An Overview of the Legal Regime of Value Added Tax 2022

CONTRIBUTED BY CHUKWUEBUKA CHIWETELU

INTRODUCTION

Taxation is the imposition of compulsory levies on individuals or entities by governments. These are levied in almost every country of the world, primarily to raise revenue for government expenditures and ensure income redistribution, targeted towards reducing inequalities in the distribution of income and wealth.

Investopedia defines taxes as mandatory contributions levied on individuals or corporations by a government entity—whether local, regional, or national that finances government activities, including public works and services such as roads and schools, or programs such as Social Security and Medicare[1].

The government as a point of duty, taxes its individual and corporate residents to fund public works and services and to build and maintain the infrastructure used in a country all targeted toward the improvement of the economy and lives of all its citizens[2].

This article will provide an overview of the issues surrounding the VAT and the classes of taxation and its underlying effect.

Classes of Taxation

Generally, taxes and taxation have been categorized into two broad main classes: direct and Indirect taxes.

  1. Direct taxes:

These are taxes on natural persons measured by income, consumption, or net wealth which includes income tax, real property tax, personal property tax, and taxes on assets, all of which are paid by an individual taxpayer directly to the government.

  1. Indirect taxes:

A tax levied on goods and services rather than on income or profits. Generally, these indirect taxes are imposed on suppliers or manufacturers of goods who eventually pass them on to the buyers of goods and services. There are examples of these indirect taxes among them includes sales tax which is levied on the sale of goods; excise tax which consists of special taxes levied on specific kinds of goods; value-added tax which is the tax value added in each production stage of a good or service.

Legal Regime of Value-Added Tax

Value Added Tax is imposed and collected by the government to serve as revenue for the state. This is collected on a product at every stage of its production during which value is added to it, from its initial production to the point of sale.[3]

Value Added Tax was introduced in Nigeria in 1993 by the VAT Act No. 102 of 1993 as a replacement for the sales tax which had been in operation under the Federal government Legislated decree No.7 of 1986 but administered by the states and the Federal capital territory.

This establishment of the VAT Act had since addressed the administrative issues around several challenges for companies with operations across the various States, who were subjected to different sales tax regimes across the country. The major issue at the time was the improper administration of the sales tax across the state.

The introduction of Value Added Tax proved sufficient and a welcomed innovation with the VAT rate introduced at 5%, which it consistently maintained despite several clamours and proposals for its change. However, with the inception of the Finance Act 2021, the VAT rate currently stands at the rate of 7.5% payable by individuals, companies, and government agencies.

Furthermore, the legislation on taxation in Nigeria has proven to be a controversial topic of discussion. In Nigeria, tax administration is carried out by the three tiers of government, namely; the Federal Government, the thirty-six States of the Federation and the Federal Capital Territory, and the various Local Governments, through the machinery set up by the respective government.

Nigeria as a federal state ensures that there is a division of law-making powers and functions between the various levels of Government. This division which truly and without a doubt encapsulates the true meaning of federalism was also eloquently put by the Supreme Court in A.G. Federation v. A.G. Lagos State[4] where it was held that:

Federalism is an arrangement whereby powers of government within a country are shared between a national, countrywide government and a number of regionalized (i.e., territorially localized) governments in such a way that each exists as a government separately and independently from others, operating directly on persons and property within its territorial area, with a will of its own and its own apparatus for the conduct of its affairs. Federalism is thus essentially an arrangement between government, a constitutional device by which powers within a country are shared among two tiers of government“.

A clear portrayal of this concept is shown in the provisions of Section 4(1) of the Constitution which provides that the legislative powers of the Federal Republic of Nigeria are vested in the National Assembly for the Federation and section 4(6) vests the legislative powers of a state in the House of Assembly of that State. Pursuant to these provisions the constitution further provided for an exclusive legislative list, a concurrent legislative list, and a residual legislative list.

These lists generally provide for what items the Federal Government or State Government may legislate on. For instance, the exclusive legislative list contains 68 items on which only the Federal Government of Nigeria can legislate while the concurrent legislative list, provides that either the National or the State legislature may legislate on items in the list, and finally, the residual legislative list which contains any other items not stated in the exclusive legislative list or the concurrent legislative list automatically becomes exclusively within the jurisdiction of the State Legislature to legislate upon on.

Taxes/Taxation as an item is included in the legislative list and could be easily found in items 58 and 59 of Part I of the Second Schedule to the constitution which deals with the exclusive legislative list on which only the Federal Government may legislate. These items 58 and 59 provide for the Federal Government to legislate on Stamp duties and Taxation of incomes, profits, and capital gains, except as otherwise prescribed by the Constitution.

As well as the issue of Taxes being found in the Exclusive legislative list, Items on taxes could also be conveniently sought and found in items 7 and 8 of Part II of the Second Schedule to the constitution which deals with concurrent legislative list and provides that the Federal or State legislature may legislate as follows:

To impose any taxes or duties on-

(a) capital gains, incomes or profits of persons other than companies; and

(b) documents or transaction by way of stamp duties; the National Assembly may, subject to such conditions as it may be prescribed, provided that the collection of any such tax or duty or the administration of the law imposing it shall be carried out by the Government of a State or other authority of a State.

Where an Act of the National Assembly provides for the collection of tax or duty on capital gains, incomes, or profit or the administration of any law by an authority of a State in accordance with paragraph 7 hereof, it shall regulate the liability of persons to such tax or duty in such manner as to ensure that such tax or duty is not levied by more than one State.’’

In furtherance of the above provisions of the constitution, the Federal Board of Inland Revenue Service was created and pursuant to Sections 7-11 of the VAT Act which provides for the administration of VAT with Section 7, vesting the administration of VAT on the Federal Board of Inland Revenue the FIRS thus is placed with the power to administer the collection of VAT from taxable persons in Nigeria to the exclusion of certain goods and services including medical and pharmaceutical products, medical services basic food items, books, and educational materials, all exempt from VAT.

The provision of section 7 of the VAT Act proved to stir the pot of controversy and has in recent times proven to be the subject of litigation. An in-depth analysis of items 58, 59 and 7, and 8 of Part I and Part II of the Second Schedule to the Constitution shows that the obligation imposed on the federal government to legislate on taxes does not extend to Value Added Taxes as there is no express mention of VAT as an Item in either the exclusive legislative list or the concurrent legislative list and thus making the ascribed powers of the FIRS by virtue of section 7 of the VAT ACT to centrally administer the collection of VAT questionable. A proposition has been made by the various state government that the exclusion of the VAT from the exclusive list and concurrent legislative list, therefore, empowers the state government to exclusively legislate on the matter of VAT.

A plethora of cases have thus emanated from this controversial position and the decisions of the courts continue to differ. In A.G Lagos State v Eko Hotels Ltd,[5] the Court had held that the VAT Act had covered the field of Sales Tax, thus, the VAT Act applies to invalidate any legislation made by the state on the same or similar subject matter. However contrary to this position and in more recent times is the case of A.G Rivers State v. FIRS.[6] Where the Federal High Court provided a literal interpretation of the Constitution of the Federal Republic of Nigeria, 1999 as amended, holding that the National Assembly is only empowered to enact laws in relation to stamp duties and the taxation of income/profit and capital gains. In furtherance, the court also held that pursuant to the Constitution, the Federal Government or any of its agencies, lacks the powers to impose and collect VAT, or any other tax not specifically provided for in the Constitution.

Consequently, it appears to be the current position on VAT is therefore that the state may to the exclusion of the federal government, or its agencies legislate on VAT as well as administer its collection flowing from the most recent case of A.G Rivers State v. FIRS. Many have however raised concerns as to the practicability of the administration of VAT at the state level with respect to the taxation of non-residents of the states, the treatment of output

CONCLUSION

The legal regime of the Value Added Tax in Nigeria has proven to be one of the chequered patterns, with no clear sense of what tier of the government has the legitimate claim over the other in its powers in legislating on the matter. The recent case of A.G Rivers v FIRS is one yet to reach finality and is currently on Appeal. However, not until the Apex Court rules on this daring issue, the law remains as the principle of stare decisis and case law remains sacrosanct, VAT belongs within the purview of the Residual legislative list and in turn, the state government reserves the exclusive right to legislate and administer the control and collection of taxes across their respective states.

Key terms: Value Added Tax, VAT, Taxation, Tax Legislation.

  1. https://www.investopedia.com/terms/t/taxes.asp
  2. https://www.britannica.com/topic/taxation
  3. https://www.lawyard.org/opinions/overview-of-the-administration-of-value-added-tax-in-nigeria-by-moshood-yahaya/
  4. (2013) LPELR-20974(SC) P.93 , paras A-G
  5.  (2018) 36 TLRN1
  6. Suit No: FHC/PH/CS/149/2020

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