Value Added Tax and the Nigerian Federalism
A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax that is assessed incrementally. It is levied on the price of a product or service at each stage of production, distribution, or sale to the end consumer. Nigeria introduced Value Added Tax (VAT) into its tax system in 1993, with a modest VAT rate of 5%. By virtue of amendments made by the Finance Act 2019, the current VAT rate for Nigeria is now 7.5%. In addition to the revised VAT rate, there are other notable amendments to the VAT Act which include the exemption of small businesses from VAT registration and filing, as well as the expansion of the VAT exemption list.
VAT in Nigeria
Businesses add VAT to the sales price of the goods or services they offer in Nigeria and the tax is borne by the final consumer of goods and services because it is included in the tax paid. VAT is currently calculated at a flat rate of 7.5% of the cost of services and products and is charged on a wide array of goods and services. Section 8 sub 1 of the VAT Act states that businesses are expected to register for VAT within the first six months of the start of the business. Businesses that want to do business with state, federal, or local government agencies are also required to show evidence of registration with VAT and past remittance. In 2019, VAT accounted for over 16.2% of the Gross Domestic Product (GDP), making it a significant contributor to the government’s total revenue, most Nigerian states depend on funding from the Federal Allocation Account Committee (FAAC) due to their poor Internally Generated Revenue (IGR), states and local governments currently receive 75% of the revenues generated from VAT,  20% is shared based on derivation and 50% based on equality, and then 30% is shared based on population. These other factors are not seen to be equitable and fair to some states. Once the VAT is collected, the agreed sharing ratio is applied. The Federal gets 15%, States get 50% and Local Governments get the balance of 35%.
Image culled from Thisday Nigeria
VAT is not charged on all goods and services i.e. some goods and services are exempted from the payment of tax goods such as all medical products, basic food products, books and educational materials, and services such as medical services, services rendered by community banks, performances towards learning. The question on who is meant to collect VAT in the country is generating a lot of controversies between the federal government and some states, these states are basing their argument on the fact that they generate more in terms of the VAT collected by the federal government but only receive little in return due to the sharing formula.
Three of the 37 states (FCT included) in Nigeria provide 81% of the VAT collected by the FIRS. Lagos has the highest VAT collection, amounting to 55% of Nigeria's VAT. FCT has second place with 20%, while 6% is from Rivers. If you remove Kano's 5%, 33 states provide only 14% of the total VAT in Nigeria; Lagos provides 4 times what 33 states provide combined! That seems an unfair deal considering several states in the country, through Sharia, do not permit the sale of certain goods and services, certain states refuse certain businesses from operating in their states, yet collect taxes from them when other states allow them.
on the other hand most of the goods and services needed for the production of most taxed goods are taxed exempted for example barley is a basic food product grown in the northern part of the country and it is tax exempted, but has a lot of economy value when it is sold in raw form to neighbouring states who in turn refine it to alcohol, also some telecommunication companies VAT is generated in all states but they remits only where their headquarters is situated also alcohol which is banned in some states contributed less than 3% of total VAT collection.
Conclusion and recommendation
Some states believe the present sharing formula is unfair. This is a legitimate concern. But the solution should not be pursued in ways that will make life more miserable for businesses and individuals, or cause further animosity in our severely challenged nationhood, the current VAT revenue sharing formula among states is not equitable. This inequity should be addressed by allocating any domestic VAT collected from each state entirely to the respective state. Only VAT collected on imports, international services and inter-state transactions should be paid into the VAT pool and shared based on derivation. This will address the current controversy without creating new problems.
 Udo Udoma & Belo-Osagie, 2021. Nigeria's New VAT Regime Nigeria's New VAT Regime - Tax - Nigeria (mondaq.com)  Value added tax act 1993 act 1993 NO.102,1993. VAT.pdf (firs.gov.ng)  Ifeanyi Ibeh,2021 Value Added Tax ruling: The winners, the losers Value Added Tax ruling: The winners, the losers | The Guardian Nigeria News - Nigeria and World News — Nigeria — The Guardian Nigeria News – Nigeria and World News  Value added tax act 1993 act 1993 NO.102,1993. VAT.pdf (firs.gov.ng) Tosin Adeoti 2021 FG vs States VAT War - Cutting Through the Noise (proshareng.com)  IBID  Taiwo Oyedele 2021 How to Fix Nigeria's Broken VAT System How to Fix Nigeria's Broken VAT System (proshareng.com)