Why Nigeria’s States Will Have Difficulty Collecting Sales Taxes, By Cheta Nwanze

The Federal Inland Revenue Service is involved in a lawsuit with the governments of the states of Rivers and Lagos over the collection of sales tax on behalf of the Nigerian federal government. In the last few minutes the Ogun State House of Assembly passed a law on the collection of value added tax, similar to that in the two states mentioned, in second reading. It becomes a law.

The return to civil rule in 1999 gave some states, starting with Lagos, the courage to challenge the FG in various parts of tax collection. The situation eased somewhat after Lagos lost a formality before the Supreme Court in 2014, but now that the Rivers state government has successfully challenged the federal government’s powers to collect VAT, Lagos is back on the hunt. I assume the current kerfuffle will go all the way to the Supreme Court, and even then I think there will be movements to change certain laws after the Supreme Court has made a decision.

At the base of this rumble lies an ongoing struggle for the legitimacy of the Nigerian state, symbolized by the federal government. One way in which Nigeria is slowly being restructured is that its federating units are constantly gnawing at the FG and assuming authority while it looks on almost helplessly. The coronavirus pandemic outbreak in Nigeria in early 2020 brought an opportunity that some state governors took advantage of. When the FG locked Lagos, Abuja and Ogun in late March 2020 to contain the spread of the virus, other state governments took matters into their own hands and locked their states. Efforts to coordinate the pandemic have been largely spearheaded by the FG, led by the Secretary of the Federation Government, Boss Mustapha, but governors have been seen condemning the federal authority. Cross River and Kogi, for example, refused to test for the virus and, despite all evidence to the contrary, consistently stated that the virus did not exist in their states. As a result, the NCDC did not receive any Covid data from these states. Additionally, the manner in which the bans were enforced by the states gave a glimpse into state police enforcement – the same harsh, hasty, and blanket use of force that we know and love is to be expected from the state police forces .

This struggle for legitimation will also be felt in the area of ​​tax collection. International financial institutions like the World Bank and the IMF have taken root in the belief that Nigerians do not pay taxes or that taxation is only focused on the formal sector. Nigerians have also parroted this for years. However, recent findings from SBM Intelligence have shown that Nigerians are among the most overwhelmed in the world, and that’s important. There is a world of difference between not wanting to pay taxes at all, but still continuing to tax, and not wanting to pay taxes and successfully evading taxes. Nigerians pay taxes, but to whom? While the state focuses on taxing the formal sector, the informal sector is taxed by non-state actors, most of whom are armed and out of control. Lagos – the state with the largest contributor to VAT – has a huge tax base that is not controlled by the government, but by local guys who shake up business owners and give very little to the treasury while the government looks the other way. Perhaps in this way the state government will create jobs for many young people in the country who would otherwise have nothing to do. However, this means that the state has subcontracted its basic authority to non-state actors, a sign of its dwindling legitimacy.

In areas outside Lagos, the political implications of this struggle or loss of legitimacy are seen in different ways – Nigeria is losing large parts of its territory to armed groups that take on more or less state functions. The Islamic State of West Africa shows this very clearly. In areas around Lake Chad, it has set up a rival government and appointed emirs to oversee various state functions such as the enforcement and collection of taxes such as livestock and agricultural taxes. ISWAP’s success is largely due to the fact that the Nigerian state has failed to control the people – a social contract, social facilities and some form of security. Despite the almost constant air strikes by the Nigerian military, ISWAP has managed to get one thing right: to provide security and relative stability to the people under its control. She did this simply by not opposing those who accepted her way of life, but rather by focusing her insurrection on the Nigerian military. There are other groups doing similar things in other parts of the country. Proto-states if you want.

The battle over VAT will have many consequences – some of them deliberate. What cannot be seen in the banal noise is the possibility that states will fight to increase VAT in the near future for one reason only: At the beginning of the life of a state, the state has many believers and thus little or no problems with the Revenue increase. At this point, it can easily do its basic job – to provide security and stability. As the population grows and the state grows, it may find it difficult to maintain control if it loses legitimacy and thus depletes its sources of income. Ironically, because a rapidly growing population should be the basis for increasing revenues. States unable to maintain their legitimacy struggle to generate revenue and open vacuums that non-state (not necessarily violent) actors have to fill. When such people fill such a vacuum, they tend not to return such revenue to the state because they feel like they did the job the state failed to do for them. The state does not think about it and therefore uses violence to collect taxes. This intensifies the legitimacy crisis, since at the end of this power the people have no choice but to perceive the state as an illegitimate entity.

The Nigerian states have not put in place the necessary VAT collection mechanisms and, like the federal government, will continue to focus on the formal sector. The only state that appears to have control of this is Lagos, but its reliance on lustful people to collect taxes diminishes its legitimacy in the eyes of its people.

The VAT debate is great for all of us as the centralized Nigerian structure has clearly failed. But behind this lies a legitimacy crisis for Nigeria’s states that is perhaps best put into words by Ebonyi State Governor David Umahi (who supports FIRS) when he said, “Our very weak states need to be tended to before we say we can all leave “control over their resources.”

I don’t think the frontline states sat down to calculate the cost.

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