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VAT War Sparks Restructuring, Fiscal Federalism

Wike - Sanwo-Olu Cariccature

September 19, (THEWILL) – On Thursday, September 16, 2021, what has come to be known as the ‘VAT war’ assumed a larger dimension and achieved a significant mileage forward since Governor Nyesom Wike of Rivers State legally took on the Federal Inland Revenue Service (FIRS) over the right of his state to collect Value Added Tax and passed an enabling law.

That day the Southern Governors’ Forum met in Enugu and issued a communique, read by its Chairman and Governor of Ondo State, Oluwarotimi Akeredolu, SAN.

Among other resolutions that dealt with their renewed call for the presidency to be zoned to the region in 2023, the encouraging response by member states to the directive to pass anti-open grazing law and developments surrounding the Petroleum Industry Act, Akeredolu said with firmness that the Forum “reaffirmed its earlier commitment to fiscal federalism as resolved at the inaugural meeting of the Forum held on Tuesday, May 11, 2021 at Asaba, Delta State and emphasized the need for the southern states to leverage the legislative competence of their respective State Houses of Assembly, as well as representation in the National Assembly to pursue its inclusion in the Nigerian Constitution through the ongoing constitutional amendment.”

Then he added, “The meeting resolved to support the position that the collection of VAT falls within the powers of the states.”

Commitment to fiscal federalism and resolution to support the position that the collection of VAT falls within the powers of the states, is an open declaration that the pace set by Governor Wike would trend and achieve a life of its own until most member states own proprietary rights to VAT collection.

Akeredolu, a Senior Advocate of Nigeria should know the possible outcome of the ongoing litigation on VAT and its implication for fiscal federalism.

THEWILL recalls that Lagos State, the commercial nerve of the country and neighbouring Ogun state, one of the three most viable states in the country, in terms of Internally Generated Revenue (IGR) had passed the VAT law in tandem with Rivers, while the former had expressed its readiness to join Rivers in the FIRS suit at the Appeal Court.

The Appeal Court had on September 9, 2021 ordered the Rivers State and Lagos State governments, which had then passed VAT Law in their respective states, to maintain the status quo over VAT collection. The appellate court had also granted the prayer of FIRS for a stay of execution of the Port Harcourt Federal High Court judgment. But Rivers has gone to the Supreme Court to challenge the Appeal Court ruling.


The VAT matter is not entirely new. On the heels of the current ‘VAT war’, the Chartered Institute of Taxation of Nigeria (CITN) recalled that there had been previous judgments nullifying the VAT Act or part of it. It issued a statement signed by its Registrar/Chief Executive, Adefisayo Awogbade. CITN said it was waiting for the appellate courts to take a definite position on the matter before making their comments.

Similarly,  Professor of Finance and Accounts at Nasarawa State University and immediate past President, Association of National Accountants of Nigeria (ANAN), Mohammed Mainoma, told THEWILL that it was the economy of collection of the VAT that made the states allow the FIRS to play that role.

“The case has been determined before when Lagos went to court to insist that consumption tax falls within the jurisdiction of states and a court ruled in their favour. Maybe the Rivers State Government felt short-changed and they want to collect themselves,” he said.

According to Mainoma, 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 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,” he added.

Explaining further, a legal practitioner and tax expert, who spoke on the condition of anonymity because of his assignments from 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 was false.

He told this newspaper 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 its provisions contradict the Constitution which is the supreme document,” the tax expert explained.

He agreed, like many others, that the parties involved will not let go because of the volume of revenue generated through VAT over the years.

For Mr Taiwo Oyedele, Fiscal Policy Partner and Africa Tax Leader at PwC, an international professional advisory service firm, enforcement of the judgment has wider fiscal implications, which is the import of Wike’s move, actively supported by Governors Babajide Sanwo-Olu of Lagos and Dapo Abiodun of Ogun State who have passed the law and the wider body of the Southern Governors’ Forum.

According to him, in a published note he referred THEWILL to when he was contacted for comments; “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.”


Contrary to the tenets of true fiscal federalism, Nigeria’s states have grown increasingly dependent on the Federal Government for revenue in a manner that suggests the federating units have offered to be taken hostage by the centre.  The trend, which can be traced to the economic crisis of 1979-1980, was reinforced by the enactment of the 1999 Constitution, which launched Nigeria back to democracy after 16 years of unbroken military rule.

The civilian governments inherited 36 states and the Federal Capital Territory from the military. The Centre had over the years appropriated to itself the lion’s share of the resources meant for the federating units to cater for their needs and adequately address the grassroots development. It was a ruinous process that had its origin in the Nigerian Civil War years.

The structure of the 1999 Constitution empowered the Federal Government in a manner that aggravates the urge to deal with the states like fiefdoms, especially in the aspect of resource control. The Exclusive, Concurrent and Residual legislative lists of the 1999 Constitution, which set the roles of the different tiers of government, exist in the most lopsided manner against the states.

The Exclusive List comprises 68 items, aside from 30 others in the Concurrent List on which the Federal Government can also make laws, thereby creating 98 legislative areas for the Federal Government. It is this structure that produced the notoriously skewed revenue formula that the states are now demanding for a review in their favour: 52.68 per cent, 26.72 per cent and 20.60 per cent for the federal, state and local governments, respectively; 13 per cent derivative is approved for oil-producing states.


While the nation awaits the new revenue sharing formula, the Value Added Tax (VAT) has entered the arena of a prolonged legal battle up to the Supreme Court. A Port Harcourt Federal High Court had outlawed the Value Added Tax Law and declared the Rivers State Government, and any other state, the rightful entity to collect VAT in their jurisdiction.

The FIRS has appealed the judgment delivered by Justice Stephen Pam of the Federal High Court, Port Harcourt Division, Rivers State, in August 2021. In the judgment, it was held that the Rivers State Government, not the Federal Government, is empowered by the Constitution to collect VAT and Personal Income Tax (PIT) in the state. The ruling that the Rivers State Government (and not the FIRS) is entitled to collect VAT in the state 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 in 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.

Incidentally, the Lagos State Government has said it will go ahead with the implementation of the state’s VAT Law, notwithstanding the Appeal Court’s order of stay of execution. Rivers State has gone to the Supreme Court to set aside the decision of the Court of Appeal that ordered it to maintain the status quo on the collection of VAT, pending the determination of an appeal that was lodged by the FIRS.

The riverine state, in a 10-ground appeal, prayed the apex court to order that the substantive appeal by the FIRS and all other processes be heard and determined by a new panel of the Court of Appeal.

It maintained, among other grounds, that the three-man panel of Justices of the Court of Appeal led by Justice Haruna Tsammani, had in the ruling erred in law when they relied on the provisions of Section 6(6) of the 1999 Constitution and the inherent jurisdiction of the appellate court, to order all the parties to maintain the status quo on the VAT dispute. Stakeholders consider the development as a peaceful way of achieving restructuring.


In a recent report by the National Bureau of Statistics, the states’ shares of VAT allocation from January 2020 to February 2021 showed that the 36 states received a total of N1.09 trillion VAT revenue from the Federation Accounts Allocation Committee. According to NBS, five northern states, two south-western states, two south-south states, and one south-eastern state collected a total of N373.84bn of the N836.51bn VAT proceeds in 14 months.

The top 10 states were Lagos (N153.94bn), Kano (N32.48bn), Oyo (N29.85bn), Rivers (N28.43bn), Kaduna (N24.75bn), Katsina (N22.72bn), Delta (N20.91bn), Bauchi (N20.49bn), Anambra (N20.14bn), and Jigawa (N20.13bn).

Lagos got the largest share of VAT revenue in the period under review (N153.94bn), while Nasarawa got the least allocation of N15.36bn.

Based on the regions, the South-West region received the highest VAT allocation (N256.21bn), followed by the North-West (N154.41bn), South-South (N119.88bn), North-East (107.43bn), North-Central (N106.58bn). The South-East received the least from the VAT allocations (N91.99bn).

The bottom 10 states were Nasarawa (N15.36bn), Bayelsa (N15.79bn), Taraba (N16.23bn), Gombe (N16.33bn), Kwara (N16.35bn), Ekiti (N16.46bn), Yobe (N16.90bn), Abia (N17.03bn), Ebonyi (N17.04bn), and Cross River (N17.17bn).

Based on the country’s revenue sharing formula, the Federal Government gets 15 percent of VAT, while states share 50 per cent and local government areas share 35 per cent. In the period under review, the Federal Government got N251.55bn from VAT.

In 2020, the total internally generated revenue of the 36 states in Nigeria was N1.21tn. Based on this indication, in 2020, Lagos may have contributed N419.65bn. In the same year, however, it received N130.97bn.

According to THEWILL investigation, VAT has been climbing higher as Nigeria generated a total of N6.78 trillion in the past five years up to the first half of 2021 (2016-June 2021). The sums of N982.27 billion, N955.73 and N1.108 trillion were generated in 2016, 2017 and 2018 respectively. Figures for 2019 and 2020 were N1.88 trillion and N1.53 trillion, respectively, while N1.09 trillion was achieved in the first half of 2021, following the increase of VAT from 5 per cent to 7.5 per cent in 2020. The money, experts say, should be deployed for infrastructural development in the respective states that generate them.


The ‘VAT war’ can be labelled the Battle for Equity. At the centre of the ‘war’ is the search for equity, financial autonomy and devolution of more powers to demographic entities like the states. It is the meat of the clamour for restructuring.

This is the new chapter that the ‘VAT war’ has opened up in the evasive and amorphous restructuring debate. In recent times, ‘Restructuring’ has assumed the status of a political albatross and a millstone around the neck of Nigeria. It has also become the journey to a visible island without a defined route.

THEWILL further recalls that ‘Restructuring’ was a major campaign focus of the All Progressives Congress (APC) in the build-up to the 2015 elections which eventually ushered in the APC/Buhari-led government. It was a chorus sung in unison and at a feverish pitch by members of the party as they laboured to wrestle power from the then Peoples Democratic Party (PDP)-led government, prior to the May 2015 general election.

Succumbing to public pressure, ahead of the 2019 general election, the ruling APC set up a Governor Nasri el-Rufai-led Committee on Restructuring. But it ended up as another political gimmick.  The truth of the matter, as it latter emerges, is that President Muhammadu Buhari and his top advisers are against restructuring. As recent as June 11 while playing host to members of the Nigerian Inter-Religious Council (NIREC), led by the Co-Chairmen, the Sultan of Sokoto, Alhaji Muhammad Sa’ad Abubakar, and the President of the Christian Association of Nigeria (CAN), Rev. Dr. Samson Supo Ayokunle, at the Presidential Villa, Abuja, the President said that demands for restructuring, state police should be directed to the National Assembly.

“On the contentious issue of restructuring or true federalism or devolution of powers, like you all know, this is a constitutional matter which only the National Assembly can deal,” he said later in a statement issued by his Special Adviser on Media and Publicity, Mr Femi Adesina.

A few days earlier, the President, was quoted as saying, “there is nothing to restructure,” describing those agitating for restructuring as “naïve and mischievously dangerous.” The President, spoke through the Executive Secretary of the Revenue Mobilisation and Fiscal Commission (RMFC), Alhaji Mohammed Bello Shehu, in Zaria, Kaduna State, during the inauguration of the Kudirat Abiola Sabon Gari Peace Foundation. Such a posture is on the same wavelength with that of Gombe State whose government’s immediate reaction to the ongoing VAT war begged Rivers and Lagos States to be their brothers keeper.

Thus, the decision of the Rivers State Government to go as far as the Supreme Court in its pursuit of the ‘VAT war’ and the full support of the Southern Governors’ Forum has once again raised the question about how a federation becomes operational to the benefit for all the federating units.

A professor of Comparative Politics and former Vice-Chancellor of Igbinedion University, Eghosa Osaghae, provides an insight in a newspaper interview.

According to him, everywhere you have a federal system, it is recognised as a system of bargain and negotiations – continuous bargains and negotiations.

“You don’t finalise your federal instrumentalities/configurations because in the course of time, human societies demand change. You have the global economy that can make you poor tonight and tomorrow you become a rich country.

“These things have a way of precipitating different demands and once you have those demands, they can lead to changes in power holding that may demand a review of jurisdictions. In Nigeria today, we have about 68 items in the Exclusive List and about sixteen in the concurrent list. In the balance of scale, that means the Federal Government is very powerful. But you don’t have a federal system when you don’t have constituent units that are legal units that can challenge the Federal Government by its own actions and activities and in the event of jurisdictional conflict, we go to the Supreme Court,” he said.

He cited the action of Asiwaju Bola Ahmed Tinubu as Governor of Lagos State in 2006 when he fought the federal government all the way to the Supreme Court over his decision to exercise his powers to create local council development areas. He won the case. The Federal Government’s only reaction was to illegally withhold the allocation to the state’s joint state/local government account. That money, however, accumulated to N10 billion and was eventually paid in 2009 by the President Umaru Yar’Adua administration, the successor to Olusegun Obasanjo’s government. By then both combatants had left office, but the case became a landmark judgment that other states later capitalised upon to create development areas.

“Restructuring cannot only be done at the legal unit through judicial interpretations and reviews; it can be done through actions. All over the world, federations have restructured in this diverse manner. If the states were not dysfunctional, they also will be in the thick for the demand for restructuring.” said Prof Osaghae.

Backing this position, a member of the Lagos House of Assembly, Setonji David, said in his reaction to the enacted VAT law by Lagos: “In Lagos State, we have always clamoured for true federalism. This is a consumption tax from the people of Lagos and it should be domiciled in Lagos and used for the people of Lagos. There are so many hassles that have to do with federalism that we are practising.

“We generate over 55 per cent of the VAT in Nigeria and we get a paltry sum of 10 per cent. Is that fair for a population of over 24 million? We are happy that the Rivers State Government went to court and the court was very clear that VAT was supposed to be a state affair. We have no choice but to follow suit.”


More state governments have joined Lagos and Rivers to enact VAT laws in their jurisdiction. The southern governors at their just concluded meeting in Enugu have given their backing to the states being responsible for the collection of VAT in their jurisdictions.

This development could serve as a starting point in achieving true fiscal federalism in Nigeria, at last, and without war. It will lead to fiscal federalism, which demands that each level of government adequately finances its operations without recourse to the central government. The states have huge potential for revenue generation, yet a majority are fiscally constrained because they look up to the handouts that trickle down from the purse of the federal government.

The lack of equity in the sharing of the VAT revenue is why states are now pushing for the first time to enact laws that give them the right to collect the taxes within their jurisdiction. For instance, while Lagos is estimated to contribute about 55 percent to local VAT, reports show that it is only allocated 15 per cent of the total collected revenue from VAT.

Many states, especially those that contribute most to VAT, believe that being in charge of the tax collection would lead to an increase in revenue and an increase in infrastructure development in their jurisdictions.

According to Governor Wike, Rivers generates an average of N15bn in VAT every month but gets a paltry 25 per cent from the Federal Government as a monthly allocation.

The Director-General of the Progressives Governors’ Forum, Dr Salihu Lukman, has said it was time for Nigerian politics to be refocused to tap into the productive potential of each state, instead of the current debate on revenue sharing.

Lukman, who delivered a paper titled, ‘Retrogressive Politics of Value Added Tax in Nigeria,’ in Abuja, on Friday, September 17, said, “There is no reason why any state in the country, including Zamfara, Yobe, Osun, Ekiti, Abia and Ebonyi States, should not aspire to generate at least N10 – 15 billion monthly as Internally Generated Revenue.

“To be caught in the backward debate about whether they should have the little they currently receive from the federation account is retrogressive. As a nation, our politics and democracy must be refocused towards nurturing the productive potentials of every state.”

Lukman said that Nigeria’s politics would do better when politicians and public commentators rise above sentiments.

He reiterated, “Nigerian democracy and politics must functionally rise above sentiment. Instead of debating how to consume the little resources that are so far available, Nigerian political leaders should be debating how to increase available resources.

“Even within the limit of the debate about increased available resources, the question of what government needs to do, policy measures required, including issues of tax, its administration and orientation, in terms of whether it should favour the low or high-income groups, should not be issues that would be blindly considered.”

Some experts argue that the states may not be better off if the Supreme Court takes VAT collection from the FIRS and states are allowed to collect it in their jurisdictions. However, the point being stressed is that Nigeria is practising constitutional democracy and doing what the constitution says is the kernel of the matter. And that is what the advocates of the new order believe will pave the way to true fiscal federalism and attaining the desired restructuring without real war.