Being a Paper Presented at the 9th South-West Zonal Tax Conference from 19th – 22nd October, 2021 at International Cultural & Events Center, (THE DOME), Alagbaka, Akure, Ondo-State.
Since its introduction in 1993, Value Added Tax (VAT) has continued to be one of the most stable and highest yielding sources of tax revenue for the country. Statistics show that VAT has contributed ₦1.108 trillion, ₦1.19 trillion and ₦1.5 trillion respectively in the last three years of, 2018, 2019 and 2020. Despite its huge contribution to national revenue, the validity of VAT has been a contentious issue especially in the light of Consumption/Sales Tax imposed by some States of the Federation. This issue has been a subject of litigation in different courts up to the Supreme Court and the various judgments have reflected the divergent views on its validity or otherwise.
The Value Added Tax Act, LFN 2004 (VATA) is the enabling law imposing Value Added Tax (VAT) on the supply of taxable goods and services in Nigeria, and in furtherance of this, the Act has empowered the Federal Inland Revenue Board to be responsible for the administration and collection of this tax. It is trite that “Acts” in Nigeria are laws enacted by the National Assembly, that is, the law making body at the Federal level. The 1999 Constitution (as amended) empowers the National Assembly to legislate on matters contained in the Exclusive and Concurrent Legislative list provided in the 2nd schedule of the Constitution, and by necessary implication, the National Assembly does not constitutionally possess the power to legislate on matters not specifically listed, save for instances where the constitution itself has permitted same.
In light of the above, the powers of the FIRS to administer and collect VAT as provided in VATA, and in fact the validity of the VATA itself has constantly been a subject of contention, as there have been various arguments to the effect that when it comes to tax matters, the National Assembly may only legislate on matters pertaining to profits/income of persons/companies, capital gains and stamp duties on instruments listed as items 58 & 59 on the Exclusive Legislative list, and that VAT which is a Sales/Consumption tax is not covered on the list. This paper is therefore centered on the legal and fiscal implication on recent pronouncement on VAT, reasons why VAT was introduced, brief background knowledge as well as some relevant decided cases on Value Added Tax (VAT) in Nigeria.
2.0 What is Value Added Tax?
The concept of Value Added Tax as a concept originated from the French Economist, Maurice Laure. It was originally referred to as “taxe sur la valueur”. Abdullah & Manning (2015) define VAT as a consumption tax payable on the goods and services consumed by persons, business organizations and individuals Abiola & Asiweh (2012). The VATs payable by tax payers depend on their consumptions rather than their incomes. VAT applies equally to every purchase. In contrast with a progressive income tax, it does not discriminate among the classes of income earners. In some countries, VAT is called Goods and Services Tax (GST). According to Abiola and Asiweh (2012), VAT has some merits over other types of taxes when judged from the point of view of tax neutrality, revenue earning capacity, efficiency, and broadness of base.
Valued Added is tax on the production and consumption of goods and services which is borne by the final consumer but collected at each stage of the production and distribution chain. Valued Added Tax is a tax that was established by VAT decree 102 of 1993. It was introduced on 1st September 1993 but became operational on 1st January 1994, as a replacement to sales tax, which was in operation under Federal Government decree No 7 of 1986. VAT is also backed up by Value Added Tax Act Cap VI, 2004 LFN.
VAT is a consumption tax that has been embraced and adopted by many nations across the globe. Value Added Tax (VAT) is a tax on the amount by which the value of an article has been increased at each stage of its production or distribution. Because it is a consumption tax, it is difficult to evade and relatively easy to administer. From a buyer’s perspective, VAT is a form of consumption tax, from the perspective of the seller; it is a tax only on the value added to a product, material, or service while from an accounting point of view, by the stage of its manufacture or distribution. VAT is an indirect tax on goods and services collected from someone other than the person who bears the cost of the tax or the tax burden. VAT is charged and payable on the supply of all goods and services, other than the exempted items listed in the first schedule to the Act Section 7 of FIRS Act.
2.1 Why the Government introduced VAT
The following are the reasons why the Federal Government introduced VAT in 1993:
- The base of the sale tax in Nigeria was narrow; it covers only nine categories of good and services including registered hotels and similar establishments. VAT covers all goods and services except those specifically exempted by the VAT Act;
- Only locally manufactured goods were targeted by the sales tax decree. VAT also covers imported goods and services, thus increasing the revenue accruing to the government;
- Imposition of VAT on imported goods to further discourage importation;
- To widen the revenue base of the Government at the three tiers- Federal, State and Local Government;
- Government desire to focus more on indirect taxes in order to avoid the problem encountered in the assessment and collection of direct taxes;
- VAT has assumed international dimension as it is widely adopted and so it is desirable for Nigeria to explore the modern system;
- It is easy to administer by way of assessment, enforcement and collection.
2.2 Recent VAT Administration:
Tax reforms are changes that are made in the Nigerian Tax system to increase the revenue base of the company. No matter the angle from which VAT is viewed, the purpose is to generate more revenue to the government. A critical review of the current formula shows clearly that VAT was designed to favour development at the lower-tier level of government.
Although VAT is centrally administered by the Federal Inland Revenue Service (FIRS), the formula for the distribution by the Federal Government when it was first introduced was 50% to FGN; 35% to the States; and 15% to LGAs. With effectfrom January 1999, the formula was adjusted as follows: FGN 15%, States 50% and LGAs and area councils of the FCT 35% (with a net of 4 per cent as cost of collection by the FIRS). The share of the States and that of the local Governments is shared amongst them using the factors of Equality 50%, population 30% and derivation 20%.The percentage of the cost of collection remains an issue which the states have raised at the Federation Account Allocation Committee (“FAAC”) meetings, but which continues to be neglected with impunity.
Nigeria’s VAT rate since the introduction of VAT through the VAT Decree No. 102 of 1993 has been 5% up until January 2020 when it was increased to 7.5%. The decision by the Federal Executive Council (FEC) to approve the proposed increase did not come as a surprise given the several attempts by recent and past administrations to increase the rate of VAT. The Value Added Tax (VAT) rate of 7.5 per cent took effect immediately after the Finance Act 2019 was signed into law by President Muhammad Buhari on 13th January 2020.
VAT on interstate transactions, including Corporate VAT payments at headquarters, that transcend intrastate transactions are legitimately collectible and retainable by the Federal Government and redistributable among all States based on the distribution formula stated above. This has generated a lot of heat in recent times as some States locked horns at the courts with the Federal Government to assert their democratic collection and distribution rights on Value Added Tax (VAT), Nigeria seems to have lost her way on a journey that was started some three decades ago.
3.0 Some Decided Cases Concerning VAT Administration in Nigeria
Some relevant decided cases on VAT are:
ATTORNEY-GENERAL OF OGUN STATE VS ABERUAGBA (1985);
The competence of State Governments to impose consumption tax and the validity of the Value Added Tax Act (“VAT Act”), have been the subject of several judicial decisions. As far back as 1985, in the locus classicus case of Attorney-General of Ogun State vs Aberuagba, the Supreme Court held that State Governments are only empowered to impose sales tax (a form of consumption tax) on intra-state transactions, without more. The implication of the Supreme Court’s decision is that State Governments cannot validly impose sales tax on inter-state or international transactions, both of which are matters exclusively reserved for the FGN on the Exclusive Legislative List (ELL). Thus, the Supreme Court struck down the Sales Tax Law of Ogun State to the extent that it imposed sales tax on international and inter-state trade and commerce.
ATTORNEY GENERAL OF LAGOS STATE V. EKO HOTELS AND ANOTHER;
These claims have usually been decided by the courts in favour of the FIRS. One of these important decisions can be found in the case of Attorney General of Lagos State v. Eko Hotels and Another, where the Supreme Court held that the VATA being an enactment of the National Assembly has covered the field on the issue of Sales Tax and prevails over the then Sales Tax Law of Lagos State.
- EMMANUEL CHUKWUKA UKALA V. FIRS (December 2020)
Things however took a dramatic turn for the FIRS when the court in Federal High Court in Ukala v. FIRS held that the National Assembly had no power to enact the VAT Act, thereby lending credence to the Plaintiff’s position that the constitutional powers of the Federal Government to impose taxes are limited to the items listed in Item 59 of Part 1 of the 2nd Schedule to the 1999 Constitution (as amended) and does not include the power to impose VAT.
In 2020, the Plaintiff in Ukala’s case through an Originating Summons sought before the Federal High Court amongst other reliefs, the following:
- A declaration that there is no constitutional basis for the imposition, demand and collection of Value Added Tax (VAT) by the Defendants (FIRS) from the Plaintiff 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 Value Added Tax or any other species of sales tax;
- A declaration that in so far as the Value Added Tax Act purports to impose, levy or authorize the demand and collection of Value Added Tax by the FIRS or any other agency of the Federal Government, it is unconstitutional, illegal, null and void to the extent of its inconsistency with the provisions of the 1999 Constitution of Nigeria, as amended;
- A declaration that all the statutory provisions made or purportedly made in exercise of the legislative powers of the Federal Republic of Nigeria, which contain provisions which are inconsistent or in excess of the powers to impose tax as prescribed by item 59 of Part 1 of the Second Schedule of the Constitution or in excess of the power to delegate the duty of collection of taxes are to the extent of their inconsistency or excess, unconstitutional, null and void.
Following a consideration of the arguments put forward by both parties, the court held that a combined reading of items 59 of the Exclusive list and items 7-10 of the Concurrent list shows that the express mention of taxation of incomes, capital gains, and duties on documents and transactions expressly excludes any references to any tax, levies, rates and fees. The court further held that vesting the National Assembly with the powers to arrogate itself the authority to allocate powers to impose, levy or collect any form of Sales Tax including Value Added Tax is considered contrary to the express provisions of the 1999 Constitution.
ATTORNEY GENERAL OF RIVERS STATE V. FEDERAL INLAND REVENUE SERVICE (AUGUST 2021)
A similar stance to the decision of the Federal High Court in the above matter has now even more recently been taken in the case of Attorney General of Rivers State V. Federal Inland Revenue Service, where the powers of the FIRS to enforce and administer taxes not expressly listed under items 58 and 59 of Part 1 of the Second Schedule to the 1999 Constitution was again in question. The Federal High Court sitting in Port Harcourt, Rivers State held that:
- The provisions of the Constitution must be interpreted literally as the words are plain and unambiguous;
- Tax laws must be construed strictly, with no room for presumption or intendment, and therefore the specific mention of some types of taxes under the Exclusive Legislative List, is deemed to exclude other types of taxes not expressly mentioned therein;
- The Constitution empowers the Federal Government to enact laws in relation to stamp duties, taxation of income/profits and capital gains only;
- The Federal Government has no constitutional authority to impose and collect VAT or any other sales tax, Withholding Tax, Education Tax and others not specifically stipulated;
- The National Assembly may only delegate the powers to administer or collect taxes to the State government, failure of which will render such delegation null and void;
- The Taxes and Levies (Approved Collection List) Act is unconstitutional, and any tax or levy provided for therein is void, except same is provided for by the Constitution or any other law made by a competent legislature.
On August 9, 2021 precisely, the presiding Justice Stephen Dalyop Pam of the Federal High Court in Port Harcourt consequently 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, PIT and VAT. The court held that it was unconstitutional for the FIRS to demand and collect VAT, Withholding Tax, Education Tax and Technology levy in Rivers State or any other state of the federation, for the reason that the constitutional powers and competence of the Federal Government is limited to taxation of incomes, profits and capital gains, without VAT or any other species of sales, or levy other as engrossed in items 58 and 59 of the Exclusive Legislative List of the 1999 Constitution as amended.
Given the consequential nature of the judgment, the Rivers State government has since formally engrossed its law to rake in resources within its residual powers. However, the FIRS have sought an appeal of this decision, and the matter is now before the Court of Appeal. Although the Court of Appeal in Abuja has temporarily halted the Rivers State government from collecting VAT until all legal disputes relating to the matter are resolved, the recent ruling by a Federal High Court in Rivers against the federal government on who had the authority to collect VAT has triggered a supremacy battle between Abuja, on one hand, and on the other hand, Rivers and Lagos.
However, sundry commentators have pointed to the implication of this development. Concerns have been expressed that the Federal Government would lose billions of naira in tax revenue as the bandwagon effect would make other states follow the Rivers state’s example in ways that could compound its liquidity problems amidst nose-diving crude oil prices, just like Lagos has joined and Oyo state is about joining the tussle with the federal government.
3.1 Legal and Fiscal Implications on Recent Pronouncement on VAT
The following are some of the legal and fiscal implications of the recent pronouncement of Value Added Tax (VAT):
- With Rivers and now Lagos taking steps by enacting laws to implement VAT collection in their respective States, about 30 states in Nigeria may experience challenges in meeting their financial obligations;
- The federation account could lose revenue from VAT amidst general dwindling federal revenue. The loss may be extended further if other taxes covered in the court ruling are assigned to states for collection.
- The development will have a serious negative impact for all tiers of government in view of the anticipated reduced revenue thereby negatively impacting the budget performance for the year 2021.
- Complexity for businesses in determining the tax due to various states and managing relationship as entities will have to deal with number of states and federal government simultaneously.
- Some states will also need time to set up the processes required to collect VAT, a luxury they probably cannot afford in the short term, and a situation that could make them lose significant revenue and put them in more dire straits.
- Residents of these economically disadvantaged states would not be provided basic amenities by their state governments due to the paucity of income from VAT, while businesses may be forced to pay multiple taxes across the different states they operate.
- On the plus side though, the federal government, according to a PricewaterhouseCoopers (PwC) report, could gain more, considering that about 27 per cent of revenues from VAT currently come from foreign non-import VAT. In 2020, for instance, the federal government’s VAT from imports was 22.7 per cent, while foreign non-imports VAT were 27.4 per cent, and local VAT 49.8 per cent.
- Individuals and corporate entities liable to charge and remit VAT on consumption transactions may be thrown into confusion as to the appropriate tax authority to deal with, given that before the decision, all VAT remittances were made to the FIRS. In the face of contending claims, a possible way out is to issue an interpleaded summons, in order to avoid paying penalties for default and the risk of adverse actions from both entities.
- If states enact their VAT or Sales tax laws, the guaranteed winners will be the federal government in respect of import VAT and international transactions (whether retained by FG only or paid into the Federation account and shared), and the FCT.
- The positions of all states will be negatively impacted by lack of capacity to collect, difficulty in auditing compliance, and higher cost of collection which may be up to 15% especially in states where consultants and other forms of agency structures are used for tax collection.
- States that have existing consumption tax such as Lagos, Edo and others would have to repeal those laws when introducing VAT or sales tax as to do otherwise would amount to legislating double taxation.
- Small businesses with turnover not more than N25m that are exempt under the national VAT would have to comply with VAT under the states VAT laws.
- Penalties for failure to register is as high as N50,000 for the first month and N100,000 for each subsequent month while the fine for failure to keep records to ascertain the correct VAT is up to N250,000. This penalty regime will weigh heavily on businesses especially SMEs such as barbers, hairdressers, tailors, shoemakers, plumbers, bus and taxi drivers, makeup artists, restaurant owners, etc. This further increases the risk of such businesses being harassed and extorted in many states especially those employing tugs to enforce tax compliance.
- There will be higher cost of goods and services arising from input VAT claim and refund complications in addition to items which are not exempted under the states VAT law such as rent, tuition, processed foods such as pounded yam, suya, jollof rice, and ogbono soup. In addition, there will be incidence of double taxation due to likely conflicts between origination and destination principle in different states. Worse still when the reality of inability to implement VAT hits home many states will inevitably introduce sales tax with its cascading effect
- Nigeria’s ease of doing business and paying taxes will deteriorate in view of the multiple VAT compliance and Nigeria’s tax to GDP ratio will decline.
- Tax practitioners including lawyers and accountants will benefit as the states VAT regime will create multiple fee opportunities to assist taxpayers comply.
- FIRS will lose cost of collection on VAT revenue within states and may have to improve its operational efficiency to sustain current capacity or seek additional funding from the National Assembly which will reduce revenue accruing for sharing to all level of government.
4.0 Conclusion and Recommendation
Presently, businesses are expressing concerns as to where to fulfill their VAT obligation especially as penalty periods for tax remittances are expiring as a result of the status quo pronouncement to be maintained between the plaintiff (Rivers and Lagos) and the defendant (Federal government and FIRS) by the Federal Court of Appeal. These pronouncements themselves become laws, especially when issued by the apex courts and can only be overturned when that law is amended by the National Assembly.
Therefore, it is recommended that tax payers and tax advisers alike to maintain compliance pending the final determination of the matter by the courts or otherwise, to avoid incurring unnecessary tax liabilities in the event of high tax burden in the future. This is an issue of utmost national importance and should be accorded the urgency that it deserves by the judiciary and all key stakeholders. The uncertainty created is counterproductive for business and tax revenue generation. Also, any outcome that negatively impacts the majority of Nigerians is not the right solution; in essence, the welfare of the Nigerian people should be a priority. Federal Government is advised to take the lead role in redistributing resources in a fair and equitable manner to reduce the constant friction in the allocation of revenue.
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