The Taxing Power of the Federal Government for Value-Added Tax

CONTRIBUTED BY UDOKA JANET ESQ.

INTRODUCTION

Value Added Tax (VAT) is a consumption tax chargeable on the value added to a product in the process of production. It is also a tax that targets the final consumer of goods and services whose main purpose is to increase government (federal, state, and local) revenue from the non-oil sector thereby reducing the government’s dependence on oil revenue majorly.

In accordance with Section 4 of the VAT Act, every taxable person is required to collect tax at the rate of 7.5% of the value of the goods and services supplied and the tax so collected is the output VAT^[1]. The administration of VAT in Nigeria is vested in the Federal Inland Revenue Service (FIRS), which is the agency of government responsible for the assessment, collection, accounting, and enforcement of taxes. In the case of AG Lagos state v Eko Hotels Ltd & Federal Board of Inland Revenue, the Supreme Court held that where a law made by the federal government has covered the field of state law, the federal law prevails in the event of inconsistencies between both laws, thereby rendering the state law null, void to the extent of the inconsistency.

The collection of Value Added Tax (VAT) has become a contentious issue in Nigeria, sparking debates and legal battles between the Federal Government and state governments. This article delves into the intricate landscape of this dispute, focusing on the landmark decision of the Federal High Court in the case of AG Rivers v FIRS & Anor. The court’s judgment on this matter not only has far-reaching implications for tax jurisdiction but also sheds light on the complexities of fiscal federalism. This article examines the key aspects of the court’s decision and highlights potential areas where the judgment may be open to scrutiny.

OVERVIEW OF THE FEDERAL HIGH COURT’S DECISION IN AG RIVERS V FIRS & ANOR

In a lawsuit filed in Port Harcourt, Rivers State, against the Federal Inland Revenue Service and the Attorney General of the Federation, the Rivers State Government requested that the Federal High Court put an end to the debate surrounding the Federal Inland Revenue System’s (“FIRS”) ability to collect Value Added Tax, Withholding Tax, Education Tax, and Technology Levy on behalf of the Federal Government.^[2]

The Parties presented their different arguments in support of their viewpoints while exchanging processes. The Court considered these arguments and the procedures at hand, and after being persuaded by the arguments made on behalf of the Plaintiff by the Attorney General of Rivers State, it held that the State, and not the Federal Inland Revenue Service, is authorized to impose and collect VAT, Withholding Tax, Education Tax, and Technology Levy. As the first and second defendants in the case, the court issued an order of perpetual injunction prohibiting FIRS and the Attorney General of the Federation from levying, requiring, threatening, or forcing Rivers State people into paying the aforementioned taxes to FIRS. The Court further ruled that the Exclusive Legislative List under the Constitution of the Federal Republic of Nigeria 1999 (as amended) does not include the authority to act on Value Added Tax, hence this does not fall under the purview of the National Assembly’s legislative authority.^[3]

POTENTIAL PROBLEMS WITH THE JUDGMENT

Even to supporters of fiscal federalism, the FHC’s Judgement on this topic initially seems sound; yet, a thorough examination of it reveals that there are gaps that were not adequately filled. Some of them include:

1. Failing to differentiate between intra-state transactions and those that are interstate or international.

The FHC did not distinguish between intra-state transactions on the one hand, and inter-state or international transactions on the other, in its judgement that the National Assembly has the authority to impose or collect VAT in Rivers State, or any other State for that matter. Attorney General of Ogun State v. Aberuagba,^[4] a case involving the taxing authority of a State Government over intra-state, inter-state, and foreign transactions, was decided by the Supreme Court. The Supreme Court ruled, among other things, that a State Government was only constitutionally authorized to levy a sales tax – a consumption tax – on intra-state transactions. It clearly stated that a State could not levy a sales tax on interstate or international transactions, which were solely assigned to the Federal Government in item 61 of the Exclusive Legislative List (i.e., the “trade and commerce clause”) under the 1979 Constitution – now item 62 of the Exclusive Legislative List, Part 1 of the Second Schedule to the 1999 Constitution. The Supreme Court overturned Ogun State’s tax statute, which placed a sales tax on interstate and international transactions. With its decision, which is still the law, the FHC fell short in extending the scope of its judgment to inter-state and international transactions, none of which was within the authority of a State Government.

1. Failure to recognize that withholding tax is a means of tax collection rather than a form of taxation.

In this instance, the FHC did not interpret withholding tax as a form of taxation, treating it as a separate head of tax from personal/corporate income taxation and/or other kinds of taxation. It is worth noting that the FHC included Withholding Tax as one of the taxes that the Federal Government is not permitted to collect because it is not specified in items 58 and 59 of the Exclusive List. This demonstrates a lack of grasp of Nigeria’s tax regime. Withholding Tax is not a type of taxation, but rather a method of collecting taxes in advance. The goal of withholding tax is to ensure that taxpayers’ earnings subject to income tax are recorded early to reduce the likelihood of tax evasion. As a result, a purchaser of goods and services subject to withholding tax is authorized to deduct the applicable rate from a supplier’s invoice and remit the withheld amount to the appropriate tax authority, which will issue a withholding tax credit note to the supplier, who will use the credit note to recover the withheld amount by deducting it from its/his/her income tax liabilities. Given that corporate income tax is not one of the taxes delegated to state governments, there is no reason to prevent the federal government from collecting advanced corporate income tax through the mechanisms of withholding tax.

1. Is it right to claim that item 7(a) & (b) of the concurrent list restricts the National Assembly’s ability to exercise its powers under items 58 and 59 of the exclusive list by allowing only state governments or their agencies to be given the authority to collect the enumerated taxes.

According to the FHC’s interpretation of items 7(a)& and (b) of the Constitution, the National Assembly could only provide a State Government or its agency the authority to collect certain taxes while acting in accordance with items 58 and 59 of the Exclusive List. This viewpoint is faulty. First off, the collection of companies’ income tax is not permitted by any state government or its revenue collection organization. Second, the authority mentioned in items 7(a) and (b) is optional and may or may not be used. The law stipulates that the National Assembly shall regulate the circumstances in which the taxes may be collected in addition to being optional. In addition, only the new tax heads indicated in items 58 and 59 of the Exclusive List are mentioned in the concurrent list. The concurrent list, which does not generate a new head of tax, cannot restrict the use of the taxing powers mentioned in the Exclusive List. It is not unexpected at all that the Federal and State Governments are given equal authority to collect personal income tax under Section 2 of the Personal Income Tax Act. The Nigerian Police Force, Army, Navy, Air Force, Nigerian Foreign Service officers, and non-residents of Nigeria who get income from anywhere in Nigeria are all subject to personal income tax collection by the Federal Government.

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.^[5] 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.^[6] 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.^[7] 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.^[8] 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.^[9] 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.^[10]

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.^[11]

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.^[12] Consequently, this effect might be used to argue that the VAT attributable to Lagos State has been exaggerated to a certain extent.^[13]

Conclusion

In conclusion, as the VAT debate continues to evolve, it is imperative for stakeholders, legal experts, and policymakers to engage in thoughtful discussions that address the intricacies of tax jurisdiction, constitutional mandates, and the fiscal well-being of both federal and state entities. The need for a harmonious tax framework that respects the principles of federalism while ensuring a steady flow of revenue remains a paramount concern. Ultimately, a balanced and informed approach will be crucial in navigating the complexities of VAT collection in Nigeria while safeguarding the interests of all levels of government and the nation as a whole.

1. Section 4 VAT Act Cap. V1, LFN 2004 ↑
2. O Oluwafemi, M. Olawoyin and A. Olowolabi, Value Added Tax (Vat): The Implications of the Judgment of the Federal High Court in AG Rivers State v. FIRS & Anor. Available at http://tundeadisa.com/2021/09/21/value-added-tax-vat-the-implications-of-the-judgment-of-the-federal-high-court-in-ag-rivers-state-v-firs-anor/ Accessed 15^th August 2023 ↑
3. Ibid ↑
4. (1985) 1 NWLR (Pt 3) 395, 405. ↑
5. The law is to be known as “Rivers State Value Added Tax Law No 4 of 2021” ↑
6. Section 35 of the VAT Law of Rivers State. ↑
7. Section 7 of the VAT Law of Lagos State. ↑
8. Section 4 of the VAT Law of Lagos State. ↑
9. Section 8 of the VAT Law of Lagos State. ↑
10. Section 8(3) of the VAT Law ↑
11. (2017) LPELR-43713(SC) ↑
12. Taiwo Oyedele, ’How to fix Nigeria’s broken Tax system’ (PwC, 11 September 2021) <www.pwcnigeria.typepad.com/tax_matters_nigeria/> accessed 15^th August 2023 ↑
13. Ibid at 10 ↑