As the September 2021 deadline when businesses are expected to file Value Added Tax claims draws close, DEBORAH TOLU-KOLAWOLE writes on how the battle for the control of taxes is making the Federal Government uneasy in the fight to save a huge part of its projected revenue
On August 8, 2021, a Federal High Court in Port Harcourt issued an order restraining the Federal Inland Revenue Service from collecting Value Added Tax and Personal Income Tax in Rivers State.
In its ruling, the court directed the Rivers State Government to take charge of the collection of both taxes.
The Rivers State Government had earlier filed a case in suit number FHC/PH/CS/149/2020 against the FIRS and the Attorney General of the Federation over demands, threats and intimidation of the state residents to pay the PIT and VAT by the tax agency.
The state government had sought 11 reliefs from the court. These include a declaration that the power of the Federal Government to delegate the collection of taxes could only be exercised by the state government or other authority of the state and no other person, according to provisions in part II (concurrent legislative list) of the Second Schedule of the 1999 Constitution as amended.
The court, presided over by Justice Stephen Pam, dismissed the preliminary objections filed by the defendants that the court lacked jurisdiction to hear the suit and, as such, the case should be transferred to the Court of Appeal for interpretation.
Pam said after a diligent review of the issues raised by both parties, the plaintiff had proved beyond reasonable doubt that it was entitled to all the 11 reliefs sought in the suit.
He, therefore, granted all the reliefs sought for by the state, explaining that there was no constitutional basis for the FIRS to demand and collect VAT, Withholding Tax, Education Tax and Technology Levy in Rivers State or any other state of the federation. The court further declared that the defendants were not constitutionally entitled to charge or impose levies, charges or rates, under any guise or by whatever name called, on residents of Rivers State and any state of the federation.
Following the ruling, the Lagos State Government asked the FIRS to stop giving demand notices for the payment of VAT in the state and to render account, within seven days, of all sums collected as VAT in the current accounting cycle in the state.
VAT Act in Nigeria
The 2020 journal of a law firm, Banwo and Ighodalo, stated, “The FIRS clarifies changes introduced to Nigerian VAT regime by the Finance Act, 2019.”
The firm defined the VAT as one of the seven principal statutes amended by the Finance Act, 2019 as being a tax chargeable on the supply of all non-exempt goods and services.
It stated, “The Value Added Tax Act was one of the seven principal tax statutes amended by the Finance Act, 2019.
“Being a tax chargeable on the supply of all non-exempt goods and services, VAT affects more transactions than other taxes and, consequently, attracts wide interest. The Finance Act increased the applicable VAT rate in Nigeria from the five per cent (specified in the VAT Act) to a new rate of 7.5 per cent.”
The firm further highlighted criteria for goods and services for VAT purposes.
It stated, “The Finance Act further provides that goods shall be deemed to be supplied in Nigeria for VAT purposes if: (i) The goods are physically present in Nigeria at the time of supply, imported into Nigeria for use by a person, assembled in Nigeria, or installed in Nigeria;
“(ii) The beneficial owner of the rights in or over the goods is a taxable person in Nigeria and the goods or right is situated, registered or exercisable in Nigeria. Similarly, services are deemed to be supplied in Nigeria for VAT purposes if: (i) The services are rendered in Nigeria by a person physically present in Nigeria at the time of service provision, or (ii) The services are provided to a person in Nigeria, regardless of whether the services are rendered within or outside Nigeria.
“VAT is chargeable on goods (including tangible or intangible property) and articles of trade; VAT is chargeable on rights in goods or property (such as rights in mineral resources, copyrights, and trademarks);
“VAT is chargeable on property (movable or immovable) such as assets, motor vehicles, oil wells, rigs, aircraft, ships, buildings, roads, jetties, or any other type of property; VAT is chargeable on services rendered in Nigeria by a person physically present in Nigeria at the time of providing the service;
“VAT is chargeable on services provided to a person in Nigeria, regardless of whether the services are rendered within or outside Nigeria; VAT is chargeable on services performed in Nigeria to persons in Nigeria, irrespective of the residence status of the service provider;
“VAT is chargeable on services provided to persons while in Nigeria regardless of the medium of delivery of the services; VAT is chargeable on services rendered remotely, online, or by virtual means to Nigerian residents or persons in Nigeria; and services rendered to and consumed by a Nigerian resident while physically outside Nigeria are not liable to VAT in Nigeria.”
In Nigeria, the VAT Act mandates all taxable persons to register with the FIRS for VAT purposes upon the commencement of business or face the prescribed penalties.
Gainers of the VAT Act
The Chairman of the FIRS, Muhammad Nami, in a document submitted to the joint Senate committees working on the 2022-2024 Medium Term Expenditure and Fiscal Strategy, which was exclusively obtained by The PUNCH, revealed that the agency projected to raise N2.44tn from both import and non-import VAT in 2022.
The breakdown showed that the agency was targeting N1.83tn from non-import VAT and N610.45bn from the Nigeria Customs Service’s import VAT. The agency also proposed to raise about N2.67tn from both sources in the 2023 fiscal year. The breakdown also showed that the agency was targeting N2tn from non-import VAT and N668.31bn from the NCS import VAT.
The projection for 2024, according to the document, however, shows that the FIRS hopes to realise N2.94tn in the fiscal year from VAT.
Based on the breakdown, the agency is targeting N2.2tn from non-import VAT and N668.31bn from the NCS import VAT.
In Nigeria, VAT is collected by the Federal Government through its agency, the FIRS, which means that all the 36 states of the federation and the Federal Capital Territory pay VAT to the Federal Government through the pooling together of resources, which according to a professor of Applied Economics, Godwin Owoh, continually fuels idleness and leaves the country continually poor.
He told The Guardian, “VAT is a consumption tax, and you cannot consume in proxy. I cannot eat bread in Enugu on behalf of somebody in Lagos. So, VAT should be location-specific, which is the intention of the Constitution.
“Some states in the country forbid alcohol consumption. So, why should a state allow the consumption of alcohol and bear the consequence, while the proceeds of the sale of the commodity are shared to another state that does not allow its consumption?
“Pooling VAT together to share among the states will continue to fuel idleness and leave the country perpetually poor. State governments can only be motivated to support an increase in economic activities if they take charge of the proceeds.”
A professor of Economics and Public Policy at the University of Uyo and Chairman, Foundation for Economic Research and Training, Akpan Ekpo, said, “Technically, VAT is the old sales tax, which should be collected by state governments. There should not be any controversy about it. The Federal Government has, over the years, settled for juicy and buoyant taxes, which should not be.”
Federal Government kicks
The Federal Government, as expected, kicked against losing a big chunk of its projected revenue, especially after it suffered a revenue shortfall of N1.76tn in the first half of the year.
A revenue performance report obtained from the Budget Office of the Federation revealed that the Federal Government’s projected revenue for 2021 was N7.9tn, of which N3.9tn was earmarked as pro rata target for the first six months.
As of June, the government had only generated N2.3tn, indicating a revenue gap of N1.8tn.
It was also realised that in the same period, the Federal Government generated N512.25bn as VAT revenue. This was against N496.39bn generated in the first quarter and N327.2bn generated in the second quarter of 2020.
The National Bureau of Statistics said the manufacturing sector generated the highest amount of VAT with N44.89bn and closely followed by professional services, which raked in N29.3bn. The commercial and trading sector generated N21.96bn, while textile and garment industry generated the least and closely followed by pioneering and pharmaceutical, soaps and toiletries with N77.74m, N169m and N188.71m, respectively.
If the Lagos State Government, for example, perfects its books for the collection of VAT and follows it up by collecting the tax directly, then the state’s Internally Generated Revenue and annual revenue will experience a huge boost.
A former Minister of Finance, Mrs Kemi Adeosun, had revealed that 55 per cent of the VAT revenue in 2017 was collected in Lagos State. This meant that of the 55 per cent of the N763bn that the Federal Government realised from local VAT in 2020, Lagos might have contributed over N400bn last year alone.
In 2020, it was recorded that Lagos generated N418.99bn as IGR and got N115.93bn as federal allocation. So, if the state starts collecting VAT, its IGR may exceed N1tn.
The FIRS, in a desperate bid to retain the collection of VAT, wrote to the National Assembly to seek the inclusion of VAT collection in the exclusive legislative list.
The federal tax agency also requested the lawmakers to approve for it the establishment of the Federal Revenue Court. A copy of the letter dated July 1, 2021, which was obtained by The PUNCH and signed by the FIRS boss, was addressed to the Chairman of the Constitution Review Committee, who is also the Deputy Speaker of the House of Representatives, Idris Wase. The letter had reference number FIRS/EC/CWREP/0416/21/037 and was received in Wase’s office on July 2, 2021.
It was titled, ‘Request for sponsorship of a bill for the establishment of the proposed Federal Revenue Court of Nigeria and the insertion of Value Added Tax under item 58 of the exclusive legislative list’.
The letter read in part, “The Federal Inland Revenue Service further proposes the amendment of Section 251 (1) (b) of the Constitution of the FRN, 1999 (amended) by removing the exclusive jurisdiction of the Federal High Court only on anything connected or related to federal tax matters since same would be vested in the proposed Federal Revenue Court.
“The Federal Inland Revenue Service also proposes for the insertion of Value Added Tax immediately after Stamp Duties under Item 58 Part II of the 2nd Schedule of the 1999 Constitution of the FRN.
“The Federal Inland Revenue Service appreciates the maximum cooperation and support we are receiving from your good office on tax matters generally.”
The Executive Chairman, FIRS, also said that the agency had appealed the judgment and filed a stay of execution, advising the public to maintain the status quo on the payment of taxes.
Nami said, “The instant judgment of the Federal High Court, Rivers State, is in conflict with the extant judgment of the Federal High Court, Kogi State, on the same subject matter i.e. the validity of the VAT Act as administered by the service.
“The conflict created by the later judgment can only be resolved by the appellate court; and the right of the appellate court in this wise should not be compromised. In view of the foregoing, parties have to maintain the status quo ante (i.e. their positions before the instant judgment of the Federal High Court, Rivers State).
“The FIRS shall continue to collect VAT and administer the VAT Act until the final resolution of the legal dispute by the relevant appellate court.”
Position of the law
A former Vice-President of the Nigerian Bar Association, Monday Ubani, argued that the Federal Government had no reason to continue to insist on the collection of VAT as doing so would amount to a contravention of the Federal High Court judgment.
Ubani, who was a guest on PUNCH Live on, added that the FIRS could not ask Nigerians to continue paying VAT to the Federal Government when the judgment giving states the power to do so had not been upturned.
He added, “The law is that states should collect VAT. That is the import of the court judgment. The attempt (of the Federal Government) to stay execution was defeated. It failed woefully. So, the position of the law today is that the states have the right and authority to collect VAT. Until that decision is reversed, the law stands.
Ubani said the court order was a positive development, especially with regards to fiscal federalism and restructuring, which many states had been clamouring for.
The former NBA vice-president added that since the Federal Government had failed to promote fiscal federalism, states had begun attaining it through legal means, which was commendable.
He stated, “I am sure this matter will end up at the Supreme Court. We are all waiting to see the legal jurisprudence that will emanate from this very innovative case. It is something that all of us are looking forward to. But for now, the Federal Government is advised to respect that decision.
“They shouldn’t give an impression that they are lawless, they don’t listen and they don’t obey court orders. That shouldn’t be the perception that the Federal Government should give. It gives a wrong impression. The world has become a global village and is watching. And if the government does not respect courts, then there is a problem. So, I will advise the FIRS to obey the court order.”
Similarly, a Senior Advocate of Nigeria, Mike Ozekhome, while reacting to the move by the FIRS in the letter addressed to the National Assembly, said, “VAT is ideally a matter within the residual legislative list of states. It is a consumption tax collected by producers and manufacturers of goods and is then passed on to the ultimate consumers.
“Why, in a federal system of government, such as we operate, should a state that harbours industries and companies lose the consumption tax to the Federal Government, which is a central government? It makes no sense at all. If the National Assembly makes the mistake of legislating on and including VAT as a matter within the exclusive legislative list, it can be lawfully challenged in a court of law. All the state attorneys-general should join hands together and sue on behalf of their various states.
The struggle over VAT has brought to the fore once again the struggle for true fiscal federalism amid paucity of funds in states.
All rights reserved. This material, and other digital content on this website, may not be reproduced, published, broadcast, rewritten or redistributed in whole or in part without prior express written permission from PUNCH.
Contact: [email protected]