VAT dispute is about constitutional issues, not capacity of states to collect VAT

1. Background to the dispute

It is apparent from ongoing discourse that the judgment of the Federal High Court (FHC) in the case of Attorney General for Rivers State (“AG Rivers”) v Federal Inland Revenue Service (FIRS) & Attorney General of the Federation (“AG Rivers case”) has turned many Nigerians into overnight Tax Consultants and turned some known Tax Consultants into daytime experts on Constitutional Law.


It is important, however, that commentators and the general public are reminded that the main issue of contention in the Value Added Tax (VAT) dispute is whether the National Assembly has powers to make laws on VAT/Sales Tax and the corresponding powers of the FIRS to administer the resulting VAT Act – a major Constitutional issue.


Whether the states have capacity to collect VAT/Sales Tax and the effects are secondary issues but many people have turned the issues the other way round. As we may recall,


VAT was introduced in Nigeria under the General Sani Abacha regime (after having been initially passed under the General Ibrahim Babangida government), when there was neither a legislature nor any form of elected officials at the state or federal level of government.


Thus by Military fiat and for close to three decades, the Federal Government administered the VAT in Nigeria at 5% of the sales value (although there was an unsuccessful attempt to increase the rate to 10% in 2007).


Other than an amendment in 2007 by the National Assembly and the Finance Act in 2019 (which increased the VAT rate to 7.5%) and another Finance Act,


2020, there has been very little legislative action or scrutiny on the VAT Act Although the VAT Act provided for a VAT sharing formula of 15%, 50% and 35% among the Federal, State and Local Governments based on a derivation formula, a number of states such as Lagos have been unfavourably affected by the distribution formula.


For example, the quantum of VAT generated from Lagos State into the federal VAT pool sits as high as 55%, while the share of VAT distributed to Lagos State is lower than 10% of total VAT collection.


Based on the foregoing, Lagos State, along with other stakeholders has over time contested the legality of the powers of the Federal Government to administer VAT.


The legality of the VAT Act has attracted differing views from stakeholders over the years with various court decisions, most of which have largely centred around the supremacy of the VAT Act (i.e. covering the field) over the Consumption/ Sales Tax imposed by states.


In recent times, however, the jurisprudence on the application of the VAT in Nigeria has advanced to the scrutiny of whether the Federal Government has any constitutional powers to impose VAT or Sales Tax ab initio.


This gave rise  to the recent decisions of the FHC, sitting in Port Harcourt, Rivers State, in the case of Emmanuel Chukwuka Ukala v FIRS (“Ukala Case”) in December 2020 and the AG Rivers case in August 2021.


In both cases, the Court held that the National Assembly had no powers to enact laws on VAT under the 1999 Constitution of the Federal Republic of Nigeria.


Specifically, the Court held that the Federal Government is only empowered to enact tax laws, impose and collect taxes that relate to stamp duties, taxation of incomes, profits and capital gains only as contained in Items 58 and 59 of Part I, Second Schedule, 1999 Constitution (Exclusive Legislative List).


The Court also held that these provisions must be read to exclude other species of taxes like VAT. The decisions clearly stated that imposition of VAT is not within the purview of the National Assembly/ Federal Government.


Thus, the imposition of VAT/Sales Tax is a residual matter, which falls within the legislative and administrative competence of the states. 2. History of VAT in Nigeria The Value Added Tax (VAT) was introduced in Nigeria in 1993 by the Federal Military Government via the Value Added Tax Decree 102.


The idea of introducing VAT in Nigeria came from the Study Group set up by the Federal Government in 1991 to review the entire Tax system.


Following the recommendation of the Study Group, VAT was introduced as a Federal Tax which replaced the existing Sales Tax that had been in operation under Federal Government legislated Decree No.7 of 1986.


The year 1999 ushered Nigeria into the democratic era and the 1999 Constitution was enacted into law. Based on Section 315 of the 1999 Constitution, existing laws such as the VAT Decree (promulgated under the Military regime) were converted into Acts deemed enacted by the National Assembly.


However, there was little to no scrutiny as to whether the 1999 Constitution empowered the National Assembly to make laws with regards to VAT or Sales Tax.


A careful scrutiny of the Exclusive Legislative List in the first Schedule to the 1999 Constitution reveals that the Federal Government lacks the powers to legislate on matters concerning Sales and Consumption Taxes/VAT.


There was also a clear omission of such taxing powers in the preceding Constitution in 1979 even though the Constitutions of 1960 and 1963 provided powers to impose and collect sales taxes by the Regions (States) and the Federal Government.


Since 1999, however, VAT had been administered centrally by the Federal Government without constitutional backing. lOmojoye is a retired public servant/ legal consultant. He writes from Palmgrove, Lagos


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