The Administration of Value Added Tax in Nigeria: State Governments versus Federal Government

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The Administration of Value Added Tax in Nigeria: State Governments versus Federal Government

Value Added Tax (VAT) is a consumption tax payable on goods and services in Nigeria except those specifically exempted by the VAT Act. The Finance Act 2019 amended the VAT Act by increasing the current VAT rate to 7.5% from the 5% stated in the VAT Act, as amended in 2007. By virtue of Section 7 of the VAT Act, the administration of VAT is vested in the Federal Board of lnland Revenue, now the Federal Inland Revenue Service (FIRS), which acts as a Federal Tax Agency. However, in the recent case of Suit No. FHC/PH/CS/149/2020, between AG Rivers State v. FIRS & AG Federation, the Federal High Court (FHC) sitting in Port Harcourt has declared that it is the Rivers State Government and not FIRS, that should collect VAT in the State.

In the above case, the FHC held that there is no constitutional basis for the FIRS to demand for and collect VAT in Rivers State or any other State of the Federation. The learned Justice delivering the judgement referred to the 1999 Constitution, stating that the constitutional powers and competence of the Federal Government is limited to taxation of incomes, profits and capital gains which do not include VAT 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 addition to the declaration, the Court restrained the defendants from demanding the taxes from the residents of the Rivers State, which by implication affects other States. The declaration is to the effect that it is now unlawful for any agency of the Federal Government to collect VAT in Rivers State. Expectedly, the FIRS filed an appeal against the FHC’s decision and obtained an order from the appellate court, staying action on the judgment appealed against pending the determination of the appeal.

The outcome of this case raises a number of issues. First, what is the effect of the Court’s declaration on the other States of the Federation? Prior to the judgment, VAT collected by the FIRS across the States and the Federal Capital Territory was shared among the three tiers of government in the ratio 15:50:35 allocated to the Federal, State and Local Governments respectively, in line with the principle of derivation. This method of allocation is especially beneficial to States whose VAT collections are smaller, have lower internally generated revenue and are heavily dependent on federal allocations to function and meet their operational obligations. With this declaration, it is expected that a number of States would face a huge drop in the allocations flowing from the federal purse. Sadly, federal allocations remain the main source of revenue for most States. It is reported that in 2017, 55% of the revenue generated by the Federal Government from VAT was being collected from Lagos State alone, with the remaining 45% generated from the remaining 35 states and the FCT. While some States may experience minimal impact, it appears that it is the other States which account for less than 20% of VAT collection that will suffer significant revenue decline as a consequence. These States will have to develop ways to increase their internally generated revenue which will directly or indirectly affect taxpayers in the States as the State governments may be forced to exploit and extend avenues where revenues can be generated.

Another issue is the effect of the decision on the VAT Act.  As it stands, with the judgment of the FHC, the current VAT Act would be considered unconstitutional. It is worthy of note that the governors of Lagos and Rivers have signed into law bills that empower the respective States to collect VAT. Also, officials in both States have expressed their resolve to enforce the judgement to the letter. It can be expected that other States in support of the decision will be following proceedings at the Court of Appeal, Abuja with keen interest. This raises the question as to whether or not this move by the State Governments is not premature considering that the matter is already on appeal.  Though the Court of Appeal has ordered that the parties should maintain status quo ante bellum, it is too soon to determine how the Court will decide. There is also the issue of a possible further appeal to the Supreme Court depending on the outcome of this Appeal. Accordingly, any actions done in pursuant of the laws may have to be reversed such that the State Government may be liable to account and pay to the Federal Government the VAT collected during that period. The outcome will also be the same if it is decided on appeal that both the Federal and State Governments have concurrent jurisdiction over the subject matter. In this case, the federal law would have covered the field and thus rendered the State laws void and of no effect.

One major argument against the decision of the FHC is the idea of fairness and justice in revenue sharing formula. It is argued that fairness to the other States with low-income generation should be a factor. However, this fairness argument may also be viewed from the other prism of fairness to the States like Lagos which are ‘robbed’ of the full enjoyment of VAT generated from their States. Can fairness and the principle of public policy be enough factors to influence the decisions of the appeal courts?

Nevertheless, pundits opine that the Rivers FHC’s decision on VAT could well be a watershed for fiscal restructuring of the country. Under a system of fiscal federalism, each State will have to work its way to self-sufficiency and financial independence by building up their revenue bases and making the right decisions to grow their local economies rather than the heavy reliance on federal support. As necessity is the mother of invention, States will have no choice but to live up to their economic potential, or die. There also an argument as to the political undertones of the matter, motivating the pushback from the Federal Government. Whatever the drive, it will be interesting to follow the events as they unfold.

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