Value added Tax (VAT): Conflict and resolving question of unbalanced fiscal federalism
Value Added Tax (VAT) is the tax levied by the Federal Government (FG) on products and services. Essentially, the VAT, otherwise referred to as ‘consumption tax’, is specifically targeted at the final consumer.
The FG charges VAT through the Federal Inland Revenue Service (FIRS) by virtue of the Value Added Tax Act, 2007 (VAT Act). Thus, the VAT Act is the enabling law on VAT in Nigeria.
The conflict about the collection of VAT between the FG and States is not new. In 2014, Lagos State Government lost its case at the Supreme Court, challenging the powers of the FG to collect VAT on goods and services supplied in the state. The Lagos State Government had sued the FG, seeking for a ruling to repeal the VAT Act on the basis that it was outside the legislative remit of the FG to collect the tax.
The court, however, ruled in favour of the preliminary objection of the Attorney General of the Federation on behalf of the FG that the Supreme Court does not have original jurisdiction in the matter, as it was a dispute between an agency of the FG and Lagos State and not a dispute between the FG and the Lagos State government. This was on the basis that VAT is collected by the Federal Inland Revenue Service (FIRS), which is an agency of the FG.
The crux of complaints by Lagos State over the VAT regime was that, in accordance with the 1999 Constitution, it ought to be within the exclusive jurisdiction of states. The centralisation of this revenue source is made more unbearable for Lagos because the transactions that give rise to the bulk of VAT collection take place in the state, but the returns to the state are relatively paltry. VAT proceeds are currently shared among the Federal (15 per cent), states including FCT (50 per cent), and local governments (35 per cent).
Careful not to fall into similar legal trap as Lagos, River State government sued the FIRS at the Federal High Court, challenging its powers to collect VAT for the FG. On August 9, 2021, the Federal High Court sitting in Port Harcourt declared that it is the Rivers State Government (RSG) and not the FIRS that should collect VAT and Personal Income Tax (PIT) in the state.
The trial judge, Stephen Dalyop Pam, also issued an order of perpetual injunction restraining FIRS and the Attorney General of the Federation (AGF), 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.
Justice Pam made the assertion while delivering judgment in Suit No. FHC/PH/CS/149/2020, filed by the Attorney General for Rivers State (plaintiff), against FIRS (first defendant) and the AGF (second defendant).
The court, which granted all the 11 reliefs sought by the Rivers State government, stated that there is no constitutional basis 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, being that the constitutional powers and competence of the FG is limited to taxation of incomes, profits and capital gains, which does 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.
The judge dismissed the preliminary objections filed by the defendants that the court lacks jurisdiction to hear the suit and that the case should be transferred to the Court of Appeal for interpretation.
Justice Pam, who also dismissed the objection raised by the defendants that the National Assembly that enacted the VAT Act ought to have been made a party in the suit, declared that the issues of taxes raised by the state government are issues of law that the court is constitutionally empowered to entertain.
Reacting to the development, commercial law scholar, Prof. Konyinsola Ajayi (SAN) said the Judge’s logic on the constitutional boundaries in respect of VAT is difficult to challenge. According to him, the question of who collects VAT is not free of the complexities of the VAT law itself and its administration.
“Even if you shudder at the trial Judge’s understanding of taxation, it will be difficult to challenge his logic on constitutional boundaries. Taking this from its root, a view needs to be taken on how this case can be used to begin to tug us away from the ‘Abuja begging bowl’ in the hands of our mini-sovereigns to an area of fiscal federalism and representation,” he said, adding that fiscal federalism and representation are key to taxation.
Also, Edoba Omoregie, who is a professor of Comparative Constitutional Law and Director of Legislative Support Services at the National Institute for Legislative and Democratic Studies, National Assembly, Abuja, is of the view that the matter would be best settled by the Supreme Court. The issues raised, he noted, are within the competence of the Supreme Court to resolve as a court of the first instance, since it involves a dispute between the states and the Federal Government.
“Therefore, I advise that the Federal Attorney General should file a suit against the entire 36 Attorneys General, asking the Supreme Court to determine which tier has the constitutional power to levy VAT. A similar matter was brought by the Attorney General of Lagos State against the Attorney General of the Federation in 2013. Unfortunately, the court declined jurisdiction on technical grounds when it decided the matter in 2014. Now that the issues have arisen again with very serious implications for the cohesion of the country, the Supreme Court should be activated to make the decisive and final determination,” he suggested.
Lagos lawyer, Stephen Azubuike believes that by the clear provisions of the 1999 Constitution, the National Assembly lacks the power to enact and implement VAT Act for the purpose of collection of VAT by the FIRS. His assertion, he said, has a judicial backing in the recent decision of Emmanuel Chukwuka Ukala v. FIRS (2021) 56 TLRN 1, where the Federal High Court 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.
Azubuike said: “We acknowledge the much earlier position of the Supreme Court in the Attorney General of Lagos State v. Eko Hotels, where the apex Court held, relying on the doctrine of Covering the Field, that the VAT Act, being a law passed by the National Assembly, had covered the field on the issue of Sales Tax and therefore renders the Sales Tax Law of Lagos State unnecessary.
“The relevance of the recent Federal High Court decision is that it dwells more on the validity of the VAT Act in the first place. It does appear that the lines of conflict will remain until there is a clear legislative intervention by way of a constitutional amendment.”
For the Executive Director, FOI Counsel, Benin City, President Aigbokhan, the Taxes and Levies (Approved List for Collection) Act, Cap. T2, LFN 2004, provides that Federal, State and Local government shall be responsible for collecting taxes and levies listed in Part I, Part II, and Part III of the Schedule to the Act. By the law, he explained, the National Assembly imposed taxes/levies for various tiers of government in line with the provision of the Constitution.
According to him, the Act enumerates the various heads of taxes and levies collectible by the Federal, State and Local Governments. “The Act charges State Government with power to collect taxes and levies in Part II of the Schedule to the Constitution, which includes Personal Income Tax (Pay as You Earn in respect of company), Development Levy from an individual, Withholding tax for an individual, Capital Gain Tax for individual and Stamp duties on instrument executed by individuals. All these cannot be accessed without legislation. The Constitution placed it under concurrent list, meaning it has the power to make such law for it to give effect to the enjoyment of the privilege,” he stated.
Aigbokhan, therefore, declared that the Federal High Court decision on the matter leaves much to be expected. He said: “It stood the law on its head. Generally, the House of Assembly has the power to make law for the collection of any tax, fee, or rate for both state and local government council. See Item 9 of the Concurrent Legislative List of the 1999 Constitution and Taxes and Levies [Approved List for Collection) Act Cap. T2, LFN, 2004. These laws empower the State House of Assembly to legislate on taxes and levies to the specific item and maximum amount chargeable.”
The paradox of the Nigerian experience, he noted, is that the listings rather than foster cohesion have fostered legislative anarchy in a way that renders inoperative rule of law and development. According to him, tax issues being an imposition on the citizens cannot be inferred but must be directly provided for in a statute. He stated that even at that, a clear and direct nexus must be shown to exist between the charging provision in a tax statute and the intended taxpayer before any tax liability can be said to have arisen.
The overarching proposition, he said, is that all charges upon the subject must be imposed by clear and unambiguous language because to some degree, they operate as penalties. He explained that citizens cannot be taxed unless the language of the statute clearly imposes the obligation and there is a written law to that effect.
His words: “Generally, states are not precluded from making tax legislation under their concurrency powers, but any such laws will be superseded by an Act of the National Assembly if there is inconsistency capable of diminishing the rights in the Act. State Houses of Assembly have consistently waited for the National Assembly to legislate on a subject and thereafter prop up to say that the law is not applicable to them and ask the court to strike it down.
“To continually arise from slumber to oppose the enforcement of a law where there is no law in the vacuum is the height of irresponsibility. Where the State House of Assembly refuses to pass a law on shared statutory responsibility, and there exists federal legislation on it, the court must without choice implement the law until there is legislative intervention.
The decision of the Federal High Court on taxation only promotes the unwillingness of states to abide by the law, even though there is no substitute. Rightly the State House of Assembly can legislate on issues on the concurrent list that has been legislated upon by the National Assembly so long as it does not overreach the federal law.”
Aigbokhan stressed that the quest by the court to quash a law in a vacuum, is a weak wicket, particularly where the Government of Rivers State passed a law after the judgment. “It was after the judgment that the government of Rivers State signed a bill into law, which authorises the state to henceforth collect VAT. The post-judgment activity should have preceded the action,” he insisted.
Tunde Salami, team lead, Legal Vintage Attorneys, Lagos, recalled that it is actually not the first time the Court was invalidating the provisions of the VAT Act. The Courts, he said, have done so in the case of Ukala v FIRS and Hotel Owners & Managers Association of Lagos v. FIRS. According to him, Section 7 of the VAT Act, vests power and administration of VAT on the FIRS.
“The Act itself explains how the VAT revenue should be shared among the three tiers of government. The Constitution on its part clearly itemised the tax that can be levied and collected by the FIRS in Item 58 and 59 of the Exclusive Legislative List. Unfortunately, VAT is not listed.
“The controversy stemming from the collection was as a result of the provision of the VAT Act, which vests the power and administration on FIRS. However, flowing from the recent Court decision in A.G Rivers v. FIRS, I seemingly align myself with the position of the Court that since VAT is not under the exclusive legislative list, State Governments are also entitled to receive and claim the VAT generated from their state. The Rivers State Government has gone ahead to pass its VAT Law and until the position is upturned by the appellate courts, that shall remain the position of the law,” Salami maintained.
He, however, pointed out that if the issue of VAT collection is not properly addressed and regulated, it might lead to issues of double or multiple taxations, especially in respect of collection of VAT, Sales Tax, and Consumption Tax.
Tax law expert, Dr. Jerome Okoro, said the life or death of every law in Nigeria depends on its conformity with the 1999 Constitution (as amended). According to him, by the supremacy of the Constitution, any part of a law that is out of tune with it must wither as a “dead branch of a living tree.” When the very existence of a law, he stated, offends the Constitution, then the entire law must lose force and wither for lack of substratum.
He said: “There are two modes in which the existence of law can be supported by the Constitution. Either the law is enacted by the tier of government constitutionally empowered to enact it under the Exclusive, Concurrent, and Residual Legislative Lists or the law is preserved as an Existing Law (laws predating the Constitution, and preserved by the Constitution). The VAT Act, 1997 clearly fails the first mode of existence. It is a federal law but does not stem from the Exclusive List. Then its support in the second mode – as an Existing Law – is not strong. Some Existing Laws are specifically mentioned and specially preserved in Section 315 of the Constitution, e.g. the Land Use Act, 1978 and the NYSC Act, 1973. These ones are not subjected to any further conditions of existence. The VAT Act is not one of these sacred cows. It rather falls under the general class of the Existing Laws, which are further subjected to the conditions of the Legislative Lists.”
According to him, the decision of the Federal High Court in Attorney-General of Rivers State v. Attorney-General of the Federation that the VAT Act is unconstitutional is the law, for now, much as the right of appeal up to the Supreme Court is open. A confusing circumstance, he noted, is that taxpayers are left at a loss as to whether to maintain their VAT compliance with FIRS or direct it to the states, or suspend it until the Supreme Court ultimately resolves the matter.
Okoro, therefore, advised that considering the controversy, both tiers of government should suspend VAT enforcement until the Supreme Court decides. He explained that the matter, ideally, ought to have originated at the Supreme Court, with all the 35 other states joined in the suit, to lay it to rest. He added that since it went the route of the Federal High Court, the other states should join the appeal as interested parties.
“On the socio-political angle, the clamour for fiscal federalism, true federalism, is rife. It is widely viewed as an instrument of sustainable peace and unity as well as geographically spread rapid economic development in Nigeria. It is high time the culture of states leaning on revenue distribution from the centre ended. The power of VAT collection should be restored to the states as a step in the right direction. Let the states be enabled to look inwards and activate their potentials in commerce and industry,” he advocated.
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