December 2, 2023

The VAT Controversy – Where will the Chips Land?


By Dr. Raphael Christopher,
Senior Member of Enugu Bar

The arguments have been fierce and unrelenting. The chips have been thrown in the air.

Where will they land?

The stakes have rarely been this high -a sum of nearly N2.4 trillion FIRS projected revenue for 2022 is in the balance.

This is quite a lot of money. You see, 15% of the estimated N2.4 trillion FIRS revenue projection for 2022 fiscal year will be going to the Federal Government coffers, 50% of the estimated N2.4 trillion FIRS revenue projection for 2022 fiscal year will be going to the State Governments coffers and the remaining 35% of the estimated N2.4 trillion FIRS revenue projection for 2022 fiscal year is slated to the Local Governments coffers.

Will it?

The issues and arguments in this matter, go beyond simple laws of revenue collection, esoteric taxation mathematics, logic emotions, legal principles to include political geopolitics, interests, and because of these gargantuan complexities and complications, so much is riding on the outcome of this matter.

Before we dig in to this matter and its attendant complexities, let us remind ourselves of the history of taxation and then the current context and legislative provisions.

Taxation itself has been around and is as old as civilisation itself. The first earliest written records appear in the Christian Bible in the book of Genesis 47:24-26 when Joseph the Jewish Prime Minister of Egypt made a law that one fifth of every crops that was harvested in the Egyptian empire was to be given to Pharaoh effectively the Federal Government of the day.

Since scientific studies place this event at nearly 4000 years BC, and there are no records to suggest otherwise, it is pretty certain that this mention of taxation is about the earliest on record. This means that other neighbouring states and empires may also have a similar taxation system in place in this time period.

The next mention of taxation comes from China. Records from over 3000 years ago show that the Qin Empire, established by the Emperor Qin Shi Huang was the first to levy taxes to pay for its military expansions and rulership of the Qin Empire which at its peak 3000 years ago, was said to have covered vast areas including China, Japan, Korea, Singapore, Malaysia, Vietnam, Cambodia as well as several other Asian countries.

The next mentions of taxation are found in the Greek Empire and then in the Roman Empire where they were used to raise funds to help govern and maintain the Empire.

So, taxation has been with us since civilisation and as can be shortly be seen, serves a most important purpose without which proper governance would not be possible in any kind or style of government anywhere in the world.

Taxation mainly helps to raise funds that is needed to help the Government carry out its functions and fulfill its responsibilities to its citizens. Yet, taxation has a much more deeper purpose and functions than what is generally understood.

Taxation is a very important tool in the management of inflation and its consequences in the economy of any nation. As such it is not merely about monies that are collected as revenue but the overall economic health and well being of every citizen and member of the country. Taxation is a key component of a good fiscal policy and driver of economic growth and prosperity of any nation and as such is very complex and any tinkering with it inevitably will impact the lives and standards of living of everyone within the country or nation.

Taxation is one of the most important way, any Government retains control of the economy and whoever charges that tax is the person that retains control of that economy and as such it makes taxation a non-negotiable fundamental components in effective macroeconomic policy for any nation’s Government.

Taxation is also one of the ways of redistribution of income and wealth within the economy. Studies backed by experience shows that in free market economies, income and wealth tended to be concentrated in the hands of a few people or states in the country which therefore harms the overall prosperity of the nation because the overall levels of demand in the economy is seriously depleted and since one of the key cornerstones of a Government is to redistribute income and wealth, only the tool
of taxation helps the Government achieve this, so the gap between the rich and the poor do not become even more wide which if not dealt with, may lead to perceived instability, food shortages and various disaffections amongst the poor of any country.

Finally, Taxation is one of the best ways to encourage democracy because people care about their money and will take interest in any government policy that affects their money and will therefore vote in elections to ensure they receive a fairer taxation system that works for them.

The above points that I have made are not exclusive of each other. They are not stand alone but are variables and components of a whole. The whole being the good model of a good economic policy that will work well for everyone in any country that dares to look at the whole picture and use this template to inform future tax planning and policies.

The principles I have espoused also applies to all levels of Governments in all societies and governances.

The current cases implicitly touches on these various issues hence why the outcome of this case has a likelihood of profound change in the National taxation policy and its attendant consequences for the nation as a whole.

The taxation regime in Nigeria comprises of the following taxes:

Personal Income Tax.
Company Income Tax
Capital Gains Tax
Value Added Tax
Education Tax
Withholding tax
Customs and Excise Duties
Information Technology Development Levy
Land Use Charge
Stamp duty tax on documents.
For completeness, I will mention the Pension Contributions, Employees Compensation Deductions, National Housing fund deductions and Industrial training fund deductions, which although are not classed as taxes yet by their very nature and regulations perform in the same way as taxes hence their inclusion in this list.

Now, in Nigeria the three tiers of Government, The Federal Government, The State Governments and The Local Governments are involved in the administration of Taxes.

But, in this treatise, we are focusing on the VAT taxes. The VAT or the value added tax is a relatively new creation in the taxation system of many countries.

In Nigeria, the Value Added Tax came in law in 1993. It was then taxable at a rate of 5% but by the provisions of The Finance Act 2019, which commenced 13th January 2020, this has now been revised upwards to 7.5% and this new rate took effect on the 1st February 2020 and remains so till today.

Now, by Federal Inland Revenue Service ( Establishment) Act, 2007 No. 13 enacted by The National Assembly of The Federal Republic of Nigeria, The Federal Inland Revenue Service was established and by section 2 of that aforesaid Act, they are to control and administer the different taxes and laws specified in the First Schedule or other laws made or to be made from time to time by The National Assembly or other regulations made there under by the Federal Government of The Federation and to account for all taxes collected.

The relevant section 59 of Second Schedule of The Exclusive Legislative list of The Constitution of The Federal Republic of Nigeria, states that The Federal Government is empowered to deal with Taxation of incomes, profits and capital gains except as otherwise proscribed by this constitution.

And by Sections 1, 2, 7,8,9,10, of The Concurrent Legislative List of The Constitution of The Federal Republic of Nigeria. The National Assembly is empowered to make laws in relation of tax collections and administration.

Recently, The Rivers State Government as Plaintiff sought and successfully obtained via a Federal High Court Judgement suit no: FHC/PH/CS/149/2020 declarations that The Federal Inland Revenue Service and The Attorney General of The Federation, the Defendants, are not entitled to interfere in its taxation proposals, administration and collection powers.

In reaching this decision, The Court felt that the clear ambiguous position of the Items 58 and 59 of Part 1 of the Second Schedule meant that The Federal Government is only empowered to make laws in relation to stamp duties, taxation of incomes, profit and capital gains only, therefore the Value Added Tax regime is not an area upon which The Federal Government is empowered to make laws.

Following this defeat, The Defendants filed a motion to stay the enforcement of this decision but that application was refused.

Recently, The Court of Appeal in Abuja has granted the appeal of FIRS for a stay to halt the execution of the judgment of the judgement in favour of The Rivers State. The Court of Appeal has also halted the implementation of the Rivers State House of Assembly VAT law.

A new twist has now emerged.

Lagos State has applied to join the proceedings. This application is on similar grounds as that of Rivers State pleadings.

This new development is significant because it shows a determined stance on the part of the state governments especially those state governments that produces the most VAT revenue and therefore stands to gain the most from a declaration in their favour.

There is nothing wrong with that.

This is simply an out working of enlightened self interest which every state is entitled to pursue.

On the flip side, it is no surprise that states with low VAT production revenue, for whatever reasons, who stands to lose billions in revenue, should the Rivers and Lagos states Governments application succeed, are the ones who are most concerned and who are urging for the status quo to be maintained!

The public also have been speaking and various shades of opinions have been expressed and counters have been offered. Social media has been agog with sound bites and sensationalisms.

In recent memory, other than the Big Brother shenanigans and scandals, no other case has quite gripped the nation and appears to continue to grip the popular imagination of the nation.

But, the chips are now in the air and which way will they land?

Given the purposes of taxation as I have already elaborated, the Rivers State judgment cannot stand because the National Assembly is the body that has been given authority in regards to taxation matters by the combined effects of the Sections 1, 2, 7,8,9,10, of The Concurrent Legislative List of The Constitution of The Federal Republic of Nigeria.

Turning to the question whether Value Added Tax is excluded within the interpretation of the
Section 59 of Second Schedule of The Exclusive Legislative list of The Constitution of The Federal Government, I do not agree that Value Added Tax is excluded.

The well known case of Udoh v. Orthopaedic Hospitals Management Board & Ora at first blush seems to favour the River states in that if it is read that the Statute does not mention a specific thing then anything not mentioned is therefore excluded .

That taken together with the strict interpretation of the Court of Appeal in Federal Board of Inland Revenue v. Integrated Data Services Limited (2009) 8 NWLR that tax laws are interpreted strictly would appear to favour the Rivers Government position.

However, I believe there is a general and somewhat fundamental misconception and misunderstanding in the understanding of what is a Value Added Tax and its relationship with other taxes in the general taxation regime.

Let us be clear. VAT is a tax that is ultimately paid by the consumer. It is not a tax on individual businesses even though the businesses pay the VAT collected to The Federal Inland Revenue Service (FIRS), the actual cost has already been paid by the customer, and is contained within the purchase price of goods or services that is purchased by the customers.

Therefore, and this is crunch and crucial – Value Added Tax is an indirect tax on the individual consumer, even if businesses are responsible for reporting it fully to FIRS.

Since, and most critically, the individual pays the tax and since the individual has to have an income to be able to pay the Value Added Tax, the tax itself is simply a tax on the individual’s income, which brings the Value Added Tax firmly, within the purview and establishes it very firmly within the taxation of income provision of Section 59 of Second Schedule of The Exclusive Legislative list of The Constitution of The Federal Government.Since, and most critically, the individual pays the tax and since the individual has to have an income to be able to pay the Value Added Tax, the tax itself is simply a tax on the individual’s income, which brings the Value Added Tax firmly, within the purview and establishes it very firmly within the taxation of income provision of Section 59 of Second Schedule of The Exclusive Legislative list of The Constitution of The Federal Government.

Further and in addition, it is clear that and an unassailable fact that The National Assembly is empowered to make laws in relation of tax collections and administration. Therefore, legislation made in the the collection of Value Added Tax is clearly part of the powers of The National Assembly and it is therefore right that the Federal Inland Revenue Service is the proper body to collect these taxes on behalf of the states as agreed.

More importantly, even if the states can argue that these laws were unlawful, it is difficult to see how they can navigate the issue of these laws being unlawful when these laws have been operating since 1993 and the affected states have been complying with these laws since 1993 in its entirety.

There is nothing in the pleadings of the Rivers State claim that addresses this point specific and the failure in addressing this very important point, opens the prospect of the doctrine of Judicial precedence and the common law of Laches and Acquiescence to be invoked to apply to prevent the states from suddenly after over 29 years of compliance with the law to now suddenly seek to upend the status quo.

Further, there is the issue of The Taxes and Levies Act 1998 which is still good law by virtue of Section 315 (4) (b) of the Constitution of The Federal Republic of Nigeria. In Part 1 of the schedule of that Act, value added tax is specifically mentioned as to be collected by Federal Government.

Contrast this with the decision of The Federal High Court in the 2020 case of The Registered Trustees of Hotel Owners and Managers Association of Lagos v A. G. of The Federation & Minister of Finance, where an amendment to the Taxes and Levies Act made by the Minister of finance was held to be unlawful and the principle restated that only The National Assembly has the power to make Laws or amend laws.

Judicial support for this can also be gleaned from cases such as The Supreme Court decisions in A.G. Lagos State v. A.G. Federation & Ors ; ( 2003) LPELR 620 and the Court of Appeal cases of MTV v. Abia State Govt. & Others. (2019) LPELR and Almaseer Law firm v. FIRS (2019) 12 NWLR.

The Court of Appeal is currently seized of this matter and it would be difficult to conceive of any different arguments that could be put before it that would persuade it to make a ruling in favour of Rivers State and Lagos State governments.

It seems to me that this matter, given its importance, will no doubt end up at the Supreme Court and I am of the view that even here it is very difficult to see how the Rivers State and Lagos State governments case would succeed in its entirety and make the Supreme Court rule in their favour.

There is another way and solution that can provide Rivers State and Lagos State Governments and other affected states with a measure of success and enable everyone live with a mediated solution.

It is not in doubt that the key crux of the matter is many states are aggrieved at the current formula of sharing of the taxation collection and administration. It appears that this unfair revenue allocation formula lies at the heart of why this case was brought.

Since, the legal matter and process appears unlikely to yield the desired results, it would seem that the solution for all parties is now to reach out to each other and mediate to seek a political solution.

One would urge all interested parties to convene and seek a stay of the Court proceedings to seek a political solution that satisfies all parties. The parties should express their sincere desire to sit down together to discuss a new and fairer revenue sharing formula. One that is fair and acknowledges the fact that both Rivers and Lagos states and other states who contribute a large chunk of the revenue income have a justifiable entitlement to have their claims and grievances discussed and a new revenue sharing formula agreement put in place as soon as possible to enable both parties continue to live together harmoniously and ensure that there is clarity and there are no uncertainty in taxation revenue collection and administration, for the current impasse and situation does no one any favours.

Finally, The National Assembly may now deal with this matter conclusively by enacting an amendment and a schedule that firmly lists every tax and confirm the Taxies and Levies Act which will put this matter to rest and enable everyone have clarity in this very important area.

But even then, the political interests of the majority party in Government with the most seats in the National Assembly may yet and inevitably carry the day.

Whichever way this impasse is resolved, all parties must work together and achieve a brokered solution that suits everyone. All
Parties must be mindful that given the dynamics of taxation and the National taxation policy vis a vis the taxation aims I have elucidated earlier, the global tax economy of Nigeria should be promoted by way of a clear and consistent taxation regime and the fact that courts of coordinate jurisdiction have made different pronouncements on the same matter, does not help, much like the current issue with granting of exparte orders which the CJN is now dealing with, this matter of taxation has to be pronounced upon by The Supreme Court and quite quickly too!

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