The Lingering Legal Tussles Between The Federal Government Of Nigeria And The State Governments Over Vat: The Way Forward.

By Stefan Onome Okorodudu

Abstract

The feud between the federal government and some of the state governments will continue to linger as long as VAT is not provided under the exclusive legislative list of the 1999 Constitution (As amended). The issue over who should have the power to administer and collect VAT in Nigeria will continue to surface. With so many judicial decisions and counter judicial decisions, yet no conclusive position has been put in place by these judicial decisions. Therefore, an attempt is made to thinker possible legislative panacea, over the said federal/states legal face-off, as against the current endless bid to seek judicial relief without adequate legislative provisions. In doing so, doctrinal method is employed which reveals that there is absence of adequate VAT or consumption tax legislation in Nigeria, to which sound judicial interpretation can attend to. It is therefore recommended that the current Nigeria 1999 Constitution and the VAT Act should be amended, where it will specifically empower the Federal Government to administer and collect VAT on behalf of States or discern which specie of consumption tax should be shared between the Federal Government and the States Governments.

Keywords:  Value Added Tax, Judicial Decisions, Way Forward, and Adequate Legislative Provision

1.0       Introductory Background

Before now, what existed as a consumption tax was the Sales Tax, which was introduced into the Nigeria tax system by the Sales Tax Decree No. 7, 1986. With the quest to improve revenue generation in Nigeria, the Value Added Tax (VAT) was introduced into the corpus of Nigeria tax regime by virtue of the VAT Decree No. 102, 1993. This said Sales Tax and VAT are basically same tax (But they are both species of consumption tax), except that the operation of VAT has a larger tax base than sales tax.

Pursuant to the Nigeria Constitution[1], the referred VAT Decree No. 102 transited into a valid law in Nigeria and later became the VAT Act, Cap. V1, LFN, 2004[2] (As amended by the Finance Act, 2020). Though, in respect of the same VAT, the tax is currently administered and collected in Nigeria by the Federal Inland Revenue Service, pursuant to the Federal Inland Revenue Service Act[3] and the Taxes and Levies (Approved List for Collection) Act[4]

VAT, being partly a tax on consumption of goods-services which emanates from importation of goods-services (imported VAT), the Federal Government through the FIRS/Custom Service, is a stakeholder. For also being tax on consumption of goods and services, which emerges from the internal economic transactions of the various federating units, the various states are stakeholders.[5]

This being the case, it is expected that there would be Federal and State contention over who should administer and collect VAT in Nigeria. Knowing that the incidence of this tax cuts across the federating states, as well as the borders over which the Federal Government has jurisdiction. This led to the policy where a central VAT regime to be administered by the Federal Government is put in place, and the revenue generated is shared among the three tiers of government, pursuant to the VAT Act, 2004[6]( As amended in 2020). This is so because, if the states and the Federal Government are allowed to collect their individual VAT or Purchase Taxes on consumption of goods and services, such goods or services will suffer endless double taxations as the goods- services move around the federation. More so that in a scenario of multiple consumption taxes within a federation, the complete circle of output /input VAT refund mechanism cannot be achieved with the presence of other species of consumption taxes.  (Except in few cases where the states are allowed to administer state sale taxes on goods or services that can easily be confined within a state.)  This contention for the authority over VAT, Purchase Tax, Sales Tax or consumption tax was envisaged in the 1960s. This was one of the reasons the 1960 and 1963 Constitutions of the Federal Republic of Nigeria, where sales tax as replaced by VAT was provided for under the then item 38 of the exclusive legislative list[7]. Meaning that it was clear under the 1960 and the 1963 constitution that the Federal Government to the exclusion of other tiers of government, was constitutionally empowered to make laws over Sales Tax, administer and collect same.

1.1       Nature of Value Added Tax in Nigeria

 Value Added Tax (VAT) is a specie of consumption tax, it is a tax on spending, borne by the final consumer of goods and services, because it is included in the price paid.  Although, the VAT element is to be separately indicated in the tax invoice, which will be either VAT inclusive or VAT exclusive[8].  VAT is referred to as a specie of consumption tax because it is a type of consumption tax and other examples of consumption taxes are Sales Tax, Purchase Tax, Goods and Services Tax, Hotels and Services Tax etc. These categories of consumption taxes are similar; however, VAT is more embraced because its mechanisms provide better consumption tax base than others.[9]

Since VAT is a consumption tax, it is relatively easier to administer and difficult to evade[10]. That is because as one has thirst, one spend, or consumes to satisfy that thirst. It is same way one can’t evade thirst, that one can’t evade VAT. The tax is also easier to administer because of the chain of input/output  refund provisions inherent in it. Which ensures that where a producer of goods or services purchases raw materials to produce goods, he pays input and collect output VAT when selling his finished products to the final consumer. This is made possible by the VAT returns and VAT refund provision under the VAT Act, 2004 (As amended), which provides thus:

(1) “A taxable person shall pay to the supplier the tax on taxable goods and services purchased by or supplied to him.

(2) The tax paid by a taxable person under subsection (1) of this section shall be known as input tax.”[11]

(1) “A taxable person shall on supplying taxable goods or services to his accredited distributor, agent, client or consumer, as the case may be, collect the tax on those goods or services at the rate specified in section 2 of this Act. (2) The tax collected by a taxable person under subsection (1) of this section shall be known as output tax.”[12]

However, the yield from VAT is a fairly accurate measurement of the growth of an economy, since purchasing power of the currency in use increases with economic growth.[13]The tax (VAT) is a self-assessment tax that is paid when returns are rendered at the rate of 7.5 %[14]

1.2 Birth of the Lingering Legal Tussle Between the Federal Government and the States  

The genesis of this unending legal tussle started by the omission of VAT (which came to replace Sales Tax) from the exclusive legislative list under the 1979 and the current 1999 Constitutions, as amended. Unlike what it was under the 1960 and 1963 Constitutions.

Expectedly, this omission has led to the unending legal battles between the Federal and State Governments over the question of who should administer and collect VAT in Nigeria. Coupled with the current scamper for state internally generated revenue; as well as the anxiety to improve federal or national revenue, as a result of the global decline in crude oil prices.[15]

Instances of such cases are the A.G., Ogun State v. Alhaja Ayinke Aberuagba & 7 Ors[16], A.G., Lagos State v. A.G., Federation & 35 Ors[17], Nigeria Employers Consultative Association (NECA) & Anor v. A.G., Federation & Two Ors, and Emmanuel Chukwuka Ukala V FIRS[18]etc.

Under the case of AG, Ogun State v. Alhaja Ayinke Aberuagba & 7 Ors[19] the Supreme Court held thus:

When all the relevant provisions of the Constitution are read together, it is obvious that the trade and commerce power conferred on the federal government in item 61 of the Exclusive List is limited. The words “in particular” in that provision are words of limitation, not of emphasis. International and inter-state trade and commerce are reserved for the Federal Government while intra-state trade and commerce is left for the States. Indeed, all the tiers of government (i.e., Federal, State and Local) have been accorded their respective shares of trade and commerce power.

Under the AG Lagos State v. AG Federation & 35 Ors[20] Uwaifo JSC established that:

Once it is established that the power of making laws is reserved exclusively by the Constitution for the States under their residual power, the Federal Government cannot be allowed to enact any Act or make any regulation under any Act in any guise in competition with any State in respect thereof no matter the salutary nature of such a law. The court must so decide in an appropriate case.

Under the Nigeria Employers Consultative Association (NECA) & Anor v. A.G., Federation & Two Ors, – the Kano State Consumption Tax Law was nullified on the basis that it imposed consumption tax at 5% on goods and services which are already subject to the federal VAT in Nigeria.

While in the case of Emmanuel Chukwuka Ukala v. FIRS[21], yet another judgment was delivered on the11th December 2020, where the Federal High Court (FHC) held that the powers of the National Assembly to make laws imposing taxes is limited to the profits/income of persons/companies, capital gains and stamp duties on instruments but does not extend to VAT.

As this age long legal fracas between the Federal Government and the State Governments continued to linger, another suit that denies the Federal Government the authority over VAT got triggered on the 9^th day of August 2021. Which is the suit between A.G., River State v. FIRS 1^st Defendant and A.G., Federation (2^nd Defendant),[22] where the Plaintiff (the Attorney General of River State) prayed the Federal High Court (River State) for the determination of the following questions among others:

(ii)Whether upon a proper interpretation of the provision of items 58 and 59 of the Second Schedule Part I (Exclusive Legislative List) of the 1999 Constitution of the Federal Republic of Nigeria 1999, as amended, the legislative competence of the Federal Government of Nigeria through the National Assembly to impose duties and taxes, and to delegate the power of collection of taxes, include the power to levy or impose any form of Sales Tax as Value Added Tax or any other form of Levy?

(iii)Whether there is a constitutional basis for the         imposition, or the demand for and collection of Value Added Tax (VAT) , Withholding Tax, Education Tax and Technology Tax in Rivers State or any other State of the Federation being that the Constitutional powers and competence of the Federal Republic of Nigeria and the Federal Government of Nigeria is limited to the taxation of incomes, profits and capital gains which does not include VAT, Withholding Tax, Education Tax, Technology Levy or any other species of sales tax, or levy other than those specifically mentioned in items 58 and 59 of the Exclusive Legislative List of the Constitution

In resolving the above issues, the court opined and held that the 1999 Constitution has specifically designated the taxes that the Federal Government is empowered to impose and collect under Items 58 and 59 of Part I of the Second Schedule thereof ( I.e., Stamp Duties, Taxation of Incomes, Profits and Capital Gains) and must be read to include other species of taxes like VAT, Withholding tax, Education tax, and Technology tax.

1.3 Court Jurisdiction

Within the context of jurisdiction, the Supreme Court judicial precedent on VAT involving AG Lagos State v. AG Federation is relevant. Here, it was held by the Supreme Court that only Federal High Court has original jurisdiction to entertain suits relating to federal revenues and not the Supreme Court. In which case, the Federal High Court that sat in Rivers State had jurisdiction. Suggesting that the issue of jurisdiction is relatively silent, even though it can become an issue when we bring the Jurisdiction of the Tax Appeal Tribunal and that of the Supreme Court to the fore.

However, by virtue of the ratios of the cases above; it becomes clear from the first mentioned suit, to the last of them that the courts had never been consistent in their positions on the questions of which tier of government should administer and collect VAT in Nigeria. This is because there is no adequate or clear legislation in Nigeria on which tier of government should have power over VAT in Nigeria. Meaning that the Federal and State Governments are seeking for judicial solutions where only adequate legislative solution is needed. That is why we find court decisions everywhere, yet none is bringing the legal tussle to a conclusive end.

Just like setting the Nigeria VAT regime in disarray, you find one competent court deciding that the Federal Government can administer VAT within the context of international trade and commerce pursuant to Item 62, Part 1, 2^nd Schedule of the 1999 Constitution, as amended. While the states can administer Sales Tax within their respective states[23].

In another suit[24], you find a competent court once more, deciding that by virtue of the same item 62, the Federal Government has covered the field, as such the State Governments cannot administer sales or consumption taxes within their respective states, neither can they validly legislate on same[25].

In yet another context, like the Rivers State or the Ukala case[26], you find the court deciding that the mentioning of international trade /commerce under item 62 of the constitution does not amount to the power of the Federal Government to administer or collect VAT  centrally in Nigeria[27]. Since VAT was not specifically mentioned under item 62, like Stamp Duty and Income Taxes are specifically mentioned under items 58 and 59 of the exclusive legislative lists of the 1999 Constitution (As amended). Which implies that the none mention of VAT in the exclusive or concurrent list, amounted to its total exclusion from the powers of the Federal Government. As a result, becomes a residual matter in relation to which only the states can legislate upon.[28]

It is almost certain that whatever position the Supreme Court takes over the Rivers State and the Federal Government VAT suit, it will not operate to put an end to this tussle, until the federal/state stakeholders settle it via a comprehensive consumption tax legislation in Nigeria.

I mean, there is no knowing as to the conclusive end of the question on who should have authority over VAT, purchase tax or sales tax in Nigeria. Should the country continue to seek judicial interpretation where there is no adequate legislation for which interpretation should be given? Is it not clear that this continuous litigation over VAT militate against the volume of revenue that could be generated from VAT, if same is administered by a definite authority without distractions?

A careful look at item 62, part 1, second schedule of the 1999 Constitution (As amended) and the dictions of trade/commerce shows that there is no specific mention of VAT like that of the Stamp Duty under Item 58 or that of Income Tax under item 59.

This suggest that if the court decides, (without being under the influence of public policy) which tier of government has the authority to administer VAT, it should be the State government. The principle being that when a court is invited to interpret taxation or revenue laws, (the constitution or statutes) they are expected to interpret them literally and strictly, without inferences or additions[29].  Based on this said principle, the question will be whether VAT was primarily mentioned under the constitution or not and the answer  is simply no.

2.0 Way Forward on the Lingering Contention Between the Federal Government and the State Governments Over VAT

Value Added Tax revenue is not a natural resource like gold or crude oil that is mainly concentrated in one segment of the federation, so that one jumps on the bandwagon to agitate that under the principle of true federalism, state with such resource should be allowed to control them. No, VAT revenue is a revenue that even the Federal Capital Territory contributes to its generation.[30]  As a result, it is always fashionable for the federating states to allow or permit the Federal Government to administer VAT on behalf of the states, as it has been successfully practiced in Canada[31]. However, states must strive to have justice reflected in the distribution of VAT revenue among the federating units, taking into consideration the amount of VAT revenue that emanate from each state in Nigeria.

For If one gets too hasty, the temptation will be to suggest that each state should be allowed to administer their respective VAT. But the reality that goods and services will go round various states before they are finally consumed, is a globally recognized yardstick when considering which tier of government should administer VAT. For allowing each state to tax the consumption of goods-services within their states, will unavoidably occasion double taxation, which will breed inflation on the prices of goods-services within the federation.  (This being one of the practical effects of consumption taxes) Though, it is usually argued that VAT does not influence the prices of goods or services, however, that theory may be true with the manufacturers or the producers, but it cannot be true within the context of the final consumer. Because, the final consumer pays the actual price of the goods and services, as well as VAT, without passing it to any other party.

 3.0 Recommendations:

Therefore, the way forward for VAT administration and collection in Nigeria is:

(i) Amend Section 162 (1) (2) of the 1999 Constitution and provide for States to receive VAT revenue allocation based on the percentage of VAT revenue that emanates from their respective states. As well as amend section 40 of the VAT Act 2004, to reflect the suggested changes on Section 162 of the Constitution.

(ii)Amend Item 62, Part 1 of the Second Schedule, or the exclusive legislative list of the 1999 Constitution, where it will specifically authorize the Federal Government to administer and collect VAT on behalf of the States.

(iii) Increase the Value Added Tax base and its revenue yield, by states repealing all forms of consumption taxes within their states and create enabling environment for FIRS to collect VAT in all States of the federation. Because allowing States to administer and collect their respective consumption taxes or VAT, will lead to double taxation of goods and services consumed.  As well as a distortion of the entire consumption tax structures in the country, which is not the best for an economy that is seemingly gasping for survival.

(vi) Constitutionally and statutorily, detailed provision should be made for consumption tax and its species in Nigeria. That is, if the Federal Government is to administer all species or all incidences of consumption tax in Nigeria, it should be clearly provided for under the constitution and where the Federal Government is to administer a specie of consumption tax, while State Governments administers theirs, it should also be clearly provided.   For instance, under Section 1, Part 1 and 2 of the Taxes and Levies (Approved List for Collection) Act, Cap. T 2, 2004, Company Income Tax is specifically reserved for the Federal Government in Nigeria. While on Personal Income Tax administration in Nigeria, its administration is shared between the Federal Government and the State Governments. In so doing, there would hardly be incessant arguments or legal tussles between the Federal Government and the federating units over who should have authority to administer and or collect them. For where this is done there won’t be conflict between a federal VAT and state sales tax or goods and services tax, as the dept each tier can go in having power over a specie of consumption tax is already provided for. An example is having hotel services tax within a state, while federal VAT exist without taxing such hotel services within a state.

(v) State Governments should be given more sense of belonging in administration of VAT in Nigeria. This can be done by ensuring that all chairmen of State Internal Revenue Service (SIRS) have representatives in the FIRS Board for the purposes of the central VAT policies in Nigeria. For as it is today, pursuant to Sections 3, 7 and 25 of the FIRS Act, 2007 (As amended), the FIRS administers VAT in Nigeria, while pursuant to Section 3 of same FIRS Act (As amended), the FIRS Board makes policies affecting federal VAT in Nigeria, without the presence of the SIRS chairmen or their representative.

4.0 Conclusion

Therefore, I submit that pursuant to Sections 1 and 2 of the VAT Act 2004 (As amended) VAT is provided for centrally in Nigeria; while based on Sections 3, 7 and 25 of the FIRS Act 2007 (As amended) the FIRS administers and collect VAT on behalf of the State Governments in Nigeria. However, the constitutional basis[32] upon which the VAT legislation is premised currently is faulty, because the referred constitutional provisions are too indirect to be the ground upon which VAT is administered and collected in Nigeria. This faulty constitutional ground of the VAT Act has led to the endemic legal tussles between the Federal Government and some of the State Governments, which is capable of militating against an effective VAT or consumption tax revenue collection in Nigeria. This endless legal tussle between the Federal Government and some of the State Governments is further exacerbated by the absence of derivative principle on the sharing formular of VAT revenue in Nigeria under Section 40 of the VAT Act 2004(As amended) and Section 162 of the 1999 Constitution (As amended). As a result of the forgoing, State Governments have no option but to contend with the Federal Government over the rights to administer VAT within their respective states, for it only demonstrate injustice that State Governments will be receiving shares of VAT revenue not in accordance with the volume of VAT revenue generated from their states. That the above scenario is coupled with the absence of a detailed provision on species of consumption taxes in Nigeria, which makes it difficult for State Governments and Federal Government to clearly identify the limit or dept they can each go in the administration of VAT or Sales Taxes within their respective jurisdictions in Nigeria. That the inadequate constitutional provision for consumption tax in Nigeria, necessitated the recommendation that legislative steps should be taken by the Federal Government and the State Governments over consumption tax in Nigeria.[33]  Instead of seeking judicial solution where no adequate legislative provision exist.

Written By Stefan Onome Okorodudu, of S. O. Okorodudu & Associates. PhD University of Abuja (Candidate)

[1] The Constitution of The Federal Republic of Nigeria (CFRN) 1999 (as amended), s 315.

[2] The VAT Act 2004 ( As amended) charges and provide for VAT in Nigeria under its Sections 1 and 2 respectively

[3]  Federal Inland Revenue Service (Establishment) Act (FIRS Act) No. 13, 2007 (As amended by the Finance Act, 2020)  s 8 (1) (2).

[4] Taxes and Levies (Approved List for Collection) Act, 2004 Part 1, paragraph 4, of its Schedule

[5]  Taiwo Oyedele (of Fiscal Policy Partner & Africa Tax Leader at Pricewater Coopers -PwC), Matters arising over VAT Collection in Nigeria, The Nation Newspaper (Lagos,  9^th August , 2021) 12. Where it reported thus: “in 2020 for instance, total VAT collection was about N1.53 trillion, 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 for 49.8 percent)”.

[6] VAT Act 2004 (as amended) s 40 (share among the three tiers thus:  Federal Government 15%, State Government 50% and Local Government 35 %

[7]Ade Ipaye, Nigerian Tax Law and Administration: A Critical Review,(1^st edn,  Asco Prime Publishers , Coles Green Road, London, United Kingdom, 2014) P 313

[8]Meshach Nnama Umenweke, ‘Tax Law and Its Implications for Foreign Investments In Nigeria’, (1^st edn, Nolix Educational Publications, Uwani, Enugu State, Nigeria, 2008) P. 234

[9]Liam Ebrill and Michael Keen, ‘The Modern VAT’ , (1^st edn, International Monetary Fund Publication, N .W. Street, Washington, D.C., USA , 2001) P 20

[10] Ibid, P 235

[11] Value Added Tax Act (VAT Act) Cap. VI, 2004 (as amended by the Finance Act, 2020) s 12 (1) (2)

[12] Ibid, s 14 (1) (2)

[13] Alan Schenk and Oliver Oldman, ‘Value Added Tax: A Comparative Approach,’ (1^st edn., Cambridge University Press, Edinburgh Building, Cambridge , United Kingdom, 2006) P2

[14] VAT Act 2004 (As amended) s 4

[15] Oil prices drops to 2 percent on Monday, extending last week”s steep losses on the back of a rising US dollar and concerns that new pandemic curbs in Asia, especially China, may set back the global recovery in fuel demand”,  Economy &  Business on Aljazeera.com (9^th August, 2021)

[16] [1985] 1 NWLR ( Pt 395)

[17]  [2003] 6 SC (Part 1) at p. 61 lines 20 -25

[18] [2021] 56 TLRN 1

[19] Supra

[20] Supra

[21] Supra

[22]  Suit No. FHC/ PH/CS/149/2020

[23]AG, Ogun State v. Alhaja Ayinke Aberuagba & 7 Ors

[24] Attorney General of Lagos State v. Eko Hotels & Another (2018) 3 TLRN 1

[25] Ibid

[26] Emmanuel Chukwuka Ukala v. FIRS (Supra)

[27] n 7

[28] Ibid

[29]  Citi Bank V FIRS [2017] 30 TLRN  Pp. 54-56

[30]  The then Minister of Finance,  Mrs Kemi Adeosun once remarked that: “ 87% of Nigeria’s VAT comes from four states and Federal Capital Territory (FCT) while only 13% comes from 32 other states in the federation. The Minister, while speaking at the parley between the federal government and progressive governors forum (PGF) on the 1^st of  August, 2017, stated that Lagos has the highest VAT collection, amounting to 55% of Nigeria’s VAT According to her, FCT has the second place with 20%, while 6 % in Rivers, 5% in Kano and 1% in Kaduna”< https://nairametrics.com/2017/08/02/these-five-states-account-for-87-of-nigerias-vat-revenue/> (assessed 9/08/2021)

[31] Richard M Bird and Michael Smart, ‘VAT in a Federal System: Lessons from Canada’, (2012) (34) (4) Journal of Public Budging & Finance 4.

[32] CFRN 1999 (As amended) S. 4 (1) (2) and Item 62, Part 1, Second Schedule of the said Constitution

[33]  The Canadian provinces once had such VAT and Purchase Tax argument with the Federal Govt, which was resolved amicably by an harmonization of all the sales/ purchase taxes,  Goods and Services Tax  and VAT.  In the end, all provinces in Canada (with the exception Quebec) left these taxes for the federal government to administer on behalf of the provinces. See the Tax and Constitutional case between the provinces of Alberta,  Ontario, and British Columbia v. the Federal Government   (Canada) (1992)2 S.C.R. 445 (Can.)