EFFECTS OF THE FEDERAL HIGH COURT’S DECISION IN AG RIVERS STATE V. FIRS & ANOR ON OTHER STATES
The Rivers State House of Assembly passed a VAT bill in response to the Honorable Court’s Judgement, and the State Governor later signed the bill into law on August 19, 2021. The Rivers State Board of Internal Revenue is given authority to impose, assess, and collect Value Added Tax from all taxable individuals and businesses in the state by Section 7 of the new law. As the rate to be charged as Value Added Tax in the state, the new law maintains the 7.5% threshold applicable under the VAT Act. The new Rivers State VAT Law, however, allocates 70% of the total VAT collected for the State, while 30% will go straight to the Local Government, in contrast to the sharing formula available under the VAT Act. The law contains no provisions for the federal government. Certain goods and services, including essential food items, medical and pharmaceutical products, books and educational materials, fertilizers, and farming equipment, are excluded from paying VAT under the law.
In a similar vein, the Lagos State Government passed its own Value Added Tax Law, in 2021, in response to the Rivers State Government’s victories before the Federal High Court. The Lagos State Internal Revenue Service has the same authority to administer the law, determine assessments, and collect the value-added tax as its equivalent in Rivers State. The Lagos State VAT Law fixes the rate at 6% on the value of goods and services as specified in the Law, in contrast to the VAT Act and VAT Law of Rivers State. Additionally, the law requires that all taxable individuals and businesses in the State register with the Lagos State Internal Revenue Service within six months of the law’s passage or the start of operations, whichever occurs first. Any taxable person who fails to register is in violation of the law, which carries a punishment of N50,000 for the first month of delinquency and N100,000 for each successive month. If the default still exists after 3 months, a court application must be made to have the location where the taxable person conducts their business sealed up.
The judgment by the Federal High Court regarding the VAT law has the implication that it will not only be lawful in Rivers State but also in any and every state throughout the nation that chooses to follow suit. More states, especially those that contribute a sizable amount of VAT to the Federation Account, might be persuaded to pass their own versions of the VAT Law in order to, primarily, allow their state’s Internal Revenue Service to assess and manage the Value Added Tax rather than the federal Inland Revenue Service. This will give the States total control over the money collected in value-added tax. However, the inability of some states to collect VAT revenues, the difficulty in auditing compliance, and the higher cost of collection, particularly in states that rely on consultants and other agency structures for tax collection, could, nevertheless, have a severe influence on the positions of all states.
Additionally, when enacting VAT laws in their states, states with existing consumption tax laws, like Lagos and others, would have to repeal those laws because to do otherwise would result in legislative double taxation, a claim that the Supreme Court has already refuted in the case of A.G. Lagos State v. Eko Hotels.
Local governments will also suffer since states set lower rates for sharing VAT money with local governments—Rivers sets a rate of 30%, Lagos sets a rate of 25%—instead of the 35% set by the federal government under the VAT Act. This would have an obvious effect in states with very low levels of VAT. It is important to keep in mind that a central filing system has been implemented, which means that businesses currently file and submit their VAT centrally based on the location of their head office. Consequently, this effect might be used to argue that the VAT attributable to Lagos State has been exaggerated to a certain extent.