AN OVERVIEW OF THE LEGAL REGIME OF VALUE ADDED TAX 2022

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] ^[1]

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 increased  to 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] ^[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. 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.

 On 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 the 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 in pursuance of/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  is thus 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, 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 governments that the exclusion of  VAT from the exclusive list and concurrent legislative list,  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] ^[8] the Court had held that the VAT Act had covered the field of sales tax, thereby  invalidating 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] ^[9]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 states 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.