VAT Judgment: Restructuring Nigeria, One Case At A Time

The dust is yet to settle on the August 9, Federal High Court judgment stopping the Federal Government’s control of the nation’s earning from the Value Added Tax (VAT) and related taxes. While some lawyers say it is of no major consequence, likening it to a flash in the pan, others see it as a major leap in the quest for restructuring (fiscal federalism and devolution of power), ERIC IKHILAE reports.

PROPONENTS of fiscal federalism and agitators for a fair and just allocation of the nation’s resources got a fillip with the August 9, judgment of the Federal High Court (FHC), Port-Harcourt, which halted the Federal Government’s control of the nation’s earning from the Value Added Tax (VAT) and related taxes.

Before now, they had opposed the arrangement whereby states that have banned the consumption of certain items still benefitted from the VAT from such items consumed in others states.

There has also been the debate about the disparity in the percentage of contribution by some states as against what is benefitted by each state.

The need for redress might have informed the suit by the Rivers State Government, marked: FHC/PH/CS/149/2020, filed in the name of the state’s Attorney-General, with the FIRS and the Attorney-General of the Federation (AGF) as defendants.

The plaintiffs had, among others, prayed the court to declare that the constitutional power of the Federal Government to impose taxes and duties was only limited to those listed as Items 58 and 59 in Part 1 of the Second Schedule to the 1999 Constitution (as amended).

They also prayed for a declaration that, by virtue of the provisions of Items 7 and 8 of the Part II (Concurrent Legislative List) of the Second Schedule to the Constitution, the power of the Federal Government to delegate the collection of taxes could only be exercised by the state government or other authority of the state and no other person/entity.

They prayed that all statutory provisions made or purportedly made in the exercise of the legislative powers of the Federal Government, which contained provisions that were inconsistent with or in excess of the powers to impose tax and duties, as prescribed by Items 58 and 59 of the Part I of the Second Schedule to the 1999 Constitution, or inconsistent with the power to delegate the duty of collection of taxes, as contained in Items 7 and 8 of Part II of the Second Schedule to the Constitution, are unconstitutional, null and void.

In his August 9 judgment, Justice Stephen Dalyop Pam of the Federal High Court (Port-Harcourt division) agreed with the plaintiffs’ claims and proceeded to issue, among others, a perpetual order of injunction restraining the defendants from collecting, demanding, threatening and intimidating residents of Rivers State to pay to FIRS personnel income tax and VAT.

Justice Pam was of the view that there was no constitutional basis for the FIRS to demand for and collect VAT, Withholding Tax, Education Tax and Technology levy in Rivers State or any other state of the federation, noting that 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.

He rejected the defendants’ argument  that the National Assembly ought to have been made a party in the suit and proceeded to declare that the issues of taxes raised by the state government were issues of law that the court was constitutionally empowered to entertain.

The judge agreed with the plaintiffs, to the effect that, it was the Rivers State and not the FIRS that 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 to the 1999 Constitution as amended.

Holding that the plaintiffs effectively proved beyond doubt that it was entitled to all the 11 reliefs sought in the suit, Justice Pam declared that the defendants were not constitutionally entitled to charge or impose levies, charges or rates (under any guise or by whatever name called) on the residents  of Rivers State and indeed any state of the federation.

Earlier, the judge dismissed the defendants’ preliminary objections, in which they argued that the court lacked the requisite jurisdiction to hear the suit, and that the constitutional issues raised in the case ought to be referred to Court of Appeal for interpretation.

Immediate reactions

Affected parties have since reacted to the judgment, with the FIRS promising to appeal, while the AGF said it would study the decision to determine what next step to take.

FIRS’ Director, Communications and Liaison Department, Abdullahi Ismaila Ahmad said: “We are appealing the matter immediately,” while the media aide to the AGF, Dr. Umar Gwandu, said: “We will study the judgement and decide on the next line of action.”

Also reacting, the Chartered Institute of Taxation of Nigeria (CITN), through its Registrar/Chief Executive, Adefisayo Awogbade, also elected to first, study a certified true copy (CTC) of the judgement before making its position public, noting that there had been similar decisions in the past.

Plaintiffs’ lawyer, Donald  Denwigwe (SAN) explained that by the judgment,  it was now unlawful for any agency of the Federal Government to collect taxes including VAT in Rivers State.

Denwigwe said: “It is a determination that it is wrong for the Federal Government to be collecting taxes, which are constitutionally reserved for the state governments to collect. So, in other words, the issue of Value Added Tax (VAT) in the territory of Rivers State and Personal Income Tax should be reserved for the government of Rivers State.

Advent of VAT

VAT, as a form of Consumption Tax, according to experts, was introduced into the nation’s tax administration system in 1993 to replace the Sales Tax. They explained that the introduction of the VAT law was with the understanding that the Federal Government (FG), which was the only entity with the capacity to collect at the time, should do so for the states, but at a fee.

“By the arrangement, the Federal Government was to only collect VAT on behalf of the states, but keep a percentage of what was collected to cover the cost of collecting. The major contention then was whether or not the percentage kept by the Federal Government was too high. There was no contention as to what cadre of government has the right to collect, until recent,” Malik Abdullahi, an Abuja-based lawyer said.

Professor Uche Uwaleke of the Nasarawa State University also explained that VAT, as a consumption tax, was used to replace sales tax, adding that it stands to reason that taxes of such nature should be collected and administered by tax authorities of the areas where the consumption takes place.

Place of VAT in Nigeria’s tax earnings

Since its introduction in 1993, VAT, according to data released by the National Bureau of Statistics (NBS), has continued to serve as a major source of tax revenue for the federation. Statistics show that total VAT earning in 2018 stood at N1.108trillion; N1.19tr for 2019 and N1.5tr for 2020.

At the current rate of 7.5 per cent, the country is said to have earned about N2.5tr from VAT in the last 18 months (January 2020 to June 2021). A breakdown of the total VAT earning in 2020, showed that local VAT contributed the most, yielding about N763b (or 49.8percent), with import VAT accounting for N348 billion (or 22.7percent) and  foreign non-import VAT was N420b (or 27.4percent).

In the first quarter of 2021, VAT collection was N496.39b while it increased by N15.8b in the second quarter to N512.25b, according to data from the National Bureau of Statistics (NBS), filed by FIRS.

The breakdown of VAT yield for the second quarter of this year (April to June) showed that N187.4b was from non-import VAT locally, N207.7b from non-import VAT for foreign goods. The balance of N117.1b VAT was from the Nigeria Customs Service (NCS) VAT on imports.

Statistics also revealed disparity in the contributions of states to the nation’s VAT pool. According to a recent report by the group, BudgIT, out of the 36 states and the Federal Capital Territory (FCT), five states contribute the most, with Lagos, Ogun, Rivers states and the FCT leading the pack.

Current sharing formula of VAT

The current operating formula for the sharing of VAT proceeds among the three tiers of government are as captured in Section 40 of the VAT Act, which provides that the VAT pool be shared 15 per cent to the Federal Government; 50 per cent to states and 35 per cent to local governments (net of four per cent cost of collection by the FIRS) and 20 per cent of the pool to be shared based on derivation.

Before Rivers State judgment

Before the August 9 judgment, the courts had on two earlier occasions pronounced on the issue of whose responsibility it was to administer VAT.

One of such instances was in the case by the Registered Trustees of Hotel Owners and Managers Association of Lagos against the AG of the Federation & others, which queried the validity of the Hotel Occupancy and Restaurant Consumption Law of Lagos State.

In its judgment in October 2019, the Federal High Court upheld the powers of the Lagos State Government to charge and collect Consumption Tax (a sales tax) from hotels, restaurants and event centres within the state.

The court was of the view that, based on the provisions of the 1999 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 the states. It proceeded to restrain the Federal Inland Revenue Service (FIRS) from imposing VAT on goods and services consumed in hotels, restaurants and event centres, which were already covered by the Lagos State’s law.

The second instance was in the case by Emmanuel Chukwuka Ukala against the FIRS. It is popularly referred to, in legal and tax circles, as the Ukala case.

The Federal High Court, in its judgment on December 11, 2020 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.

Effect of the judgment on existing tax regime

Law experts are of the view that, like every judgment of court, this judgment would impact on the existing tax regime in the country until it is either set aside at the highest court or sustained. They were, however, divided on what nature the impact could take.

According to Abubakar Sani, the judgment may not stand the test of time because the judge took a narrow view of the provision of the constitution in reaching his decision.

Sani said he did not agree with the decision, “for the simple reason that the court applied an unduly (and, therefore, illegitimate) restrictive interpretation of the phrase ‘taxes on incomes, profits and capital gains’ used in Item 59 of the Exclusive Legislative List of the Constitution.

“The Supreme Court has stated time and again that the Constitution should be interpreted liberally and broadly. The mere absence of the words: ‘Value Added Tax’ from the Constitution does not place VAT in the Residual List of the Constitution – even granted that strict language is required for the imposition of tax obligations. I doubt that the judgment will stand the test of time.”

Another lawyer, Tunde Falola argued that, until it is set aside by any of the appellate courts, the judgment was binding on the Federal Government and should be complied with. Falola noted that although they were not parties to the suit, other states could benefit from the decision.

“Definitely other states of the federation can benefit from the judgment. This is because the judgment is a judgment in rem, because it defines the status of the parties to the case. To this end, it is binding on the whole world, parties and whoever, until set aside by the appellate court

“Apart from foregoing, reference was also made to all other states of the federation. In other words, the court emphatically stated that there was no constitutional basis for the FIRS to impose or collect VAT, Withholding Tax from the people of River State or any other state of the federation,” he said.

Falola added that what other states need to do “is to get a copy of the judgment ready and thereafter, write the FIRS whenever demands regarding these categories of taxes are made in their respective states. This is because, until it is set aside by an appellate court, the judgment remains binding an enforceable.”

On his part, Abdullahi argued that the judgment has no major significance on the current tax arrangement vis-a-vis the tax revenue accruable to the Federal Government. He noted that the Federal Government’s role under the current arrangement was not strictly to administer VAT, but to collect for the states, which informed why it is only entitled to 15 percent.

“As it stands today, about 12 to 15 per cent of the total revenue from VAT is collected at the border by the Nigerian Customs Service (NCS). Since no state can collect tax at the border, it still has to be the Federal Government.

“So, the impact on the Federal Government will not be that significant. It is the majority of the low earning states, outside Lagos, Rivers, Ogun, Kano and the FCT, that would be negatively impacted.

“If the judgment is left unchallenged, the Federal Government will be left to concentrate on VAT from government’s contracts and securities transactions, as well as Customs, and the FCT. By implication, FIRS will administer VAT within the FCT and non-import foreign VAT, while the NCS will continue to collect import VAT on international trade all for the benefit of the Federal Government,” Abdullahi said.

For activist-lawyer Daniel Makolo, the judgment constitutes a major leap in the struggle for fiscal federalism, restructuring and resource control, noting that similar pronouncements would soon follow as it relates to Item 14 on the Concurrent List, dealing with electricity; the establishment, promotion and management of power stations within a state.

“We have been fooled for too long. The state has a responsibility to and within her territorial jurisdictions to cater for the welfare and peculiar needs of the state. It can encourage industrialisation by any means possible, including creating enabling environment by ensuring including power generation and liberalisation.

“This judgment is a quantum leap in our quest for devolution of powers and responsibility to the state. And, on a good day, I see this judgment standing taller and taller on appeal. The judgment covers the entire country of Nigeria even the so-called political sharia states.

“The states can just sit on the fence and enjoy the benefits of the judgment. Smart states will immediately adjust their tax network, bearing in mind their socio-cultural peculiarities and see how to harness the benefits of the judgement,” Makolo said.

He advised the Federal Government and the states “to allow our laws to be tested and expanded through the rule of law only. This will solve our problems largely.”

Judgment, boost for restructuring through justice system

Observers are also of the view that the judgment suggests that the clamour for restructuring could be better addressed through the court, with a constant push at the status quo, as against the lure of violent agitations.

They added that in the face of a pliant National Assembly, inclined to savouring everything thrown at it by the Executive, the best approach at reordering the status quo, the states, particularly those led by opposition parties, ought to actively engage the Federal Government in court on areas where it is obvious the central government was impinging on their rights.

They cited the case in Lagos State between 1999 and 2007 when the Bola Tinubu administration constantly engaged the Federal Government, under the then President Olusegun Obasanjo in court in a bid to deepen the nation’s democracy.

Due to the doggedness of the then Lagos State Government, the state was able to acquire powers to establish Local Community Development Authorities (LCDAs), enact state tax laws and state urban development laws.

In one of the cases done at the Supreme Court against the Federal Government by Lagos State – the Attorney-General of Lagos State v Attorney-General of the Federation (2003) 4 WRN 124 – Justice Samson Uwaiso  said: “In the circumstances, I have to say that Professor Osinbajo is right in his submission that urban and regional planning for the Federal Capital Territory, Abuja is within the exclusive legislative function of the National Assembly but only by virtue of Section 299(a) conferring residual power on it and not the controversial Section 20 of the Constitution.

“Similarly, each State House of Assembly has the exclusive function to make planning laws and regulations for the state under its residual power. It will therefore be in clear breach of the principles of federalism for the National Assembly to make a law in the form and to the detail and territorial extent of the present Nigerian Urban and Regional Planning Decree No.88 of 1992 and an incursion into the legislative jurisdiction of the states. It is a noncontroversial political philosophy of federalism that the Federal Government does not exercise supervisory authority over the state governments.”

Vice President Yemi Osinbajo, who was referred to in Justice Uwaifo’s comment, confirmed this while speaking at a colloquium to celebrate the 80th birthday of the former Governor of Osun State, Chief Bisi Akande.

Osinbajo said:  ”In the period from the civilian government of Chief Bola Tinubu in Lagos, in which I had the privilege to serve, till date, the government of Lagos State has demonstrated that it is possible to have restructuring, especially fiscal federalism and devolution of power to states, but by the process of litigation as opposed to going through the legislature.

“As of 1999, my very first with Asiwaju Bola Tinubu, he made it clear that what was most important to him was for the state to pursue fiscal federalism and devolution of power for our state. He wanted me to study it and then to look at how it could be done and we spent a lot of time and resources, looking at how to do it.

“We realised that going to the National Assembly would be a waste of time and we then decided to go through the process of litigation. As a matter of fact, we went to the Supreme Court and the Federal Government at that time opposed all the moves we made.

“Fortunately for us, and we thank God, we were able to record successes which today, are the major achievements we can say we have scored in terms of restructuring our country, especially in fiscal federalism and devolution of power,” Osinbajo said.

Source: Nation

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