Between The Federal Government And The Rivers State Government Who Is Constitutionally Empowered To Impose And Collect Value Added Tax: A Legal Opinion On The Recent Judgment In Attorney General Of Rivers State V Federal Inland Revenue Service

By Arekhandia Zebedee

The recent judgment of Honourable Justice S. D. Pam of the Federal High Court, Port Harcourt Division, in the case of AG Rivers State v FIRS & Anor[1] has generated a lot of legal commentaries. The judgment is novel because the suit from which it arose is the first case where a State Government in Nigeria would challenge the constitutionality and validity of the Federal Government to impose and collect Value Added Tax (VAT). Preceding cases that had been decided by the Nigerian Courts on VAT were not on the constitutionality and validity of VAT.
For instance, in Manufactureres’ Association of Nigeria v. The Attorney-General of Lagos State & Anor[2], it was the constitutionality of Lagos State Sales Tax Law (in view of the VAT Act on the same area), that was challenged and the suit was initiated by aggrieved tax payers. Also in Lagos State Board of Internal Revenue v Nigerian Bottling Company & Anor[3] and AG Lagos State v Eko Hotels Ltd & Anor[4], it was the constitutionality of Lagos State Sales Tax Law (also in view of the VAT Act on the same area), that was challenged and the suits were also initiated by aggrieved tax payers. Although in the case of Manufactureres’ Association of Nigeria v. The Attorney-General of Lagos State & Anor the Hon. Justice O.M. Falase of the Lagos State High Court declared VAT as unconstitutional and ultra vires the Federal Government[5], the suit cannot be said to be on all fours with the instant case of AG Rivers State v FIRS & Anor because the parties and issues are not the same.

It is germane to state here that since VAT was enacted via the VAT Decree of 1993, there have been agitations and protests by State Governments in Nigeria over the unilateral imposition and collection of VAT throughout Nigeria by the Federal Government. The reason for the opposition by State Governments is based primarily on the fact that the VAT Decree of 1993 repealed the Sale Tax Act of 1986, which hitherto vested the State Governments with the powers to administer and keep proceeds of the sale tax within their jurisdictions.[6] The new VAT Decree altered and reduced the tax revenue of the State because the VAT at inception introduced a sharing formula of money from VAT in the ratio of 20/80 between Federal and State Governments respectively, and this was later changed to 15/50/35 between Federal, State and Local Governments respectively.[7]

It was in opposition to the VAT Decree (hereinafter referred to as VAT Act) that some State Governments introduced the Sales Tax Law as a form of consumption tax imposed by the State[8]. And the Sales Tax Law of the States were on goods and services already taxed by the Federal Government through the VAT Act. This did not go down well with the taxpayers that were subjected to the new Sales Tax Law of States, and as expected, taxpayers that were subjected to the new Sales Tax Law of States initiated several suits, most especially in Lagos State.

With the Supreme Court decision in AG Lagos State v Eko Hotels Ltd & Anor[9], many taxpayers and even Tax Administrators thought that the issue of validity of VAT had been laid to rest. It is therefore not surprising that there have been several comments and analysis of the judgment in AG Rivers State v FIRS & Anor since it was delivered. A careful look at the judgment shows that the case decided who, between the Federal Government of Nigeria (FGN) and the Rivers State Government (RSG), is empowered to impose and collect VAT under the Constitution of the Federal Republic of Nigeria, 1999 (as amended).

According to the judgment of Justice Pam, the RSG has the constitutional right to impose and collect VAT within its domain. Expectedly, in a press statement by the Federal Inland Revenue Service (FIRS), the 1st Respondent in the case, FIRS declared that it had appealed the judgment and filed an application for a stay of execution of the judgment. Consequently, the FIRS has advised the public to maintain the status quo ante (to continue to pay VAT to the FIRS) pending the outcome of its appeal[10]. Despite the FIRS press statement, the RSG has now enacted the Rivers State VAT Law, and there are divergence views on whether taxpayers in Rivers State should continue to pay VAT to the FIRS in view of the pending appeal, or to the RSG in line with the State’s new VAT law.

Some lawyers disagree with the FIRS press statement and insisted that the Rivers State VAT Law is valid. For example, Ozekhome (SAN) opined that the VAT law is constitutional.[11] Ogala (SAN) argued that the Items outside the Exclusive and Concurrent Lists are for Local Governments and not for State Governments.[12] Kazeem (SAN) advised FIRS to obey the order of the Port Harcourt Federal High Court until it is set aside.[13] And Falana (SAN) warned that the FIRS should not be prevented from collecting VAT, pending the hearing and determination of the appeal[14]

In light of the pending appeal, legal issues relating to the judgment are sub judice. While we await judgments of the appellate courts in the case (the Court of Appeal and the Supreme Court, as the case may be), it is however not out of place for academics, researchers and writers to express divergent opinions on the case. Therefore, the opinion expressed by this writer is not intended to pre-empt or prejudice the expected judgment of the Court of Appeal in the case.

A careful scrutiny of the judgment reveals that it was premised mainly on the constitutionality of the Federal and State Governments to impose and collect VAT, and it appears that the Court interpreted the ‘Taxing Powers’ of the FGN and State Governments with respect to VAT under the 1999 Constitution of Nigeria (as amended). Under the Constitution, ‘Taxing Powers’ are divided between the FGN and State Governments. Instructively, the Constitution does not specifically reserve power to make laws for the imposition of any tax for State Governments. The only references to the power of State Governments in relation to taxation are Items D9 and D10 in the Concurrent Legislative List under the Second Schedule of the Constitution.

A careful perusal of Items D9 and D10 shows beyond doubt that State Governments, including the RSG, are not specifically empowered to imposed or collect VAT. However, this is without prejudice to the provision of Item D7 of the Concurrent Legislative List in the Second Schedule of the Constitution which empowers State Governments to collect certain taxes such as Capital Gain Tax and Personal Income Tax. This was the interpretation given by the Court in the case of Lagos State Internal Revenue Board v Motorola Nigeria Limited & Citibank Nigeria Limited[15] where the Court of Appeal held thus:

‘‘Even though taxation of incomes, profits’ and capital gains are items on the Exclusive Legislative List, the collection of taxes is brought under the Concurrent Legislative List. Specifically Item D7 says: “In the exercise of its powers to impose any tax or duty –

(a) capital gains, incomes or profit of persons other than companies; and

(b) documents or transactions by way of stamp duties, the National Assembly may, subject to such conditions as it may prescribed, provide 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 the State.

I accept the submission made by learned counsel for the Appellant-that the collection of income tax mentioned in item d of the Concurrent Legislative List is the constitutional responsibility of the State Government. Therefore the imposition and enforcement of Pay As You Earn of employees of companies (including those of the 1st Respondent) resident in Lagos State is vested in the Appellant”.

In the instant case of AG Rivers State v FIRS & Anor, the reasoning of the Court in its judgment that the Federal Government lacks the power to impose and collect VAT is premised on the ground that Items 58 and 59 of the Exclusive Legislative List do not specifically mention VAT as one of the taxes over which the Federal Government has exclusive jurisdiction. This line of reasoning by the Court may not be correct considering the view expressed by the Supreme Court per Bello JSC (as he then was) in the case of Attorney General, Ogun State v. Alhaji Ayinde Aberuagba.[16] Although the issue in that case is not squarely on the constitutionality of the Federal Government to impose and collect VAT as it is in AG Rivers State v. FIRS & Anor, the dictum of Bello JSC is helpful in understanding the position of the Supreme Court on whether sales tax (similar to the present VAT) which is not included in the Exclusive and Concurrent List is within the jurisdiction of the Federal Government or State Governments to impose and collect. While rejecting the argument of both parties in the case, the erudite Hon. Justice Bello, JSC (as he then was), held thus:

It is axiomatic that in the absence of any constitutional provision, express or implied, to the contrary, the respective taxing power of the Federation and of a State includes sales taxing power. Accordingly, the Federation is entitled to levy Sales tax on any saleable matters within its competence. It must, however, be emphasized that it is not within the competence of a State:

to make sales tax law affecting any matters in the exclusive List, or
to make any sales tax law in any matter in the Concurrent List which is inconsistent with any law validly made by the Federation; or
to make any sales tax law on any matter in the Concurrent Legislative List where any law validly made by the Federation has covered the field.
As earlier stated in this paper, the VAT Decree of 1993 repealed the Sale Tax Act of 1986, which hitherto vested the State Governments with the powers to administer and keep proceeds of the sales tax within their jurisdictions. And flowing from the decision of the Supreme Court in Aberuagba’s case, it is safe to state here that since VAT is not listed in the Exclusive or Concurrent Legislative List,[17] the respective taxing powers of the FGN and State Governments include the power to make law for the imposition and collection of VAT.

However, we opine that State Governments, including the RSG, lack the power and vires to make any VAT law in any matter in the Exclusive List, or in any matter in the Concurrent List which is inconsistent with any law validly made by the FGN. State Governments also lack the power to make any VAT law on any matter in the Concurrent Legislative List where any law validly made by the FGN has covered the field. Since the VAT Act has covered the field on consumption tax in Nigeria, it is therefore ultra vires the RSG to make VAT law.

From the foregoing, we state with the greatest respect that the judgment in AG Rivers State v FIRS & Anor to the effect that the Federal Government lacked the power to impose and collect VAT, merely because Items 58 and 59 of the Exclusive Legislative List do not specifically mention VAT, is a narrow interpretation of the relevant provisions of the Constitution which ought not to be adopted. This is because if such narrow interpretation of the taxing powers in the Constitution is adopted, it could impliedly mean that the RSG cannot also impose and collect VAT since Items D7, D9 and D10 of the Concurrent Legislative List does not mention VAT. This may now leave us with the view expressed by Ogala (SAN)[18] that VAT is an Item outside the Exclusive and Concurrent Lists as such it is for Local Governments. But this view cannot also be sustained in light of the position of the Supreme Court per Bello JSC (as he then was) in Aberuagba’s case.

In conclusion, we are therefore of the opinion that the judgment of the Federal High Court, Port Harcourt Division, in the case of AG Rivers State v FIRS & Anor was reached per incuriam. We believed the Court of Appeal will expeditiously decide the pending appeal given the huge financial implication of the judgment on government revenue. Irrespective of the outcome of the appeal in the case, we advise that a legislative solution can be adopted to permanently resolve the present VAT issues. In this regards, we suggest that any of these options may be adopted:

(a). The Constitution should be amended to adopt the income tax model to VAT. By this model, VAT will be included in the Exclusive Legislative List, and like the income tax, the FGN will make law for the imposition of VAT, but the collection of companies’ VAT will be by the FGN, while VAT in respect of individual and business names will be collected by State Governments, or

(b). The Constitution should be amended to make the imposition and collection of VAT exclusively for the FGN. But under this model, VAT money will be shared by the three tiers of government in the ratio of 10/50/40 in favour of the Federal, State and Local Governments respectively. In addition, for the purpose and in the interest of fairness the sharing of the VAT revenue for State and Local Governments should reflect the VAT revenue derivation from each State and Local Government so that more VAT revenue will go to State and Local Governments with higher VAT revenue.

The law is stated as at August 31, 2021.

DSW, LLB, (BENIN); LLM (IBADAN); BL; Legal Officer, Nigeria Police Force, Zone 2 Police Command Headquarters, Lagos, Nigeria. Tel: +2348030699275: Email: ekpiku@yahoo.com

[1] Suit No. FHC/PH/CS/149/2020 (yet to be reported)

[2] Suit No. ID/105M/2001, cite by Sanni, A. O. (2010). Division of Taxing Powers in Nigeria-a Paradigm Shift, A PhD Research Thesis submitted to the Department of Commercial and Industrial Law, University of Lagos. Pp. 287- 293 . Available online on https://ir.unilag.edu.ng/bitstream/handle/123456789/4346/Division%20of%20Taxing 20Powers%20in%20Nigeria%29-a%20Paradigm%20Shif..pdf. Accessed August 26, 2021

[3] (2011) 1 TLRN 45

[4] (2017) LPELR-43713(SC)

[5] It should be noted that the judgment of Falase J. in Manufactureres’ Association of Nigeria v. The Attorney-General of Lagos State & Anor is of no legal consequence in view of the Supreme Court’s decision in the case of AG Lagos State v Eko Hotels Ltd & Anor which voided the Sales Tax Laws of Lagos State in favour of VAT

[6] Sanni, A. O. supra note 3

[7] Sanni, ibid

[8] For example, see the Sales Tax Lagos Law of Lagos State enacted in 2002

[9] The Supreme Court held that VAT was valid and the Sales Tax Law of the Lagos State was void to the extent that it conflicted with the VAT Act. This decision was based on the doctrine of covering the field because the VAT Act and the Sales Tax Law were held to be on the same field, i.e. both are consumption taxes

[10] See https://punch.com/firs-appeals-rivers-high-court-ruling-on-vat-collection/. Accessed 20 August, 2021

[11] Ozekhome (SAN), thenigerialawyer.com, Taxpayers Can’t Disregard Rivers VAT Law, SANs Tell FIRS. Available online in https://thenigerialawyer.com/taxpayers-cant-disregard-rivers-vat-law-sans-tell-firs. Accessed on August 30, 2021

[12] Ogala (SAN) thenigerialawyer.com. op.cit

[13] Kazeem (SAN) thenigerialawyer.com op.cit

[14] Falana (SAN) hisdaylive.com, Judgment on VAT Will Strenghten Compaign for Restructuring. Available online in https://www.thisdaylive.com/index.php/2021/08/30/falana-judgment-on-vat-will-strengthen-comaign-for-restructuring. Accessed on August 31, 2021

[15] (2013) 12 TLRN 181 at 185, ratio 1; per Akaahs, JCA (as he then was)

[16] Sanni, A. O. op.cit at pp. 252-255

[17] same as the repealed Sales Tax Act on which Aberuagba’s case was decided

[18] Ogala (SAN), thenigerialawyer.com op.cit