By Okoro Chinenye Elizabeth

Introduction

There is probably no tax that has generated as much controversy as Value Added Tax (VAT) in Nigeria. The reason for this seems to be that given its indirect nature, VAT can be said to be the most effective means of taxing every Nigerian. It is hard to evade because it is charged on goods and services, and it is relatively easy to administer and collect. In 2021, VAT accounted forN2.07 trillionof revenue raised in Nigeria, which is a35.4% increase from N1.53 trillion recorded in 2021.[1]

The FIRS is empowered by law to administer and collect VAT in Nigeria[2]. The VAT is shared between the federal government, state governments and local governments in the following order- Federal Government 52.68%; State Governments 26.72%; Local Governments 20.60% and Derivation Formula 13%[3]. Over the years, different state governments have opposed the collection, and onward redistribution of VAT by the federal government to various states for different reasons. It has been argued that the federal government has no power to collect VAT, and VAT should be managed by the states where they are collected as is expected in a true federal state. As of today, the question- who has the power to collect VAT? remains a valid one before the courts. We shall analyze the notable cases that have contributed to the development of VAT in Nigeria, as well as the case of Attorney General of Rivers State vs. Federal Inland Revenue Service& Attorney General of the Federation[4] which is still before the court, and we will canvas the need for the current structure to be modified to reflect a true federal state.

Case analysis

In AG Ogun State V Aberuagba[5], the House of Assembly of Ogun State enacted the sales tax law in 1982 which imposed a tax on the purchase of specified goods and services and made provisions for the collection of the same. The respondents as plaintiffs, who were wholesale purchasers of beer in Ogun State sought a declaration for themselves and on behalf of wholesale purchasers in the state, that some provisions of the sales tax were inconsistent with the provisions of the constitution. The matter was later referred to the Court of appeal where the constitutional validity of the law was determined. The appellant/defendant was dissatisfied with the decision of the Court of Appeal and appealed to the Supreme Court.

At the Supreme Court, the constitutional validity of sales tax imposed by the Ogun state House of Assembly was deliberated. The Supreme Court held that the Federal Government had the power to make laws with respect to international trade, commerce and interstate trade (item 61(a-f) of the constitution), while the States havethe power to impose tax on all matters in the concurrent list and residuary matters subject to the rule of inconsistency under section 4(5) of the constitution. However, sinceby section 3 of the Ogun State Sales Tax Law, the tax was only chargeable on the products brought into Ogun state from another state or from outside Nigeria, it follows that the tax was a discriminatory tax directed against inters state or international trade and commerce which are within the exclusive regulatory power of the Federation under item 61(a) of the constitution. Based on this, the Supreme Court declared the law unconstitutional.

In Nigerian Soft Drinks Company Limited V Attorney General of Lagos State[6], the Court of Appeal considered the constitutional validity or otherwise of the Sales Tax Law of Lagos State. The action was commenced at the High Court of Lagos State by the Nigerian Soft Drinks Company Limited, challenging the constitutional validity of Lagos state sales tax law as being a piece of legislation which infringes the provision of Item 61 of the Exclusive Legislative List, in that it imposes tax on interstate trade and commerce which falls under the exclusive reserve of the Federal Government. The trial court held that the Lagos State Sales Tax Law was constitutionally valid. Nigerian Soft Drinks Company Limited appealed the decision of the trial court and on appeal, the matter was stood over by the court of appeal pending the outcome of the decision of the supreme court in the case of A.G Ogun State v Aberuagba.

The Court of Appeal per Ademola, JCA held that the Sales Tax Law of Ogun State was held to be invalid in Aberuagba’s case because Sections 3(1) and 3(4)(ii) of the Ogun State Sales Tax Law imposed tax on taxable products brought into the state which is a matter of inter-state trade and commercewithin the exclusive legislative power of the Federation. The court, in making a distinction between both laws stated that under Section 2 of the Lagos State Sales Tax Law, the persons liable to pay the tax are purchasers or consumers of any of the taxable commodities listed in the schedule to the law. Thus, the incidence of the tax is not upon the goods but upon the persons, whereas under the Ogun State Sales Tax Law, the incidence of the tax is upon the goods brought into the State.Where the incidence of the tax is on the goods brought into the State, that amounts to imposition of excise duty on those goods and would have the effect of interference with interstate trade and this would be contrary to Item 61(a) of the 1979 Constitution. Section 2 of the Lagos State Sales Tax Law which provides that every purchaser or consumer of any of the chargeable commodities listed in the schedule shall be liable to pay Sales Tax at the time of the purchase or at the time of consumption is not an exercise of power with respect to trade and commerce in Item 61 of the Exclusive Legislative List and therefore is constitutional.

Attorney-General Lagos StateV. Eko Hotels LimitedandFederal Board of Inland Revenue[7]had a more interesting twist. By an originating summons filed on the 5th day of March 2004, the 1st respondent came by an interpleader proceeding seeking a determination by the Federal High Court as to whether remittance of money collected as tax by it from its consumers should be paid to the Federal Board of Inland Revenue (FBIR) or to the Lagos State Government having regard to the provisions of the Value Added Tax (VAT) Decree No.102 of 1993.

In a considered judgment, the learned trial court held that the Federal High Court had jurisdiction to entertain the suit. It also held that the 1st respondent could only be a “taxable person” or remitting agent in respect of the amount due as tax on its sales to its consumers to a single agency, which is the FBIR (2nd respondent). Dissatisfied with the decision, the appellant (Lagos State) appealed to the Court of Appeal, and after a considered judgment delivered on 13th July 2007 dismissed the appeal and affirmed the judgment of the trial court. The appellant was aggrieved by the decision of the Court of Appeal and further appealed to the Supreme Court.

In reaching its decision, the Supreme Court considered several questions. The court considered whether the above cases of Attorney General of Ogun State v. Aberuagba and Nigerian Soft Drinks Ltd. v. A.-G. Lagos State, cited to the trial court as constituting staredecisis, were authorities that the 1st respondent was obliged to remit proceeds of Sales Tax to Lagos State Government. The apex court held per Kekere-Ekun, J.S.C.that in Aberuagba’s case and Nigerian Soft Drinks ltd case, what was in issue was the validity of the exercise of legislative powers by both the Ogun State House of Assembly and the Lagos State House of Assembly in enacting the Sales Tax Law of 1982. The 1st respondent did not challenge the validity of the Sales Tax Law of Lagos State. Hence, the cases cited have nothing to do with the determination as to which of the two contending parties is entitled to tax already collected under the VAT Act.

The court further held that the goods and services covered by VAT Act and the Sales Tax Law of Lagos state are the same and as such the VAT Act has effectively covered the field in that regard. Thus, even if the Lagos State House of Assembly had the requisite legislative competence to enact the Sales Tax Law, once an existing Federal law or an Act of the National Assembly has covered the field, the Act of the National Assembly or such existing Federal law must prevail. Similarly, the court also held that the Sales Tax Law of Lagos state amount to double taxation, in that, not only do both legislations cover the same goods and services, but they are also targeted at the same consumers.

In a more recent case of Attorney General of Rivers State vs. Federal Inland Revenue Service& Attorney General of the Federation[8],the Federal High Court(“FHC”)sittingin Port Harcourt delivered a judgement that has since heated up the polity. The Plaintiff had, by an Originating Summons, sought the Court’s interpretation regarding the legality of the Federal Government to collect Value Added Tax (VAT). They that the power vested on the Federal Government to make law and demand or collect taxes is limited to the provision in Item 58 and 59 of the Second Schedule. Therefore, the imposition of taxes such as the Value Added Tax (VAT), Withholding Tax, Technology Tax and Education Tax by the Federal Government is ultra vires the powers of the Federal Government and therefore null and void. After due consideration, the court reaffirmed the constitutional powers of the states to legislate on certain tax matters but went further to strip the Federal Inland Revenue Service (FIRS) of the power to collect VAT. More precisely, the court held as follows:

That it had carefully perused the constitution in a bid to discover whether the Federal Government is empowered to impose and collect taxes outside the provisions of items 58 and 59 of the Exclusive Legislative List without success. Therefore, the Federal Government’s power to impose and collect taxes is limited and/or circumscribed to the specie of taxes listed in items 58 and 59 of the Exclusive Legislative List and no other. Thus, the court held that the Federal Government does not have the power to make laws on VAT, Education Tax and Technology Tax since they are outside its taxing power.

That the Taxes and Levies (Approved List for Collection) Act (the “Approved Taxes Act”) is unconstitutional, null and void. The FHC relied on the case of Uyo Local Government Council v Akwa Ibom State Government & Anor[9], where the Court of Appeal nullified the Approved Taxes Act for being inconsistent with the provisions of the Constitution, and consequently declared that any tax or levy contained therein is automatically unconstitutional, null and void – except such tax or levy is expressly provided for in the Constitution or any other law validly enacted by a competent legislature.

Except for corporate income tax, item 7(a)&(b) of the Concurrent Legislative List limits the power of the National Assembly to delegate the power to collect taxes listed in Items 58 and 59 of the Exclusive Legislative List to only State Governments or their agencies thereof. Therefore, any delegation to any other person or entity apart from a State Government or its agency shall be null and void. The implication of this decision is that the National Assembly cannot make law empowering the Federal Government or any of its agents – such as the FIRS – to collect any of the taxes (except companies income tax) listed in items 58 and 59 of the exclusive list.

The Federal Inland Revenue Service (FIRS) has since appealed the judgement of the Federal High Court. The Service implored members of the public to continue complying with the Value Added Tax Obligations.[10]

Fiscal federalism in Nigeria

The crux of all these cases seems to be centred on resource allocation and management as well as fiscal federalism and decentralization, which have remained contentious issues in Nigeria. Fiscal federalism is an economic framework for understanding the relationship among federal, state, and local governments that focuses on the division of spending and taxing powers among these governments[11]. It deals with understanding which functions and instruments are best centralized and which are best placed in the sphere of decentralized levels of government.

Fiscal decentralization and the desire for local discretion and devolution of power is oftenseen as a vehicle to promote good governance and development. The reason for this stems from the fact that it is impossible for the central governments to meet up with the demands of their federating units, therefore it becomes imperative to build local structures that will bring the government closer to the people. The situation in Nigeria is, however, different. The paradox of Nigeria’s fiscalsystem is that it focuses more attention on ‘sharing’ than ‘generating’. In otherwords, increased revenue generation has attracted less attention than revenue sharing[12]. While this has been justified on the grounds of balanced development, fiscal justice and fair play amongst the states in Nigeria, states like Lagos, Ogun and Port Harcourt, who are some of the major contributors to VAT in Nigeria have argued that states should be able to control their internally generated revenue. This is particularly necessary as some Northern States in Nigeria that have implemented Sharia Law and oppose the sales of Alcohol enjoy the Value Added Tax, reaped from such sales in other states. It is our view that true fiscal federalism will foster innovative thinking amongst States in Nigeria, and will result in more autonomous and viable federating units.

The case of Attorney General of Rivers State vs. Federal Inland Revenue Service& Attorney General of the Federationpresents an opportunity for the Supreme court to address the issues of resource allocation and distribution. We subscribe to the recommendation that Since this matter borders more on the interpretation of the Constitution,the appellate court could borrow a leaf from the decision of the Supreme CourtinAberuagba’s case by holding that the state governments have theexclusive power to legislate on VAT matters relating to intra-State transactions; while the FederalGovernment exercises theexclusivepowertolegislateon inter-Stateand international transactions.[13]

[1]Nigeria records highest VAT revenue of N2.07 trillion in 2021. https://nairametrics.com/2022/03/26/nigeria-records-highest-vat-revenue-of-n2-07-trillion-in-2021/
[2] There has been a lot of arguments on the powers of FIRS to collect VAT and the scope of those powers. This will however be addressed in this work.

[3]New Revenue Formula: FG proposes 50. 65% for self, States 25.62, LGs23.73. https://www.vanguardngr.com/2021/11/new-revenue-formula-fg-proposes-50-65-for-self-states-25-62-lgs-23-73/

[4]Unreported judgment of the FHC, delivered by Hon. Justice Stephen Dalyop Pam, on August 9, 2021, in Suit No. FHC/PH/CS/149/2020)

[5] 1985 NWLR (pt. 3)395

[6] 1987 2 NWLR (PT.57) 444

[7](2018) 36 TlRN 1.

[8]Unreported judgment of the FHC, delivered by Hon. Justice Stephen Dalyop Pam, on August 9, 2021, in Suit No. FHC/PH/CS/149/2020)

[9](2020) LPELR-49691(CA)

[10]https://punchng.com/firs-appeals-rivers-high-court-ruling-on-vat-collection/

[11]https://encyclopedia.federalism.org/index.php?title=Fiscal_Federalism

[12]Akpan H. Ekpo1 and AbwakuEnglama, Fiscal Federalism in Nigeria: Issues, Challenges and Agenda for Reform. https://link.springer.com/chapter/10.1057/9780230583191_11

[13]Dr. Jude Odinkonigbo, Attorney General of Rivers State vs. Federal Inland Revenue Service: A Review of the Pros and Cons of this Landmark VAT Decision. https://www.templars-law.com/wp-content/uploads/2021/10/Attorney-General-of-Rivers-State-vs.-Federal-Inland-Revenue-Service-A-Review-of-the-Pros-and-Cons-of-this-Landmark-VAT-Decision-005.pdf