Recent Controversy On VAT Collection: The Need To Adopt Fiscal Federalism And Restructuring

By Afe Babalola SAN

VALUE Added Tax is a consumption tax created by statute. Though levied at every level of the consumption chain, VAT is borne by the final consumer of the product or service. Section 2 of the Value Added Tax, 1993 provides that “the tax shall be charged and payable on the supply of all goods and services (in this Act referred to as “taxable goods and services”) other than those goods and services listed in the First Schedule to the Act”.

First Schedule to the Act lists the goods exempted from the payment of VAT as follows: “All medical and pharmaceutical products, basic food items, books and educational materials, baby products, fertiliser, locally produced agricultural and veterinary medicine, farming machinery and farming transportation equipment, all exports, plant and machinery imported for use in the Export Processing Zone, Plant, machinery and equipment purchased for utilisation of gas in down-stream petroleum operations, Tractors, ploughs and agricultural equipment and implements purchased for agricultural purposes. Exempted services include medical services, services rendered by community banks, people’s bank and mortgage institutions, Plays and performances conducted by educational institutions as part of learning, and all exported services.

The rate of VAT payable on goods and services is as provided under Section 4 of the Act, as follows: “the tax shall be computed at the rate of 5 per cent on the value of all goods and services as determined, under sections 5 and 6 of this Act, except that goods and services listed under part III of the first Schedule to this Act shall be taxed at zero rate”. However, the foregoing provision was amended by virtue of Section 42 of the Finance Act 2020 which increased the rate to 7.5%. It provides: The tax shall be computed at the rate of 7.5% with effect from 1 February 2020, on the value of all goods and services, except that goods and services listed under Part III of the First Schedule to this Act shall be taxed at zero rate.”

Going down the memory lane, the idea of VAT in Nigeria started with the acceptance of the recommendation of the study group on indirect taxation in November 1991 set up by the Federal Government. The Federal Government was not satisfied with the revenue yield from the Sales tax which covers only nine categories of good plus sales and services in registered hotels, motel, and similar establishment. The government realised that the narrow scope negates the fundamental principles of consumption tax, which by nature is expected to cut across consumption of goods and services. However, VAT has a broader base and includes most professional services and banking transactions that are high profit-generating sectors. According to research, under VAT, a considerable part of the tax to be realised is from imported goods. This means that locally manufactured goods will not be placed at a disadvantage, relative to import and since VAT is based on the general consumption behavior of the people, the expected high yield from it will boost the fortunes of the state government with minimum resistance from the payers of the tax.

By virtue of section 7 of the Value Added Tax Act, the Federal Board of Inland Revenue is responsible for the assessment and collection of VAT and shall account for all amounts collected in accordance with the provisions of the Act. Notwithstanding the fact that VAT was to be collected and enforced by an organ of the federal government, VAT was excluded from the jurisdiction of the Federal High Court by the 1999 Constitution. The reason for this may not be far-fetched: by the sharing formula provided in section 40 of the Act, it can be very well argued that the federal government’s tax administrative machinery was used to collect VAT on behalf of the state governments, as they had had jurisdiction over the sales tax that was being introduced by Finance Decrees (Miscellaneous Taxation Provisions) Nos 30, 31 and 32 of 1996 and Nos 18 of 1998 and 30 of 1999. In contrast, revenues derived under the Sales Tax Act accrued exclusively to the state governments while the VAT revenue is now shared by all levels of government.

Section 40 of the Act provides as follows: “Notwithstanding any formula that may be prescribed by any other law, the revenue accruing by virtue of the operation of this Act shall be distributed as follows, that is- (a) 15% to the Federal Government. (b) 50% to the State Governments and the Federal Capital Territory, Abuja; and (c) 35% to the Local Governments: provided that the principle of derivation of not less than 20% shall be reflected in the distribution of the allocation amongst States and Local Governments as specified in paragraphs (b) and (c) of this section.”

The need to embrace true fiscal federalism

The long-disputed call for fiscal federalism was again brought to fore in a recent suit filed by the government of Rivers State against the Federal Inland Revenue Service, wherein the state government challenged the collection of VAT by the agency. The Federal High Court, Port Harcourt Division, delivered its judgment in the suit and held that it is the Rivers State Government (RSG) and not the Federal Inland Revenue Services (FIRS) that should collect Valued Added Tax (VAT) and Personal Income Tax (PIT) in the state. The Court further issued an order of perpetual injunction restraining FIRS and the Attorney General of the Federation, both first and second defendants in the suit, from collecting, demanding, threatening, and intimidating residents of Rivers State to pay to FIRS, personnel income tax and VAT.

Follow-up to the judgment of the Federal High Court, the executive governor of Rivers State, Nyesom Wike, reportedly advocated for states to fully oversee the collection of revenues accruing from Value Added Tax in their states. Perhaps, in recognition of the inherent lapses in the 1999 Constitution which conspicuously omits Value Added Tax from the Exclusive Legislative List, but limits it to stamp duties, taxation of incomes, profits and capital gains (items 58 and 59 of the Exclusive Legislative List), there has been a move by the Federal Inland Revenue Service to push for the amendment of the 1999 Constitution so as to put collection of Value Added Tax (VAT) on the Exclusive List. However, this move has been publicly resisted, particularly, by southern Governors who, through the Chairman of the Southern Governors’ Forum, Arakunrin Rotimi Akeredolu (SAN), noted that: “The issue of VAT, looking at the constitution, is under the purview of the states. Southern governors have taken a decision to pursue fiscal federalism. This is not a tax that is under the purview of the federal government. We, the southern governors, clamour for true federalism and true federalism includes fiscal federalism. They know that the constitution did not give them the power to collect VAT and that is why they are clamouring for the amendment of the constitution. That amendment will be dead on arrival.”

The need to embrace fiscal federalism is now more imperative than ever. The regional autonomy maintained by the Independence and Republican Constitutions of 1960 and 1963, respectively, gave powers, particularly fiscal and economic powers to the regions. However, this structure gave way as a result of military misadventures, starting with the 1966 coup and subsequent countercoup, as well as the civil war from 1967 to 1970. It has been noted that this was the birth of a unitary system of government which has indeed bequeathed the present lopsided, impracticable, unsustainable, and divisive federalism.

The whole concept of fiscal federalism was well-articulated by K.C. Wheare: “Financial subordination makes an end of federalism in fact, no matter how carefully the legal forms may be preserved. It follows therefore that both state and federal authorities in a federation must be given the power in the constitution each to have access to and to control, its own sufficient financial resources. Each must have a power tax and to borrow for the financing of its own services by itself.”

It follows, therefore, that there is an urgent need for a national dialogue to appropriately fashion out the modalities for achieving true fiscal federalism amongst the component federating units. Had it been that same issue had been resolved through dialogue – for instance, a sovereign national conference – same may not have been subjected to diverse court interpretations, and the attendant differing public perceptions and misperceptions. While the Federal High Court restrained the FIRS from collecting VAT in Rivers State, the Court of Appeal ordered parties to maintain status quo. Now, Rivers State has further appealed to the Supreme Court to set aside the decision of the Court of Appeal that ordered it to maintain status quo on the collection of Value Added Tax.

Once again, I advocate convocation a Constitutional Conference and a new people’s constitution which will engender a total restructuring of the fiscal, political and economic landscape of the nation.

AARE AFE BABALOLA, OFR, CON, SAN, LLD. D.Litt.