Sadiq GulmaThe recent debates in Nigeria on the proposed tax reforms have brought up some issues many seem not to pay attention to or become interested in. That is the misreporting of internally generated revenues (IGRs) of many states and its implications on their economic growth. This misreporting comes due to the current VAT reporting and collection that propagates the headquarters logic i. e. companies filing their taxes in the state where their headquarters is located. One of the implications is that the IGRs generated in every state where companies such as MTN, Dangote Cement, Cadbury, DSTV, Electricity Discos, etc. do their business, are under-reported. All the VAT collected from MTN, being the biggest VAT contributor according to the Head of FIRS, from sales of recharge cards in all states of Nigeria, is only recorded for Lagos State where MTN has its corporate headquarters.
According to my findings, the MTN trade partner in Sokoto State who has the sole license to sell MTN recharge cards in the State, makes 1 billion NGN sales on a monthly average. All the VAT from these sales is not reported for Sokoto State but for Lagos State. That means the IGR of Sokoto State is consistently underreported by 7.5% of sales of MTN recharge cards. This under-reporting is for all states affected by these. It is like Sokoto State doing the hard work of ensuring a good business climate exists where such companies can generate revenues peacefully and record high sales in the state, but instead of the taxes to be collected in Sokoto State, the state where the HQ of this company is located steals the credit.
The bigger question to ask is how many companies out there are doing this and making the figures from many states low and in turn making them look poorer and unattractive for investments. This argument can also be extended to pay-as-you-earn (PAYE) tax. Companies and organisations with branches across the states also file taxes where the HQ is located. With the numerous NGOs and companies active in northern Nigeria, and their PAYE not reported in the state the staff work in, should necessitate a discussion for state governors about the point of tax administration.
The second revelation we get from the under-reporting of IGRs according to the reports by the National Bureau of Statistics (NBS) is the undermining of the economic potential of many states, especially northern Nigeria which is choreographically chanted as poor and incapable of attracting foreign direct investments (FDIs). It is not only individual investors that look at the IGRs of states to inform their decisions for likely investments in certain states. Even financial and multilateral institutions like the World Bank, IFC, and so many others we do not know that are looking for the next place to invest, do get the impression that the IGRs in these states are low and therefore not likely good investment locations. It is therefore no surprise there why Lagos State with numerous corporate headquarters located significantly attract more businesses to open in Lagos. While IGR is not the single attractive factor for investments, it is surely one that carries a lot of weight.
I remember the time the then Governor of Kaduna State Mallam Nasir El-Rufai was vigorously pushing to secure the World Bank loan that has been used to taint his government in different colours. One of the conditions for granting the loan is for Kaduna State to increase their IGRs as the current level then was judged inadequate for the state to be able to pay back its loan. Mallam went on different sprees to drive the collection up: ensuring the collection of tenement rates from building property occupiers, consolidation of tax collection, ensuring tax defaulters pay, setting up of the ruthless traffic wards called KASTELIA, and so on. That drive along with other initiatives like setting up of the Kaduna State Investment Promotion Agency (KADIPA) saw Kaduna State increased their IGR from around 11.5 billion NGN in 2015, to around 44.5 billion NGN in 2019. A figure that remarkably put Kaduna State’s IGR ahead of northern Nigeria’s commercial nerve Kano State, to the surprise of many. Only then along with other conditions was the loan granted. (I will write more about this in subsequent blogs).
These are some of the reasons why the states with low IGRs need to support the tax reforms. If they understand how higher IGRs attract investment, regardless of how much share they get, it can shift how and what they argue for in the tax reforms debate. If anything, states must insist the headquarters logic to be taken away immediately. I think states should be interested in revisiting the IGR reports of the past years to correct for these reporting anomalies by the NBS, should NBS not be interested in that. The state governors should think about mounting a claim for the tax credit from previous years that were “stolen” from them. After all, tax reclaims should always be possible.
This article is the second in a series I am writing on the proposed tax reforms. See related posts by clicking on tag tax reforms below.
Written by Sadiq Gulma.
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Nice analysis, keep it up