[ANALYSIS] VAT As Weapon In Battle For Resource Control

By Sanya Adejokun

BETWEEN 2020 and now, there have been four notable cases decided by the Federal High Court on the validity of Value Added Tax (VAT) legislation in the country.

Two of the cases were decided in Port Harcourt against VAT while another one in Lagos also nullified the law. In the fourth instance, FHC in Kano ruled endorsed VAT when it restrained Kano State Government from imposing Consumption Tax on transactions involving goods and services, which are already subject to VAT as the VAT Act had covered the field in that regard.

In the latest ruling, Justice Stephen Dalyop Pam said the constitutional powers and competence of the Federal Government was limited to taxation of incomes, profits and capital gains, which did not include VAT or any other species of sales, or levy other than those specifically mentioned in items 58 and 59 of the Exclusive Legislative List of the Constitution.

The court agreed with the Rivers State government (plaintiff) that the state and not FIRS was constitutionally entitled to impose taxes enforceable or collectable in its territory of the nature of consumption or sales tax, VAT, education and other taxes or levies, other than the taxes and duties specifically reserved for the Federal Government by items 58 and 59 of Part 1 of the Second Schedule of the 1999 constitution as amended.

The court also declared that FIRS and Minister of Finance were not constitutionally entitled to charge or imposes levies, charges or rates (under any guise or by whatever name called) on the residents of Rivers and any state of the federation.

Since then, legal economic and social commentators have noted federal government is potentially the greatest beneficiary while only a few states like Lagos, FCT, Rivers, Ogun, Kano, Oyo, and Kaduna will benefit among the states. The value of VAT collected by Nigerian Customs Service on behalf of FIRS on foreign related goods and services amount to between 12 and 15 percent the total collections.

Others argue that it will become difficult if not impossible for states to individually administer VAT within their jurisdictions for lack of capacity. Companies operating in multiple states may also have difficulties dealing with different laws in different states. Others also suggested that Federal Government may resort to appropriating the sizeable contributions of VAT accruing from Customs sources and treat it as independent revenue.

VAT is currently shared in the ratio of 15 per cent to FG; 50 per cent to states and 35 per cent to local governments.

A Chartered/Forensic Accountant and Tax Advisor, Mr Godwin Oloke who is Managing Partner, Oloke Oloke and Co. the development is capable of “promoting fiscal federalism as states will now be able to impose and demand VAT from those transacting business within their jurisdictions.

States will also be forced to make their states investor friendly. Since the more goods and services people consume, the more VAT they will collect. It stands to reason therefore, that states with a lot of commerce like Lagos will now increase their income while others without sufficient commerce will witness drop in VAT.”

Oloke also believes that states retrieving their rights to levying and administering VAT will remove the unfairness in unethical practices whereby Sharia compliant states will cease to share from proceeds of alcoholic beverages.

He noted that some states will suffer but that Federal Government may not suffer much from the development since it may then hold on to VAT coming from foreign sources collected by Nigerian Customs Service and oil companies.

He however, contended that VAT coming from oil companies and customs should be pooled into the Federation Account. If this same approach used in administering personal income tax is applied to VAT, IGR of investor friendly states will have been greatly boosted. This will force states to look inwards and design policies that will attract investors to their states thereby promoting true fiscal federalism.”

While applauding states for testing certain practices in the courts, he expressed the fear that there may no longer be uniformity in rates and administration of VAT.

“There could be multiple tax rates in states with attending negative impact on the ease of doing business.”

Concurring with Oloke, a professor of finance and former Commissioner of Finance in Imo State, Uche Uwaleke said the judgment will encourage state governments to design policies that will attract investors to their states which in turn will give the states the leverage to impose taxes thus increasing their Internally Generated Revenue (IGR).

“VAT replaced sales tax that was something within the jurisdiction of the state. Ideally it should be collected at the state level. If states are allowed to collect VAT, many of them will be encouraged to develop that aspect of taxation as opposed to going to the tax pool to share. In view of the fact that a lot of the states are trying to beef up IGR, allowing them to collect and administer VAT will boost the IGR of states. As much as possible, we should find a way of devolving taxing powers and responsibility to subnational governments as that is what true fiscal federalism is all about”.

Ethically, Uwaleke, who is of Nassarawa State University, Keffi wondered “why Kano for example and some other states should be benefiting from VAT from alcohol. So, when you now allow Kano to collect tax, Kano will not impose VAT on those commodities like alcohol and those things that are haram. It will enable sharia compliant states to apply the principles of Sharia but when you put it in a pool, it is difficult to segregate those that came from which sources”.

However, Fiscal Policy Partner at PwC, Mr Taiwo Oyedele who also agreed that consumption tax belongs to states explained “what happened in 1993 when the VAT law was introduced was the understanding that the Federal Government had the capacity to collect. FG was only collecting on behalf of states and then keeping a percentage to cover the cost of collection. We can debate on whether the percentage is high or not and that is why they keep only 15 per cent and 85 per cent goes to states and local governments.”

VAT was first introduced on August 24, 1993 in replacement of the Sales Tax or Consumption Tax through a decree that has now undergone subsequent amendments with the last being in 2020 to reflect modifications and provide clarifications. VAT is currently charged at the rate of 7.5 per cent. With some states bent on imposing other forms of consumption tax, Andersen Tax says operation of the VAT Act concurrently with the Consumption Tax creates multiple consumption tax burden on taxpayers and “it is imperative that a superior court rules on the issue to provide clarity and certainty on the application of the VAT Act and the appropriate body (National or State House of Assembly) empowered to legislate on the taxation of consumption of goods and services. This is to eliminate the incidence of multiple taxation, a major disincentive to business.”

There are currently three decisions by Federal High Court in nullifying VAT legislation and one in favour of it and so, Anderson Tax opined that the matter will eventually get to the Supreme Court to determine what will ultimately be the fate of VAT as is currently administered in Nigeria.

The apex court had rejected a case by Lagos State asking it to adjudicate on the matter because FHC has original jurisdiction.

A legal practitioner, Mujib Dada-Qadri Esq noted that the FHC, Port Harcourt ruling “is exciting to some southerners who see their region of the country as the biggest source of VAT and implying the North as “parasite”.

So the judgment fits the deepening regional division unfortunately. It is more unfortunate because the judgment will attract ethnic biases instead of unbiased and dispassionate legal analysis.”

According to him, only Lagos, Ogun, FCT and Rivers are the highest contributors of VAT.

“This is a slap in the face of other states whether in the south or north that are being sustained largely by the contributions of just four or five states” and said it was too early for anyone to jubilate because statutory interpretations can be tricky.

“The concurrent legislative list as provided for in the 1999 constitution does not exclusively grant “state government” ultimate authority, concurrent list empowers the National Assembly and state assemblies.