stability and fiscal sustainability.[1] For now, the short-term uncertainty exposes firms to antagonistic regulation as rival state actors continue to claim jurisdiction.

Significance – Distribution of resources

Nigeria is in a period of structural and strategic flux. Over the past decade, oil price volatility and local unrest in the Niger Delta have pushed down receipts from the oil sector and increased the state’s dependence on non-oil revenues. This situation became more pronounced after the Covid outbreak last year. Oil receipts made up around 83% of government revenue in 2011, but that figure was only about 44%% last year.[2] General government revenue also declined in that period and remained below the 2011 level even before Covid. On that note, the federal government raised VAT by half in November 2019 to deal with the oil revenue shortfall and restrain public debt. Further underlining the fiscal crisis, debt servicing costs were equivalent to 97% of government revenue under the 2020 budget.

The resulting pressure on states has revived questions about Nigeria’s federal revenue allocation system and the uneven relationship between the country’s south and north that often contributes to political tension. Most of the 36 states in Nigeria do not generate enough internal revenue on their own (e.g. income tax), and so they depend heavily on monthly allocations from the federal government. Further, nine out of the bottom 10 states that generate the least revenue internally are in the north.[3] This draws attention to the formula by which VAT is collected by the federal government and made to trickle down.

The federal government retains 15% of receipts and shares the rest among state and local governments, but Lagos and Rivers (both in the south) particularly believe they do not receive a share that is commensurate with their contribution to the central pool – and that some states receive disproportionately more than they would collect on their own in a decentralised system. For example, oil-rich Rivers collects more internal revenue than 10 other states combined. It also internally collects more tax than northern Kano, the country’s most populous state, but it gets less VAT share than Kano.[4]

Outlook – Regulatory and political climate

There is short-term uncertainty regarding the tax regime while litigation is in progress between the next 6-18 months.

The case between FIRS and Rivers is presently at the Appeal Court and may progress to the Supreme Court. In the interim, large firms in Lagos and Rivers are vulnerable to hostile regulation at either federal or state level depending on how they comply in this conflict. Rivers state governor Nyesom Wike has already threatened to shut companies in his state if they do not begin paying VAT to Rivers from this month – while FIRS has asked companies to continue payments to the federal agency.

Broadly, the tense relationship between the north and south remains a long-term source of political risk that has recently disrupted supply chains and that continues to affect the distribution of power and resources in the country. For instance, some foods were in shortage down south in March when northern traders refused to truck food to the south following ethnic-related unrest. The tension means that any radical changes to revenue allocation among states could stoke instability in the country, but the more likely scenario is that electioneering will overtake the current agitation about VAT and attention will be diverted to the general elections, which are scheduled to be held in the next 17 months.

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[1] 2020 fourth quarter budget implementation report (March 2021). Nigeria Budget Office.

[2] 2011 fourth quarter budget implementation report (March 2012). Nigeria Budget Office.

[3] Internally generated revenue at state level, Q4 and full year 2020 (April 2021). Nigeria’s National Bureau of Statistics.

[4] 2020 state of states, revised edition. BudgIT.

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