Northern Nigeria and VAT: The imperative of industrialisation

Northern Nigeria has lately been dominating national news headlines following a federal high court judgment that shifted value-added tax (VAT) collecting authority to Rivers state as opposed to the prevailing status quo that has the federal government as the sole VAT collecting authority through the Federal Inland Revenue Service(FIRS).

Sequel to the court judgment, Rivers and Lagos states immediately started rolling out legislation to guide them on the collection and administration of VAT regimes at sub-national levels.

However, some states in the north came out to openly register their dismay over the court judgment and called for the maintenance of the status quo. And although the court of appeal in Abuja has issued an order to halt the enforcement of the judgment as passed by the federal high court in favor of Rivers state government, the issue continues to dominate the national discourse, with several narratives yet again portraying the north as being economically parasitic and an impediment towards a more ‘federal’ Nigeria.

Like several other times, this legal dispute and national debate about which entity should hold the exclusive rights to collect value-added tax (VAT) between states in Nigeria and the federal government got me thinking from an economic perspective rather than through the usual emotionally and politically clouded lenses most people think.

VAT is a form of consumption tax (paid on purchase of goods or services), it is collected at every point along the supply chain of a product(or service) where value is added to it. Here is how it works;

Let’s make an example with bread and assume Nigeria has a value-added tax of 10%.

It means that when a wheat processor buys wheat at the rate of N5 to add value to it by processing it into flour, VAT would be N0.5 (10% of N5) and the total cost would be N5.5. The N0.5 would be paid to the VAT-collecting authority by the wheat farmer.

When a baker then buys the value-added product(which is flour) at the rate of N10 from the wheat processor, VAT would be N1 (10% of N10) and the total cost would be N11. The VAT paid at the point of purchase of wheat which is N0.5 would then be subtracted from the total VAT at the point of sale to the baker which stands at N1 (because the wheat farmer had already paid it – the N0.5 after the purchase of wheat from him), and the remainder N0.5 will be paid to the VAT-collecting authority by the wheat processor.

Then when the baker adds value to the flour by baking it into bread, he sells to retailers at N15, VAT in this case would be N1.5 making the total cost N16.5. The VAT paid at the point of purchase of the flour by the baker which stands at N1 will now be subtracted from the total VAT at retail which stands at N1.5 (because the wheat processor had already paid it – N1 after the of purchase of flour from him) and the remainder N0.5 will be paid to the VAT-collecting authority by the baker.

Then when the retailer sells the bread to the final consumer at N20, VAT, in this case, would be N2 and the total cost would be N22. The VAT paid at the point of retail which is N1.5 will now be subtracted from the total VAT at consumption which is N2(because the baker had already paid it – N1.5 after the purchase of bread from him) and the remainder N0.5 will be paid to the VAT-collecting authority by the retailer.

So cumulatively, the wheat farmer, wheat processor, baker and retailer would pay N0.5 each bringing the total to N2 which is 10% of the final price of N20.

VAT tremendously contributes to Nigeria’s national revenue contributing about N1.53 trillion in 2020 “with import VAT being N348 billion (or 22.7%) while foreign non-import VAT was N420bn (or 27.4%) and local VAT amounted to N763bn (or 49.8%)”. Lagos and Rivers contribute about 70% of total VAT collections in the country.

Northern Nigeria as a region ought to look upon this issue as an opportunity to prove to the world that the north is not a parasite as others portray it to be. The north is known for its tremendous agricultural and mineral resource endowments which form a chunk of the raw materials (mostly traded out of the north) that are used in manufacturing the goods that get sold back to the north as value-added products on which VAT are paid to the section of the country whose industries transformed the products into value-added forms.

As seen in the VAT explanation above, VAT is collected at every point along the supply chain of a product(or service) where value is added to it. Hence, the north should focus on transforming the supply and value chains of products that are gotten from the raw materials(agric and minerals) that are abundant in the north. The north should take a regional step through the Northern Governors Forum to make industrialisation one of the region’s topmost policy priorities and optimally exploit the region’s comparative advantages. This can be kickstarted with a Northern Industrial and Economic Summit.

The sale of products in their raw forms outside the region should be discouraged. The Northern Governors Forum should adopt a cross-regional approach that would encourage the production of raw materials that have the potential of powering industrialisation at almost every point in their value and supply chain and incentivise value-addition.

The region should commit itself to improve its ease of doing business ratings so as to attract the required local and foreign direct investments in the manufacturing and industrial sector necessary to improve the value-added industrial capacity of the region. This is the only way the North would be able to generate more VAT and even other tax revenues and at the same time improve employment rate because every stage in the value chain requires certain level of expertise and manpower. The region should adopt policies that would encourage inward technology/skills transfer by making sure a considerable portion of its teeming population get trained(especially by non-indigenous professionals bring in FDIs) in the numerous skills required to run the various industries. Training of locals on adaptation to modern technologies needed for the sustained success of these initiatives should also be encouraged.

Transformed value and supply chains would definitely assure an increase in the production of value-added products, promote industrialisation and improve employment rate by creating numerous jobs along the various points in the value and supply chain. This development would be characterised by increased economic activities and would attract several other sectors, especially the financial services sector to this part of the country making it a full industrial and economic hub capable of self-sustenance.

Northern states should position themselves in readiness to fully leverage the AKK Gas Pipeline for their numerous industrial needs including for power generation, feedstock for certain products, source of process heat, etc by ensuring that a robust and sustainable gas off take portfolio gets developed along the AKK corridor.

Northern states should adopt strategies to also fully exploit their mineral resource wealth. While mineral exploration remains on the exclusive list and is being seen as an economic activity too difficult to venture into, states can minimise such kind of difficulties by creating mining development companies and leveraging the special purpose vehicle model where states partner private sector investors in the mining and mineral exploration sector to form joint-venture companies. Using this model as adopted in states like Kaduna, the state mining development companies secure the “hard to secure” mining titles, provide supporting infrastructure, handle community relations and security while the investors pursue their mining activities. The states should then attract mineral value-added industries that would fully explore the numerous mining and minerals value chains.

The North is unarguably a huge market for value-added products on its own owing to its population, however, it can leverage already existing trade routes to access other markets in other regions of the country and also other countries by export. The region should also position itself in readiness to optimally leverage prospective railway transport systems like the Kano-Maradi Rail which would make it more easier to access southern markets and ports for export and also open up the huge markets in other Sub-Saharan African countries through Maradi, Niger. The Africa Continental Free Trade Agreement is a tool the North could leverage too to expand its market for value-added products produced in the region.

This is also the time the North should rigorously press for the holistic dredging of the River Niger which would assure the activation of Baro and Lokoja River Ports for the enhancement of exports from the North and also the activation of the five Container Freight Stations(Inland Dry Ports) we have in the North.

Ultimately, with improved value-added industrial capacity, value-chain transformation/optimization and employment rate; economic prosperity of the North through increased economic activities, purchasing power, rate of consumption, industrial presence and value-addition is assured.

Abdulhaleem Ishaq Ringim is a political and public affairs analyst. He writes from Zaria and can be reached via [email protected]