FIRS’ claim that no country collects VAT at sub-national level

The Federal Inland Revenue Service (FIRS) recently claimed that there is no country in the world where Value Added Tax (VAT) is collected at the sub-national level.

This claim was made by the group lead, Special Tax Operation Group of the FIRS, Matthew Gbonjubola, during a press briefing on Wednesday on the VAT collection tussle between the organisation and some states.

Verdict: False. While it is true that many countries operate federal VAT systems, there are a number of countries that levy VATs at the sub-national level. Analysis of VAT administration laws and practices across several countries and jurisdictions show that some countries, including India, Brazil and Canada, allow states/provinces to collect VATs, contrary to the claim by the FIRS that such practice does not exist in any country in the world.

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Speaking during the press briefing, Gbonjubola said tax collection at sub-national levels could result in confusion and multiple collection of taxes.

“If for example, Osun State charges VAT, let’s say at 10 per cent. Sokoto State charges VAT, let’s say at five per cent, at the point of procuring the goods, this guy would have paid VAT at 10 per cent, but when he is going to sell, he will only charge at five per cent,” he said.

The tax expert explained further that “as such, the input suffered is greater than the output; and the question is: Who bears the shortfall of five per cent? Will you go to Osun State to collect that five per cent or will you ask Sokoto State to reimburse the merchant of five per cent?”

Based on the challenges he outlined, which could hamper VAT collections at the state level, he claimed that there was no country in the world collecting VAT at the sub-national level.

“You will find out that these two reasons are why it is extremely difficult, if not impossible, to operate VAT at sub-national level, and that is why there is no country in the world that does that,” he claimed.

The VAT war

The FIRS has been at odds with Rivers and Lagos states over the collection of VAT.

A US-based tax think-tank, Tax Foundation, explains that VAT is a consumption tax assessed on the value added in each production stage of a good or service.

The Foundation explained that each business along the production chain was required to pay VAT on the value of the produced good/service at that stage, with the VAT previously paid for that good/service being deductible at each step.

“The final consumer, however, pays the VAT without being able to deduct the previously paid VAT, making it a tax on final consumption. This system ensures that only final consumption can be taxed under a VAT, avoiding tax pyramiding,” the Foundation stated.

The Rivers State Government approached a Federal High Court in Port Harcourt and sought for an interpretation of the 1999 constitution of the Federal Republic of Nigeria, as amended, on who was responsible for VAT collection between the state and the federal government. The court ruled that states and not the FIRS should be collecting VAT.

Acting on the judgement, the Rivers State Government ordered full enforcement of the verdict while the FIRS filed an appeal against it.

The Lagos State governor, Babajide Olusola Sanwo-Olu, has also signed into law, a state VAT bill mandating all taxpayers to pay VAT to Lagos State and not the FIRS.

While some states like Kogi and Katsina states had expressed support for the FIRS to continue collecting VAT on behalf of the states, the Court of Appeal in Abuja has ordered parties in the dispute over the administration of the VAT to stay action pending the resolution of all legal issues in contention.

It was in the heat of the VAT war that Gbonjubola claimed that no country allows VAT collection at the sub-national level. But how true is the claim?

Verification

Tax Foundation estimates that more than 140 countries worldwide and all the Organisation for Economic Co-operation and Development (OECD) countries, except the United States, levy VATs, making it a significant revenue source and the most common form of consumption taxation globally.

Daily Trust on Sunday analysed VAT administration laws and practices across several countries and jurisdictions and found that some countries levy VATs at sub-national levels, contrary to Gbonjubola’s claim.

For instance, unlike Nigeria, Brazil has long had a state VAT (ICMS), as well as a much more limited federal VAT (IPI) and a municipal tax on services (ISS).

There are two VATs in Brazil: a state sales tax (Imposto sobre Circulação de Mercadorias e Serviços – ICMS) and a federal excise tax (imposto sobre produtos industrializados – IPI).

A multinational professional services network of firms operating as partnerships, PricewaterhouseCoopers (PwC), states that in Brazil, the state VAT (ICMS), although a federal law, should be followed, each state issues its own legislation, which brings certain differences when compared to the federal law.

“VAT is collected in the state of São Paulo at an 18 per cent rate. Certain products can attract a higher rate (usually 25 per cent) or a lower rate (in most cases, 12 per cent). The internal ICMS rates may vary according to each state of Brazil. Usually, the ICMS rates range from 17 per cent to 20 per cent for the most cases but higher and lower rates may be applied as well,” PwC stated.

Details obtained from KPMG show that VAT rate of 17 per cent applies to the following states in Brazil: Acre, Alagoas, Ceará, Espírito Santo, Goiás, Mato Grosso, Mato Grosso do Sul, Pará, Piauí, Rondônia, Roraima and Santa Catarina.

In addition, Amazonas, Amapá, Bahia, Distrito Federal, Maranhão, Minas Gerais, Paraíba, Paraná, Pernambuco, Rio Grande do Norte, Rio Grande do Sul, São Paulo, Sergipe and Tocantins collect 18 per cent VAT.

Similarly, Canada has a mix of federal and provincial VAT collection systems.

The Canadian Goods and Services Tax (GST) is a federal tax levied at a rate of 5 per cent on the supply of most property and services made in Canada. It is a VAT applied at each level in the manufacturing and marketing chain.

Data from the KPMG show that some provinces, including British Columbia, Manitoba, and Saskatchewan each levy a Provincial Retail Sales Tax (PST) (in addition to the 5 per cent GST) at 7 per cent, 7 per cent, and 6 per cent respectively, on most purchases of tangible personal property, software and certain services.

The Tax Policy Center stated, “The Canadian experience also shows that a federal VAT can successfully coexist with either a VAT or a retail sales tax levied by sub-national governments.”

An India-based financial firm, Paisabazaar, stated that the VAT system in India is enforced by the state government and it is levied on different levels of goods and services.

“VAT in India is completely different from one state to another as the rules, regulations and laws are different for different states. Each state lays down its unique set of guidelines for implementing VAT,” Paisabazaar stated.

For instance, in Uttar Pradesh, the UP VAT rules are followed, which were implemented in 2007, even as VAT implementation, rates, collection and return filing are varied for different states.

It is significant to state that the United States does not collect VAT, but empowers states to collect a consumption tax, which is similar to VAT.

But a global network of professional firms providing audit, tax and advisory services, KPMG, said sales taxes, which are consumption taxes as VAT, are collected at sub-national level in US.

“The US has no VAT tax. The federal government raises money primarily through the income tax system. The states and local governments establish and collect their own sales taxes. Local governments rely primarily on property taxes,” KPMG.

Conclusion

It is not true that there is no country in the world where VAT is collected at the sub-national level. While it is true that many countries operate federal VAT systems, there are a number of countries that levy VATs at the sub-national level.

Analysis of VAT administration laws and practices across several countries and jurisdictions show that some countries, including India, Brazil and Canada allow states/provinces to collect VATs, contrary to the claim by the FIRS that such practice does not exist in any country in the world.