6% tax rate, 25% revenue allocation to LGAs… highlights of Lagos VAT bill

Earlier this week, a bill seeking to empower the Lagos state government to collect value-added tax (VAT) passed the first and second reading at the state house of assembly.

The lawmakers directed the committee on finance that is overseeing the bill to report its findings on Thursday.

Consumers pay VAT when they purchase goods or obtain services. All goods and services (produced within or imported into the country) are taxable except those specifically exempted by the VAT Act.

The VAT rate was raised in Nigeria from five percent to 7.5 percent in 2020.

VAT collection by the Federal Inland Revenue System (FIRS) on behalf of the federal government has been a subject of controversy. The FIRS, which administers the tax, transfers the generated revenue to the three levels of government via the federation accounts allocation committee (FAAC).

Recently, a court in Port Harcourt restrained FIRS from the collection of VAT and empowered the Rivers state government to take charge.

After the ruling, the Lagos state government began to domesticate a law to guide the collection of its VAT and warned FIRS to obey the Rivers ruling.

In a plenary session, Mudashiru Obasa, speaker of the house, said the VAT bill, when passed into law, would lead to a higher revenue stream.

TheCable outlines key features of the Lagos VAT bill:

6% TAX RATE

Section 4 of the bill provides that the State will charge VAT at the rate of six percent on the value of goods and services.

“The tax shall be computed at the rate of 6 percent on the value of goods and services as prescribed under Sections 5 and 6 of this Law, except the goods and services listed under Part III of the Schedule which shall be taxed at Zero rates,” it reads.

LIRS RESPONSIBLE FOR TAX ADMINISTRATION 

Section 7 empowers the Lagos State Internal Revenue Service (LIRS) to administer and implement the law. The LIRS would account for money collected in line with the law and do any other things necessary for the assessment and collection of the tax.

REGISTRATION OF TAXPAYERS 

Section 8 states that taxable persons are to register for the tax within six months of the commencement of the law or six months of commencement of business, whichever is earlier. 

NON-RESIDENT COMPANIES ALSO REQUIRED TO REGISTER 

According to section 9, non-resident companies are to register for the tax if they carry on business in the state, using the address of the person with whom it has a subsisting contract as its address for purposes of correspondence relating to the tax.

IMPORTERS MUST PAY VAT BEFORE CLEARING GOODS

Section 16(2) provides that “an importer of taxable goods shall pay to the Service the tax on the goods before clearing.”

ESTABLISHMENT OF VAT APPEAL TRIBUNAL

The bill provides for a body known as the Value Added Tax Appeal Tribunal.

“There is established a Value Added Tax Appeal Tribunal (referred to in this Law as “the Tribunal”) which shall comprise of the following members:

(a) a Chairman, who shall be a legal practitioner of proven ability and integrity with a minimum of ten (10) years experience in tax matters;

(b) one (1) accountant with relevant experience in tax matters;

(c) three (3) other persons from either the private or public sector whose membership shall in the opinion of the Governor, assist to resolve disputes arising from tax assessment,” section 21 (1) states.

“(2) The members of the Tribunal shall be appointed by the Governor on the recommendation of the Attorney-General and Commissioner for Justice.

“(3) The Tribunal shall assist the Service in resolving disputes arising from tax assessment as set out under the provisions of this Law.

“(4) The Tribunal shall have powers to regulate its own proceedings and may make standing orders for that purpose, and subject to any such standing orders, may function notwithstanding –

(i) any vacancy in its membership or the absence of any member;

(ii) any defect in the appointment of a member; or

(iii) that a person not entitled to do so took part in its proceedings.

“(5) Notwithstanding its standing order, the quorum at any meeting of the Tribunal shall be three (3) members.”

25% VAT REVENUE ALLOCATION TO LGAS, 75% TO STATE GOVERNMENT 

Section 33 states that VAT revenue shall be shared 75 percent to the state government and 25 percent to the LGAs.

TAXPAYERS TO PAY VAT BY THE 21ST DAY OF THE SUCCEEDING MONTH 

According to Section 15, monthly remittance and returns are due by the 21st of the subsequent month in a manner specified by the LIRS. This implies that the first return under the law will become due by the 21st of the month after enactment.

“A taxable person shall render to the Service, on or before the 21st day of the succeeding month, a return of taxable goods and services purchased or supplied by him during the preceding month in the manner specified by the Service,” section 15(1) states.

“(2) A person who imports taxable goods into the State shall render to the Service, returns on the taxable goods imported by him.

“(3) A taxable person who fails to render returns to the Service, commits an offence and is liable on conviction to a maximum fine of Five Hundred Thousand Naira (N500,000.00) for every month the failure continues.”

VAT – EXEMPT ITEMS

The list of exempt items is similar to the national VAT Act including basic food items; medical and pharmaceutical products, medical services; books and educational materials; items covered under the Hotel Occupancy and Restaurant Consumption Law of Lagos State, amongst others.

NO EXEMPTION FOR SMALL BUSINESSES 

There is no exemption for small businesses with turnover below N25 million as is the case under the national VAT Act.

The Lagos state government had directed the FIRS to stop issuing demand notices for payment of VAT in the state and to render accounts, within seven days, of all sums collected as VAT in the current accounting circle in the state.

The state government premised its demands on the decision of the federal high court in Port Harcourt, Rivers state.

On Monday, the Rivers state government announced that the court dismissed the FIRS’s application on stay of execution on VAT collection. 

The Rivers state government said the court ruled that “granting the FIRS application for a stay of execution would negate the principle of equity.”

But the FIRS had told taxpayers to continue to honour their tax obligations under the VAT Act pending the final determination of the appeal.