10 ways states’ VAT laws will affect businesses

Many state governments are making moves to enact their Value Added Tax (VAT) laws and this will affect small businesses in many ways, according to tax expert and Fiscal Policy Partner at PricewaterhouseCoopers (PwC), Taiwo Oyedele.

VAT is a tax payable on the supply of goods and services at different stages of the product supply and service delivery value chain. The burden of the tax ultimately falls on the final consumer.

This is following a Federal High Court judgment in favour of Rivers State government that the collection of VAT by FIRS was unconstitutional.

Lagos, Akwa Ibom and Rivers state have gone ahead to enact tax laws that will enable them to collect VAT revenues and shore up their earnings.

If states enact their VAT or Sales tax laws, Oyedele has highlighted the impact of this on all parties involved, especially small businesses.

1. The guaranteed winners will be the federal government in respect of import VAT and international transactions (whether retained by FG only or paid into the Federation account and shared), and the FCT. States that may either lose or gain are Lagos and Rivers due to HQ effect and subject to collection efficiency. Lagos also has to deal with granting input VAT at 7.5% on items sourced by businesses outside the state against the lower output VAT rate of 6%. All other states and 774 local governments will be worse-off, all things being equal.
2. The positions of all states will be negatively impacted by lack of capacity to collect, difficulty in auditing compliance, and higher cost of collection which may be up to 15% especially in states where consultants and other forms of agency structures are used for tax collection.
3. States that have existing consumption tax such as Lagos, Edo and others would have to repeal those laws when introducing VAT or sales tax as to do otherwise would amount to legislating double taxation.
4. Small businesses with turnover not more than N25million that are exempt under the national VAT would have to comply with VAT under the state’s VAT laws.
5. Penalties for failure to register is as high as N50,000 for the first month and N100,000 for each subsequent month while the fine for failure to keep records to ascertain the correct VAT is up to N250,000. This penalty regime will weigh heavily on businesses especially SMEs such as barbers, hairdressers, tailors, shoemakers, plumbers, bus and taxi drivers, makeup artists, restaurant owners, etc. This further increases the risk of such businesses being harassed and extorted in many states especially those employing tugs to enforce tax compliance.
6. People will pay more, but government will collect less due to inefficiency of collection and leakages. There will be higher cost of goods and services arising from input VAT claim and refund complications in addition to items which are not exempted under the states VAT law such as rent, tuition, processed foods such as amala, suya, jollof rice, and ogbono soup. In addition, there will be incidence of double taxation due to likely conflicts between origination and destination principle in different states. Worse still when the reality of inability to implement VAT hits home many states will inevitably introduce sales tax with its cascading effect.
7. Nigeria’s ease of doing business and paying taxes will deteriorate in view of the multiple VAT compliance and Nigeria’s tax to GDP ratio will decline.
8. Tax practitioners, including lawyers and accountants will benefit as the states VAT regime will create multiple fee opportunities to assist taxpayers comply.
9. Local governments will be worse off. Effectively between states and LGs, the VAT revenue split under the national VAT is 59% to 41%. However, states are prescribing lower rates for LGs e.g. Rivers 30%, Lagos 25%.
10. FIRS will lose cost of collection on VAT revenue within states and may have to improve its operational efficiency to sustain current capacity or seek additional funding from the National Assembly which will reduce revenue accruing for sharing to all level of government.

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