[ANALYSIS] VAT As Weapon In Battle For Resource Control

By Sanya Adejokun

BETWEEN 2020 and now, there have been four notable cases decided
by the Federal High Court on the validity of Value Added Tax (VAT)
legislation in the country.

Two of the cases were decided in Port Harcourt against VAT while
another one in Lagos also nullified the law. In the fourth
instance, FHC in Kano ruled endorsed VAT when it restrained Kano
State Government from imposing Consumption Tax on transactions
involving goods and services, which are already subject to VAT as
the VAT Act had covered the field in that regard.

In the latest ruling, Justice Stephen Dalyop Pam said 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.

The court agreed with the Rivers State government (plaintiff)
that the state and not FIRS 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 of the 1999 constitution as amended.

The court also declared that FIRS and Minister of Finance were
not constitutionally entitled to charge or imposes levies, charges
or rates (under any guise or by whatever name called) on the
residents of Rivers and any state of the federation.

Since then, legal economic and social commentators have noted
federal government is potentially the greatest beneficiary while
only a few states like Lagos, FCT, Rivers, Ogun, Kano, Oyo, and
Kaduna will benefit among the states. The value of VAT collected by
Nigerian Customs Service on behalf of FIRS on foreign related goods
and services amount to between 12 and 15 percent the total
collections.

Others argue that it will become difficult if not impossible for
states to individually administer VAT within their jurisdictions
for lack of capacity. Companies operating in multiple states may
also have difficulties dealing with different laws in different
states. Others also suggested that Federal Government may resort to
appropriating the sizeable contributions of VAT accruing from
Customs sources and treat it as independent revenue.

VAT is currently shared in the ratio of 15 per cent to FG; 50
per cent to states and 35 per cent to local governments.

A Chartered/Forensic Accountant and Tax Advisor, Mr Godwin Oloke
who is Managing Partner, Oloke Oloke and Co. the development is
capable of “promoting fiscal federalism as states will now be able
to impose and demand VAT from those transacting business within
their jurisdictions.

States will also be forced to make their states investor
friendly. Since the more goods and services people consume, the
more VAT they will collect. It stands to reason therefore, that
states with a lot of commerce like Lagos will now increase their
income while others without sufficient commerce will witness drop
in VAT.”

Oloke also believes that states retrieving their rights to
levying and administering VAT will remove the unfairness in
unethical practices whereby Sharia compliant states will cease to
share from proceeds of alcoholic beverages.

He noted that some states will suffer but that Federal
Government may not suffer much from the development since it may
then hold on to VAT coming from foreign sources collected by
Nigerian Customs Service and oil companies.

He however, contended that VAT coming from oil companies and
customs should be pooled into the Federation Account. If this same
approach used in administering personal income tax is applied to
VAT, IGR of investor friendly states will have been greatly
boosted. This will force states to look inwards and design policies
that will attract investors to their states thereby promoting true
fiscal federalism.”

While applauding states for testing certain practices in the
courts, he expressed the fear that there may no longer be
uniformity in rates and administration of VAT.

“There could be multiple tax rates in states with attending
negative impact on the ease of doing business.”

Concurring with Oloke, a professor of finance and former
Commissioner of Finance in Imo State, Uche Uwaleke said the
judgment will encourage state governments to design policies that
will attract investors to their states which in turn will give the
states the leverage to impose taxes thus increasing their
Internally Generated Revenue (IGR).

“VAT replaced sales tax that was something within the
jurisdiction of the state. Ideally it should be collected at the
state level. If states are allowed to collect VAT, many of them
will be encouraged to develop that aspect of taxation as opposed to
going to the tax pool to share. In view of the fact that a lot of
the states are trying to beef up IGR, allowing them to collect and
administer VAT will boost the IGR of states. As much as possible,
we should find a way of devolving taxing powers and responsibility
to subnational governments as that is what true fiscal federalism
is all about”.

Ethically, Uwaleke, who is of Nassarawa State University, Keffi
wondered “why Kano for example and some other states should be
benefiting from VAT from alcohol. So, when you now allow Kano to
collect tax, Kano will not impose VAT on those commodities like
alcohol and those things that are haram. It will enable sharia
compliant states to apply the principles of Sharia but when you put
it in a pool, it is difficult to segregate those that came from
which sources”.

However, Fiscal Policy Partner at PwC, Mr Taiwo Oyedele who also
agreed that consumption tax belongs to states explained “what
happened in 1993 when the VAT law was introduced was the
understanding that the Federal Government had the capacity to
collect. FG was only collecting on behalf of states and then
keeping a percentage to cover the cost of collection. We can debate
on whether the percentage is high or not and that is why they keep
only 15 per cent and 85 per cent goes to states and local
governments.”

VAT was first introduced on August 24, 1993 in replacement of
the Sales Tax or Consumption Tax through a decree that has now
undergone subsequent amendments with the last being in 2020 to
reflect modifications and provide clarifications. VAT is currently
charged at the rate of 7.5 per cent. With some states bent on
imposing other forms of consumption tax, Andersen Tax says
operation of the VAT Act concurrently with the Consumption Tax
creates multiple consumption tax burden on taxpayers and “it is
imperative that a superior court rules on the issue to provide
clarity and certainty on the application of the VAT Act and the
appropriate body (National or State House of Assembly) empowered to
legislate on the taxation of consumption of goods and services.
This is to eliminate the incidence of multiple taxation, a major
disincentive to business.”

There are currently three decisions by Federal High Court in
nullifying VAT legislation and one in favour of it and so, Anderson
Tax opined that the matter will eventually get to the Supreme Court
to determine what will ultimately be the fate of VAT as is
currently administered in Nigeria.

The apex court had rejected a case by Lagos State asking it to
adjudicate on the matter because FHC has original jurisdiction.

A legal practitioner, Mujib Dada-Qadri Esq noted that the FHC,
Port Harcourt ruling “is exciting to some southerners who see their
region of the country as the biggest source of VAT and implying the
North as “parasite”.

So the judgment fits the deepening regional division
unfortunately. It is more unfortunate because the judgment will
attract ethnic biases instead of unbiased and dispassionate legal
analysis.”

According to him, only Lagos, Ogun, FCT and Rivers are the
highest contributors of VAT.

“This is a slap in the face of other states whether in the south
or north that are being sustained largely by the contributions of
just four or five states” and said it was too early for anyone to
jubilate because statutory interpretations can be tricky.

“The concurrent legislative list as provided for in the 1999
constitution does not exclusively grant “state government” ultimate
authority, concurrent list empowers the National Assembly and state
assemblies.

By Sanya Adejokun

BETWEEN 2020 and now, there have been four notable cases decided
by the Federal High Court on the validity of Value Added Tax (VAT)
legislation in the country.

Two of the cases were decided in Port Harcourt against VAT while
another one in Lagos also nullified the law. In the fourth
instance, FHC in Kano ruled endorsed VAT when it restrained Kano
State Government from imposing Consumption Tax on transactions
involving goods and services, which are already subject to VAT as
the VAT Act had covered the field in that regard.

In the latest ruling, Justice Stephen Dalyop Pam said 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.

The court agreed with the Rivers State government (plaintiff)
that the state and not FIRS 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 of the 1999 constitution as amended.

The court also declared that FIRS and Minister of Finance were
not constitutionally entitled to charge or imposes levies, charges
or rates (under any guise or by whatever name called) on the
residents of Rivers and any state of the federation.

Since then, legal economic and social commentators have noted
federal government is potentially the greatest beneficiary while
only a few states like Lagos, FCT, Rivers, Ogun, Kano, Oyo, and
Kaduna will benefit among the states. The value of VAT collected by
Nigerian Customs Service on behalf of FIRS on foreign related goods
and services amount to between 12 and 15 percent the total
collections.

Others argue that it will become difficult if not impossible for
states to individually administer VAT within their jurisdictions
for lack of capacity. Companies operating in multiple states may
also have difficulties dealing with different laws in different
states. Others also suggested that Federal Government may resort to
appropriating the sizeable contributions of VAT accruing from
Customs sources and treat it as independent revenue.

VAT is currently shared in the ratio of 15 per cent to FG; 50
per cent to states and 35 per cent to local governments.

A Chartered/Forensic Accountant and Tax Advisor, Mr Godwin Oloke
who is Managing Partner, Oloke Oloke and Co. the development is
capable of “promoting fiscal federalism as states will now be able
to impose and demand VAT from those transacting business within
their jurisdictions.

States will also be forced to make their states investor
friendly. Since the more goods and services people consume, the
more VAT they will collect. It stands to reason therefore, that
states with a lot of commerce like Lagos will now increase their
income while others without sufficient commerce will witness drop
in VAT.”

Oloke also believes that states retrieving their rights to
levying and administering VAT will remove the unfairness in
unethical practices whereby Sharia compliant states will cease to
share from proceeds of alcoholic beverages.

He noted that some states will suffer but that Federal
Government may not suffer much from the development since it may
then hold on to VAT coming from foreign sources collected by
Nigerian Customs Service and oil companies.

He however, contended that VAT coming from oil companies and
customs should be pooled into the Federation Account. If this same
approach used in administering personal income tax is applied to
VAT, IGR of investor friendly states will have been greatly
boosted. This will force states to look inwards and design policies
that will attract investors to their states thereby promoting true
fiscal federalism.”

While applauding states for testing certain practices in the
courts, he expressed the fear that there may no longer be
uniformity in rates and administration of VAT.

“There could be multiple tax rates in states with attending
negative impact on the ease of doing business.”

Concurring with Oloke, a professor of finance and former
Commissioner of Finance in Imo State, Uche Uwaleke said the
judgment will encourage state governments to design policies that
will attract investors to their states which in turn will give the
states the leverage to impose taxes thus increasing their
Internally Generated Revenue (IGR).

“VAT replaced sales tax that was something within the
jurisdiction of the state. Ideally it should be collected at the
state level. If states are allowed to collect VAT, many of them
will be encouraged to develop that aspect of taxation as opposed to
going to the tax pool to share. In view of the fact that a lot of
the states are trying to beef up IGR, allowing them to collect and
administer VAT will boost the IGR of states. As much as possible,
we should find a way of devolving taxing powers and responsibility
to subnational governments as that is what true fiscal federalism
is all about”.

Ethically, Uwaleke, who is of Nassarawa State University, Keffi
wondered “why Kano for example and some other states should be
benefiting from VAT from alcohol. So, when you now allow Kano to
collect tax, Kano will not impose VAT on those commodities like
alcohol and those things that are haram. It will enable sharia
compliant states to apply the principles of Sharia but when you put
it in a pool, it is difficult to segregate those that came from
which sources”.

However, Fiscal Policy Partner at PwC, Mr Taiwo Oyedele who also
agreed that consumption tax belongs to states explained “what
happened in 1993 when the VAT law was introduced was the
understanding that the Federal Government had the capacity to
collect. FG was only collecting on behalf of states and then
keeping a percentage to cover the cost of collection. We can debate
on whether the percentage is high or not and that is why they keep
only 15 per cent and 85 per cent goes to states and local
governments.”

VAT was first introduced on August 24, 1993 in replacement of
the Sales Tax or Consumption Tax through a decree that has now
undergone subsequent amendments with the last being in 2020 to
reflect modifications and provide clarifications. VAT is currently
charged at the rate of 7.5 per cent. With some states bent on
imposing other forms of consumption tax, Andersen Tax says
operation of the VAT Act concurrently with the Consumption Tax
creates multiple consumption tax burden on taxpayers and “it is
imperative that a superior court rules on the issue to provide
clarity and certainty on the application of the VAT Act and the
appropriate body (National or State House of Assembly) empowered to
legislate on the taxation of consumption of goods and services.
This is to eliminate the incidence of multiple taxation, a major
disincentive to business.”

There are currently three decisions by Federal High Court in
nullifying VAT legislation and one in favour of it and so, Anderson
Tax opined that the matter will eventually get to the Supreme Court
to determine what will ultimately be the fate of VAT as is
currently administered in Nigeria.

The apex court had rejected a case by Lagos State asking it to
adjudicate on the matter because FHC has original jurisdiction.

A legal practitioner, Mujib Dada-Qadri Esq noted that the FHC,
Port Harcourt ruling “is exciting to some southerners who see their
region of the country as the biggest source of VAT and implying the
North as “parasite”.

So the judgment fits the deepening regional division
unfortunately. It is more unfortunate because the judgment will
attract ethnic biases instead of unbiased and dispassionate legal
analysis.”

According to him, only Lagos, Ogun, FCT and Rivers are the
highest contributors of VAT.

“This is a slap in the face of other states whether in the south
or north that are being sustained largely by the contributions of
just four or five states” and said it was too early for anyone to
jubilate because statutory interpretations can be tricky.

“The concurrent legislative list as provided for in the 1999
constitution does not exclusively grant “state government” ultimate
authority, concurrent list empowers the National Assembly and state
assemblies.