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VAT ruling: FG to lose taxes amidst dwindling revenue

From Victor Edozie (Port Harcourt), Sunday M. Ogwu (Lagos), Chris Agabi, Simon E. Sunday, John C. Azu & Faruk Shuaibu (Abuja)

The federal government would most likely lose billions of naira in tax revenue amidst dwindling income if the recent court judgement in favour of Rivers State to collect Value Added Tax (VAT) and two other taxes stands and other states follow a similar path.

Daily Trust reports that the federal government had been struggling to augment its income following serious setbacks occasioned by COVID-19 pandemic that rattled its revenue from oil revenue.

A verdict by a Federal High Court in Rivers on Monday, August 9, 2021, on who has the power to collect VAT favoured the state government; a development seen as a serious setback for the federal government, which heavily relied on income from non-oil sources.

The government at the centre is viewed as “very powerful” because it gets a large chunk of federal allocation and in some cases subsidises the states and local government areas.

Most states in the country struggle to make ends meet due to their weak internal revenue drive initiatives as they wait for monthly allocation from the federal allocation committee, which shares the monies collected from oil sales and some taxes.

Some analysts told the Daily Trust Wednesday that while there is the likelihood of a legal tussle up to the Supreme Court over the judgement that favoured Rivers State, others viewed the development as “positive”, saying it would strengthen the revenue profile of states and by extension their prospect of becoming truly independent without prejudice to a viable federal structure.


Nigeria raked in N2.5tr from VAT in 18 months

At a 7.5 per cent VAT rate, Nigeria might have raked in 2.5 trillion from VAT in the last 18 months- January 2020 to June 2021.  In 2020, total VAT collection was about N1.53tr with import VAT being N348 billion (or 22.7%) while foreign non-import VAT was N420bn (or 27.4%) and local VAT amounted to N763bn (or 49.8%).

In the first quarter of 2021, VAT collection was N496.39bn while it increased by N15.8bn in the second quarter to N512.25bn, according to data from the National Bureau of Statistics (NBS), filed by FIRS.

The breakdown VAT generation for Q2 (April to June) showed that N187.4bn was from non-import VAT locally, N207.7bn from non-import VAT for foreign goods. The balance of N117.1bn VAT was from the Nigeria Customs Service (NCS) VAT on imports.

According to the 2020 report of BudgIT, out of the 36 states and the FCT, only five can boast of contributing the highest VAT collection in Nigeria even as  Lagos, Ogun, FCT, Rivers are the highest contributors of VAT.


FIRS to appeal case, as ministry studies judgement

Rivers State is one of the major contributors of income to the federal purse and with the latest judgement, there are fears that the FGs income would be affected.

Counsel to FIRS, O.C. Eyibo, said he would study the judgement that favoured Rivers State and advise his client.

When contacted on the position of the Service on the judgment, the Director, Communications and Liaison Department, FIRS, Dr Abdullahi Ismaila Ahmad said that they would appeal the decision made by the court.

“We are appealing the matter immediately,” he said.

In the same vein, the office of the Attorney General of the Federation and Minister of Justice, Abubakar Malami (SAN), said it will take a step after studying the court judgement.

The media aide to the minister, Dr Umar Gwandu, said in a reaction on Wednesday that, “We will study the judgement and decide on the next line of action.”


We only interpreted the constitution – Rivers Govt

The Rivers State Government said it only interpreted the 1999 constitution of the Federal Republic of Nigeria as amended in terms of who was responsible for the collection of taxes between the state and the federal government.

Its Lead Counsel, Donald Chika Denwigwe (SAN), who addressed newsmen on the court ruling said there were discussions on whether the case should be referred to the Court of Appeal or not.

Speaking on the implication of the judgment, Denwigwe said it was now unlawful for any agency of the federal government to collect taxes including VAT in Rivers State.

“It is a determination that it is wrong for the federal government to be collecting taxes, which are constitutionally reserved for the state governments to collect.

“So, in other words, the issue of Value Added Tax (VAT) in the territory of Rivers State and Personal Income Tax should be reserved for the government of Rivers State,” he stated.


Ruling may affect states’ revenue from FG – Experts

Speaking on the judgement, experts say the consequences will be far-reaching.

Fiscal Policy Partner and Africa Tax Leader at the PriceWaterCoopers (PwC), Taiwo Oyedele said: “Ironically, the biggest losers will be the states except for Lagos. A few states like Kano, Rivers, Oyo, Kaduna, Delta and Katsina may experience minimal impact, while at least 30 states, which account for less than 20 per cent of VAT collection will suffer significant revenue decline.

“The federal government may be better off given that FCT generates the second-highest VAT (after Lagos) in addition to import and non-import foreign VAT,” he said.

Daily Trust reports that at present, Section 40 of the VAT Act requires that the VAT pool be shared 15 per cent to the FG, 50 per cent to states and 35 per cent to LGs (net of 4 per cent cost of collection by the FIRS). Twenty per cent of the pool is shared based on derivation.

Oyedele further explained that the judgement may also have implications for taxes collectable by local governments that are currently administered by states as well as the amendment via Finance Act 2020, which introduced an electronic money transfer levy in place of stamp duties, among others.

On how to resolve the issue, Oyedele argued that it will be necessary to amend the Nigerian Constitution to address the current challenges while retaining the positives under the current system.

“For instance, states will have to rely on the federal government to enforce the Significant Economic Presence requirement for global tech companies.

“Ultimately, Nigeria can learn from other climes, but we must figure out our most suitable form of fiscal federalism,” he said.

Also reacting to the judgement, the Registrar/Chief Executive of the Chartered Institute of Taxation of Nigeria, Adefisayo Awogbade said while the Institute has the first and second cases of similar judgements in the past, they were making efforts to get a certified true copy of the third and current case.

“From the foregoing decisions, it is evident that this is not the first time that the VAT Act has been declared unconstitutional.

“As an Institute, we were waiting for the appellate courts to take a definite position on the matter before making our comments,” he said.

Commenting, Ogbeide E. Benjamin, a tax expert and former chairman, Chartered Institute of Taxation of Nigeria (CITN), Abuja Chapter, said, “The judgement was a landmark judgement and the impact of this judgement on the finances of the states will be enormous.”

According to him, “VAT is consumption-based and on several items, some of which are outlawed in some states. I believe the country stands to profit by allowing states to administer VAT. By this, states will be further encouraged to scale up their economic drive to attract more foreign direct investments and local investments since they will be the ones to get the VAT benefits.”

On whether the judgement was correct as per tax laws, he said, “Presently, there is no law in Rivers State that enforces the collection of any tax like VAT. You cannot collect a tax when no law imposes the same. Tax is based on law.”

He also noted that the FIRS will exercise its constitutional right of appeal under section 242(1) of the 1999 CFRN and apply for a stay of execution of the judgement under Section 18 of the Court of Appeal Act.


What the P/Harcourt judgement says

The Federal High Court in Port Harcourt, on Monday, August 9, 2021, ruled that the Rivers State Government (and not the FIRS) is entitled to collect VAT in the state. This is on the premise that only the state is constitutionally entitled to impose taxes in its territory of the nature of consumption or sales tax.

Presided over by Justice Stephen Dalyop Pam, the court also issued an order of perpetual injunction restraining the FIRS and the Attorney General of the Federation, both first and second defendants in the suit, from collecting, demanding, threatening and intimidating residents of Rivers State to pay to FIRS, personnel income tax and Value Added Tax.

Justice Pam asserted while delivering judgement in Suit No. FHC/PH/CS/149/2020, filed by the Attorney General for Rivers State (plaintiff), against the Federal Inland Revenue Service (first defendant) and the Attorney General of the Federation (second defendant).

The Court, which granted all the 11 reliefs sought by the Rivers State Government stated 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, being that the constitutional powers and competence of the federal government was limited to taxation of incomes, profits and capital gains, which did not include VAT or any other species of sales, or levy other than those specifically mentioned in items 58 and 59 of the Exclusive Legislative List of the Constitution.

The court agreed with the Rivers State Government that it was the state and not FIRS that was constitutionally entitled to impose taxes enforceable or collectable in its territory.

By implication, FIRS will administer VAT within the FCT and non-import foreign VAT while the Nigeria Customs Service (NCS) will continue to collect import VAT on international trade.


Similar verdict in Lagos

In October 2019, the Federal High Court, Lagos Division, in the Registered Trustees of Hotel Owners and Managers Association of Lagos v. A. G. Federation & Others while considering the validity of the Hotel Occupancy and Restaurants Consumption Law of Lagos State upheld the powers of the Lagos State Government to charge and collect Consumption Tax from hotels, restaurants and event centres within the state. The court held that based on the constitution and the Taxes and Levies (Approved List for Collection) Act, the power to impose consumption tax was a residual power within the exclusive competence of States.

It restrained the FIRS from imposing VAT on goods and services consumed in hotels, restaurants and event centres as this was already covered by the Lagos State Law.

A legal practitioner, Jude Okey Ugwuanyi Esq, said the judgement was that it was within the powers of state governments to generate tax and other revenues and in so doing the federal government could not interfere with such powers.

He said value-added revenues ought to belong to states where those activities existed as distinct from mining revenues.

“For instance, under the Nigerian Constitution, anything relating to oil tax among others is reserved for the federal government, but outside those, the federal government cannot interfere with state tax,” he said.

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