The Ongoing VAT Face-Off in Nigeria: The Way Forward

The case between the Attorney General of River State v Federal Inland Revenue Service (FIRS) and Anor has become a highly controversial one. The traction it has gained in recent weeks has rekindled the discussion on the constitutionality of the Value Added Tax (VAT) Act. Generally, the bulk of this case centers around the uncertainty of who is fleecing whom of their revenue. Ordinarily, matters like this typically involve taxpayers against tax authorities. This time, it involves the Federal and State governments as well as the taxpayers. The effect of which is likely to affect public policy and tax administration.

Background of the Case

Following the decision of the Federal High Court (FHC) in Emmanuel Chukwuka Ukala v. Federal Inland Revenue Service, the office of the Attorney General of Rivers State brought an action before the Court seeking the interpretation and determination of the following provisions of law:

• Interpretation of Item 58 and 59 of Part 1 of the second schedule to the constitution in line with the residual powers of the States as stated in Section 4(7) of the constitution. 
• Upon proper interpretation of Item 58 and 59 as stated above and item 7(a) and (b) of the constitution, whether the National Assembly had the legal competence to legislate on matters of taxation beyond the express provision of Item 58 and 59. 
• Upon proper interpretation of issues 1 and 2 above, whether the Taxes and Levies Act is not unconstitutional to the extent that it legislates on matters such as VAT, Withholding Tax, Education Tax and Capital Gains Tax to a non-resident of Federal Capital Territory (FCT), etc. 

Summary of the Judgement

On issues 1 and 2, the court held that the law was unambiguous, required no extra interpretation other than its literal interpretation, and that tax law was interpreted strictly. Additionally, the court emphasized that where a statute expressly mentions specific things, things not mentioned are deemed excluded. Hence, the court ruled in favour of the plaintiff, stating that since consumption tax is a residual matter, the National Assembly could not legislate on it, consequently declaring the VAT Act unconstitutional.

On issue 3, based on judicial precedents, the court ruled in favour of the plaintiff that the Taxes and Levies Act was unconstitutional. 

Matters Arising Post-Judgement

Following the decision of the court, the Rivers state government enacted its own VAT law that directed the Rivers State Internal Revenue Service to commence immediate collection of VAT from businesses within Rivers state. Similarly, Lagos state enacted its VAT law though implementation is yet to commence. The FIRS appealed the judgment and subsequently applied for a stay of execution at the Federal High Court which was not granted. In addition, FIRS issued circular instructing taxpayers to continue collecting and remitting VAT to the FIRS while the Court of Appeal ordered all parties to the case to “maintain status quo ante bellum”: both the FIRS and Rivers State should maintain the position before the judgment. 

Consequently, Rivers state government has now appealed to the Supreme Court to set aside the order of the Court of Appeal Court. Interestingly, Lagos state applied to join Rivers state as a respondent at the Court of Appeal, but the application was rejected. Also, both Rivers and Lagos state made an oral application to the Court of Appeal for a receiver or manager to be appointed in the interim to collect VAT from their territories, pending the conclusion of the case. However, this was also denied.

Matters for Consideration

Understandably, emotions surrounding the constitutionality of VAT have been stirred, and opinions have been rendered by all and sundry. Some even allude to this as a wake-up call for restructuring Nigeria. Nevertheless, it is crucial to consider the following matters arising free of any political sentiments and focus on the tax implication for government at all tiers and the disturbed taxpayers. 

• It is unclear who benefits more if VAT collection is split between the state and federal governments. What is certain is that the ongoing controversy is troubling for taxpayers. Beyond this uncertainty, there is still the question of how input and output VAT claims will be reconciled considering inter-state transactions. This would not be an issue if states choose to enact Sales Tax as against VAT law. However, Sales Tax is not free of shortcomings. It would impose multiple taxes on the same transaction along the value chain since there is no input/output set-off mechanism. Furthermore, VAT on import or any federal jurisdiction, other than the Federal Capital Territory, may be lost since the VAT Act will be inoperative. In 2020, import VAT accounted for about 50% of VAT revenue.

• While it appears that some states are aligned in demanding the right to self-collect VAT, the possible inter-state disputes which may arise are being ignored. For instance, a situation where goods are produced in one state and sold in a different state could exasperate inter-state conflict as the argument of which state should collect the applicable VAT would arise. 

• Nigeria is certain to take steps backwards in terms of its tax outlook. While this may appear interim, the current progress with VAT collection is a result of decades of continuous growth. Going back to taking baby steps may not be the most pragmatic approach. 

Recommendations and Conclusion

The issues surrounding the constitutionality of the VAT Act is borne out of the grievance by states like Rivers and Lagos that expect more from VAT revenue allocations. The problem is not necessarily the system for collection and remittance but on how the VAT collected is redistributed to the states: an issue that can be addressed without necessarily overhauling the entire structure. Based on section 40 of the VAT Act, the percentage allocated to derivation can be amended to rectify the unfair redistribution of the current VAT regime. 

Taxpayers, especially those in states like Rivers and Lagos, are advised to consult with their tax advisors/consultants. However, two factors are up for consideration: Firstly, the subsisting Court of Appeal Order which ordered the parties to “maintain status quo ante bellum”, and secondly, the fact that no state has issued a clear directive or circular on the mechanism for implementation of its VAT law. Until such a time, taxpayers can continue carrying out their VAT obligations as they were.