August 22, (THEWILL) – The Value Added Tax (VAT) has entered the arena of another legal battle. This time, the stage is the Court of Appeal at the instance of the Federal Inland Revenue Service (FIRS) over the recent judgment of the Federal High Court in Port Harcourt, Rivers State.
In a judgment delivered by Justice Stephen Pam of the Federal High Court, Port Harcourt Division, Rivers State, on August 9, 2021, it was held that the Rivers State Government, and not the Federal Government, is empowered to collect Value Added Tax (VAT) and Personal Income Tax (PIT) in the state. The ruling was based on the premise that only the state is constitutionally entitled to impose taxes in its territory of the nature of consumption or sales tax.
The court held that there was no constitutional provision backing the collection of VAT, Withholding Tax, Education Tax and Technology Levy in Rivers State or any other state of the Federation by the FIRS. This was based on the fact that the Federal Government is restricted by the Constitution of the Federal Republic of Nigeria, 1999 to taxation of incomes, profits and capital gains. The court held that the (aforementioned) taxes do not in any way include VAT or any other levy other than those specifically mentioned in Items 58 and 59 of the Exclusive Legislative List of the Constitution.
Previous Cases
But that was not the first time the court would outlaw the collection of VAT by the Federal Government. The Chartered Institute of Taxation of Nigeria (CITN) recalled that there had been previous judgments nullifying the VAT Act or part of it. In a statement signed by its Registrar/Chief Executive, Adefisayo Awogbade, CITN said, “In October 2019, the Federal High Court, Lagos Division, in the Registered Trustees of Hotel Owners and Managers Association of Lagos V. A. G. Federation & Others while considering the validity of the Hotel Occupancy and Restaurants Consumption Law of Lagos State upheld the powers of the Lagos State Government to charge and collect Consumption Tax from hotels, restaurants and event centres within the State.
“The Court held that based on the Constitution and the Taxes and Levies (Approved List for Collection) Act, the power to impose consumption tax was a residual power within the exclusive competence of states. It restrained the FIRS from imposing VAT on goods and services consumed in hotels, restaurants and event centres, as this was already covered by the Lagos State Law.
“The court proceeded to declare sections 1,2,4,5 and 12 of the VAT Act as being inconsistent with section 4(2),(4) (a) & (b), (7)(a) & (b) of the Constitution and consequently unconstitutional and invalid. The court granted perpetual injunction against FIRS from collecting VAT from hotels, restaurants and event centres in Lagos.”
Furthermore, the tax regulatory body said, “In Emmanuel Chukwuka Ukala v. FIRS & A.G. FEDERATION in Suit No. FHC/PH/CS/30/2020, Hon. Justice I. O. Oshomah sitting at the Port Harcourt Division of the Federal High Court, on December 11, 2020, expressly held that the National Assembly had no power to enact the VAT Act.
“The plaintiff had asked the court to declare that there was no constitutional basis for the imposition, demand and collection of VAT by FIRS from him since the constitutional powers and competence of the National Assembly were limited to those specifically listed in Item 59, which did not include VAT or any other species of sales tax. The court, therefore, declared the VAT Act a nullity.”
Recalling the total nullification and partial nullification of the VAT Act, the CITN summarised as follows: “In the Registered Trustees of Hotel Owners and Managers Association of Lagos v. A. G. Federation, the court invalidated some of the provisions of the VAT Act. In Ukala v. FIRS, the court nullified the VAT Act. In A.G. Rivers v. F.I.R.S., it has been reported that the court has nullified the VAT Act and empowered the States to impose, demand and collect VAT within their States.
“From the foregoing decisions, it is evident that this is not the first time that the VAT Act has been declared unconstitutional.”
To play safe, the tax institute confirmed that it is in possession of the first and second cases mentioned, and that it is making efforts to get a certified true copy of the third and current case (the Port Harcourt High Court judgment).
“As an Institute, we were waiting for the appellate courts to take a definite position on the matter before making our comments. As soon as we receive the certified true copy of the judgment, our legal advisers will study it and advise us accordingly. When that is done in the next few weeks, the Institute will take an informed position and the public will be duly communicated.
“We are mindful of our statutory mandate as the only Institute that controls and regulates the tax profession and tax practice in all its ramifications, and we will not shirk our responsibility to the public in all matters relating to taxation in Nigeria,” the CITN said.
What’s Going to Happen?
Given the significance of the matter, it was obvious that the FIRS would appeal the judgment. It was obvious, too, that some states may push ahead with the implementation of the judgment, while the others play the waiting game. The volume of revenue that VAT earns for the Federal, state and local government is too significant to cause an interested party to stand aloof, depending on how it impacts it. And this is why the legal battle will not only be long, but fierce.
The CITN alluded to this while explaining the reason for its “middle-of-the-way” position on the matter – for now. “In view of the length of time that it takes for an appeal to be determined in our country, we think it will be in the public interest not to wait any longer, hence this press release.”
But Taiwo Oyedele, Fiscal Policy Partner and Africa Tax Leader at PwC, an international professional advisory service firm, was more forthcoming on the likely consequence of the VAT battle that would rage for a long time to come.
Reacting to the Rivers Court judgment, Oyedele gave a background to the origin of VAT. He said, “VAT was introduced via Decree No.102 of 1993. It replaced sales tax operated under Decree No.7 of 1986 which was administered by states and the FCT. By contrast, VAT is administered by the FIRS and the revenue is shared among all 3 levels of government. Both VAT and sales tax fall under the category of consumption tax.”
Oyedele stated that Sections 3 and 4 of the Constitution empower the National Assembly to legislate on matters contained in the Exclusive Legislative List and certain items under the Concurrent Legislative List.
The 2nd Schedule to the Constitution, items 7 and 8 of Part II (Concurrent Legislative List) provide that the National Assembly in exercise of its power to impose tax or duty on persons other than companies, may prescribe that such tax or duty be collected or administered by the state.
What this means is: “If the judgment is enforced or upheld on appeal, it will apply to other states and not just Rivers State. This means each state would administer VAT within their territory. By implication, FIRS will administer VAT within the FCT and non-import foreign VAT, while the Nigeria Customs Service will continue to collect import VAT on international trade,” Oyedele said in a statement entitled “The Federal High Court’s judgment on the administration of VAT in Nigeria and matters arising”, issued on August 10, 2021.
The Tax expert recalled that a previous Supreme Court judgment had ruled that VAT covered the field (of consumption tax) and therefore, a state cannot impose a consumption tax in addition to VAT. This means any state intending to impose VAT will have to repeal its existing consumption tax.
In considering the implications of the Rivers Court judgment on VAT, Oyedele observed that, ironically, the biggest losers will be the states except Lagos. A few states like Kano, Rivers, Oyo, Kaduna, Delta and Katsina may experience minimal impact, while at least 30 states which account for less than 20 percent of VAT collection will suffer significant revenue decline. The Federal Government may, in fact, be better off given that the FCT generates the second highest VAT (after Lagos) in addition to import and non-import foreign VAT.
Currently, section 40 of VAT Act requires that the VAT pool be shared 15 per cent to the FG; 50 percent to states; and 35 per cent to LGs (net of 4 per cent cost of collection by the FIRS). 20 per cent of the pool is shared based on derivation.
In 2020 for instance, total VAT collection was about N1.53 Trn with import VAT being N348 billion (or 22.7 percent) while foreign non-import VAT was N420 billion (or 27.4 percent) and local VAT amounted to N763 billion (or 49.8 percent).
The Federal Government is likely to retain more than the 15 percent it currently shares, while states and LGAs will have less to share, especially if we consider VAT on FG contracts included in Local VAT which will also be due to the FG.
This judgment may also have implications for taxes collectible by local governments which are currently administered by states, as well as the amendment by Finance Act 2020 which introduced Electronic Money Transfer levy in place of stamp duties, among others.
In addition, complications may arise for businesses, including SMEs who may have to deal with multiple tax authorities for VAT purposes and consequently a decline in Nigeria’s ease of paying taxes and doing business ranking.
Going forward, Oyedele, like many analysts, agreed that the FIRS would likely appeal the judgment of the Port Harcourt High Court, and that this would result in all parties maintaining the status quo. “Given the significance of this judgment, it is expected that the FIRS will appeal the decision. Therefore the status quo is likely to continue in the meantime.”
Enters Persistency
But Gov. Nyesom Wike, on August 19, signed into law the bill recently passed by the Rivers State House of Assembly on VAT collection in the state. He maintained that the judgment of the Federal High Court sitting in Port Harcourt had sufficiently addressed the illegality perpetrated by the Federal Inland Revenue Services.
“The Federal High Court sitting in Port Harcourt has addressed the illegality perpetrated by the Federal Inland Revenue Services (FIRS) on behalf of the Federal Government in the collection of VAT in states”, Wike said while assenting to the bill.
To show the extent of the potential legal battle ahead, Gov. Wike pointed out that when agencies of the Federal Government were allowed to illegally demand and collect taxes meant for states to collect, they strangled the states financially and turned them to beggars.
Urging the FIRS to focus more on whose duty it is to collect VAT, instead of being clever by half by claiming that 30 states would suffer if some states were allowed to collect VAT, Wike went into analysis: “In this state we awarded contracts to companies and within the last month, we paid over N30 billion to the contractors and 7.5 per cent will now be deducted from that and to be given to FIRS.
“Now, look at 7.5 per cent of N30 billion of contracts we awarded to companies in Rivers State, you will be talking about almost N3 billion only from that source. Rivers State Government has never received more than N2 billion from VAT at the end of the month. So, I have contributed more through the award of contract and you are giving me less. What is the justification for it?” Wike argued.
Legal Potpourri
But some analysts argue that the reason that the FIRS took over the collection of VAT was for the ease of the states who might not have the capacity to bear the cost of collecting VAT in their territory. Professor of Finance and Accounts at Nasarawa State University and immediate past President, Association of National Accountants of Nigeria (ANAN), Muhammad Mainoma, told THEWILL that it was the economy of collection of the VAT that made the states allow the FIRS to play that role.
According to him, the judgment has not said anything new. It was the ease of collecting the VAT that made FIRS to be the collecting agency for the states and that the proceeds are distributed to the states in accordance to how it accrued from the state.
“If every state were to collect, the cost of collection to the states would have been higher. It is the economy of collection that made the states to allow FIRS play that role,” Mainoma said in a note to THEWILL.
Asked if he envisaged protests from the states regarding the Port Harcourt Court judgment, Mainoma answered in the negative.
“There will not be a protest. Maybe the Rivers State felt short-changed and they want to collect themselves. The case has been determined before when Lagos went to court to insist that consumption tax falls within the jurisdiction of states and court ruled in their favour.
Oyedele spoke along the same line in a recent interview with a national newspaper. He said, “Based on the constitution, consumption tax belongs to the states and I don’t think that anyone is debating that. So, what happened in 1993 when the VAT law was introduced was the understanding that the Federal Government (FG) had the capacity to collect.
“At the time, even Lagos state did not have the capacity to collect. The Federal Government was only collecting on behalf of the state and then keeping a percentage of the state to cover the cost of collecting. So, we can debate on whether the percentage is high or not and that is why they only keep 15 percent and 85 percent goes to the states and local governments.”
“We have also had different cases in the past including up to the Supreme Court which was between Lagos state and Federal Inland Revenue Service (FIRS) and it was a debate between VAT and consumption tax. And the Supreme Court said VAT law has covered the fees and therefore Lagos state should not introduce consumption tax. Although this is not the same, they are related.
“If you think of a law like personal income tax, it is a state tax and no one is debating it with them to collect it, but the law was centrally enacted. So, I see VAT playing out the same way. Centrally enacted, maybe at some point states would collect it themselves but at the moment, FIRS is collecting on their behalf, “he said.
Maintaining that it would pay more states to allow FIRS to be the collecting agency, Oyedele added, “I don’t think any other state would make more money as of today from collecting their VAT than what they are sharing from the Federation. The reason is very simply, there is customs VAT that is collected by customs on behalf of FIRS, and that accounts for somewhere around 12 to 15 percent of VAT and that is a VAT no state would be able to lay claims to. Also, maybe 60 to 70 per cent of the nation’s VAT is generated in Lagos. This means all the other states are barely contributing 30 per cent.”
He pointed out that the complexities involved in collecting VAT state by state, is a very important factor to consider.
However, a legal practitioner and tax expert who would not want his name published because of his assignments with the government, said the claim that FIRS assumed the responsibility of collecting VAT on behalf of the states to save the states the cost of engaging in the exercise would not hold.
He maintained that the issue for determination was the constitutionality of the VAT Act. “The Constitution is the Grundnorm, its provisions on taxes are clear and well spelt out. The VAT Act is also there with its provisions on taxes well spelt out. The issue at stake is whether the VAT Law should override the Constitution or whether part(s) of it contradict(s) the Constitution which is the supreme document,” the tax expert explained.
Reacting to this, the tax expert and legal practitioner emphasised on the provisions of the constitution. He said the court would look at what the issues are and give its judgment without sentiments. “The question is, whose duty is it to collect VAT?” He agreed that VAT matters are not as simple as they are seen because there are VATs on goods and services produced within a state and there are VATs on goods and services passing through a state.
He said the court had ruled that the latter be collected by the Federal Government, even though the conveyor may be using the infrastructure produced/offered by the state through which the goods and services pass. “If you allow the states to collect such VATs, it means that an importer from Anambra State would pay VAT to the four or five states of the goods cleared at the Lagos Ports being taken to Onitsha, that will be complicated,” he said.
He agreed it is not going to be easy because some states, like Lagos, Rivers and Kano will put up a strong fight. Others, like Jigawa, Kebbi, Yobe, will be on the side of the FIRS.
Oyedele insists, “This is a judgment of the Federal High Court and I don’t think any state will want to implement it. You expect there would be an appeal to the Court of Appeal and then the Supreme Court. This is a major issue. So I don’t think anyone will allow it to stand at this level where it is. The reality is that it will not be implemented now, it will still be under appeal and I don’t know how many more years that will take.”
“But we (Rivers State) are standing on the part of history as representatives of the state to have taken the bull by the horn to challenge the illegality of the Federal Government through the Federal Inland Revenue Services (FIRS),” Gov. Wike said in Port Harcourt while signing the VAT bill into law on August 19, 2021.
While thanking the state lawmakers for their courage to have given the bill speedy passage, Wike assured that every area that the law allows the state to collect revenue will be maximised for the survival of the state.
The FIRS Director of Communications and Liaison Department, Mr Abdullahi Ahmed, could not be reached at the time of going to press. But in a statement he signed notifying the public that the FIRS had appealed the Port Harcourt High Court judgment and also sought for a stay of execution.
The statement said, “The public should continue to comply until the matter is resolved by the appellate court, in order to avoid accruing the consequent penalties and interest for non-compliance.”
Why Not Let Go?
It is obvious that the parties involved will not let go because of the volume of revenue generated through VAT over the years. VAT revenue has grown exponentially over the years. Nigeria’s revenue from VAT rose from N797.51 billion in 2017 to N1.09 trillion in the first nine months of 2018. In 2019, the figure rose to N1.17 trillion and hit N1.5.53 trillion in 2020. VAT in Q2 2021 was N512.25 billion against N496.39 in Q1 2021.
What’s the way out?
“It will be necessary to amend the Constitution to address the current challenges while retaining the positives under the current system. For instance, states will have to rely on the federal government to enforce the Significant Economic Presence requirement for global tech companies.
Ultimately, Nigeria can learn from other climes, but we must figure out our most suitable form of fiscal federalism,” Oyedele said.
About the Author
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
