Rivers VAT judgment throws up sharing formula for debate

The judgment by the Federal High Court in Port Harcourt that the Rivers State government should be in charge of collecting Value Added Tax (VAT) in the state has thrown up a debate over the revenue sharing formula of the taxes between the Federal Government and states.

Value Added Tax (VAT) has since its introduction in 1993 continued to be one of the most stable and highest yielding sources of tax revenues for the federation account. In the second quarter of 2021, VAT collections rose by 57 percent to N512 billion from N327 billion in the corresponding period of 2020, a relief to cash-strapped states who pocket 50 percent of VAT collected.

The landmark ruling, made August 9 by Justice Stephen Pam, restrains the tax agency of the Federal Government, the Federal Inland Revenue Service (FIRS) and the Attorney General of the Federation, from collecting VAT and Personal Income Tax (PIT) from residents of Rivers State.

The judgment could set the precedent for other states to push for collection of VAT and PIT in their states.

The Rivers government had filed a case against the FIRS and the attorney general of the federation over demands, threats and intimidation of the state residents to pay PIT and VAT by the tax agency.

The state had sought 11 reliefs from the court. These included a declaration that the power of the Federal Government to delegate the collection of taxes can only be exercised by the state government or other authority of the state and no other person according to provisions of the Second Schedule of the 1999 Constitution as amended.

The court, which granted all the 11 reliefs sought by the Rivers government, stated that there was no constitutional basis for the FIRS to demand for 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 does 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.

Read also: Personal income taxes play significant role in OECD countries tax mix

Implication of the judgment

The Federal High Court’s decision brings far-reaching consequences –ranging from renewing discussions around revenue sharing formula to the possibility of aggressive taxpayers challenging the powers of the FIRS to collect VAT from them.

The Federation Accounts Allocation Committee (FAAC) shared a total of N733.095 billion as June 2021 revenue, out of which the shared VAT revenue was N143.652 billion.

Though the Revenue Mobilisation Allocation and Fiscal Commission (RMAFC) said a new Revenue Allocation Formula among the three tiers of government would be ready before the end of the year, it is worthy to note that the VAT collected in Nigeria is shared among the Federal, State and the Local Governments in the ratio of 15:50:35 percent formula. The FIRS keeps 4 percent as the cost of collection.

“The judgment seems to be correct. I haven’t read the specific constitutional provisions it interpreted but it does sound sensible,” a Lagos-based lawyer told BusinessDay.

“It is certainly revolutionary in the sense that even though it stated what exists, it defined a state of affairs that practically every other state had chosen to ignore or had forgotten.

“In so far as the judgment and taxes are concerned, the decision itself merely affirms that states, not the Federal Government, have the power to collect VAT, sales tax and the other taxes subject to the judgment. This is as good as it gets but the real issue is the sharing formula for these taxes collected by states, as between the state collecting the tax and the Federal Government.

“This judgment gives states that generate a lot of VAT and other taxes collected in those states, but remittable to the Federal Government, an excellent window to put the issue properly on the table. In other words, the current revenue allocation formula is now up for discussion,” the lawyer said, whose experience cuts across private and public sectors.

On his take on some definitive issues the judgment throws up, he said: “States need to start asking questions about taking back responsibility for concurrent legislative issues that the Federal Government has historically treated as if they are exclusively federal.

“Usurpation of state powers by the Federal Government dates back to 1966 and has become ingrained in practically every Federal public officer in all three branches of the Federal Government, especially Federal Government Ministries Departments and Agencies (MDAs) that act as states are totally incompetent.

“This attitude is partly responsible for the huge administrative burden/cost that has weighed down the Federal Government since 1999.”

According to him, “One of such issues is electricity distribution in the states over which the states, according to Section 14 of the Concurrent Legislative List, actually have Exclusive Regulatory Responsibility, not the Federal Government. This is a huge boost to states like Edo and Lagos that have publicly asserted their intention to pass laws to establish their state electricity markets because it indicates that the Federal High Court will not adopt the attitude that the Federal Government is the Exclusive authority in every matter.”

He further said: “The real value in this judgment is that it reminds us all that the Concurrent Legislative List does have meaning, and the Federal Government /National Assembly habit of making laws on everything, including matters that are concurrent and then claiming that they have ‘covered the field,’ must stop forthwith.”

What is VAT?

In Nigeria, VAT is a consumption tax paid when goods are purchased and services rendered, and is governed by Value Added Tax Act Cap V1, LFN 2004 (as amended). VAT is a multi-stage tax borne by the final consumer.

All goods and services (produced within or imported into the country) are taxable except those specifically exempted by the VAT Act. Nigeria’s VAT is charged at a rate of 7.5 percent.

Some goods and services such as non-oil exports are zero rated, while all taxable persons are required to file VAT monthly returns no later than 21st day following the month of transaction.

Under the Nigerian VAT regime, three groups of taxpayers are obligated to deduct VAT at source and remit directly to the tax authority. These are: Nigerian companies that are carrying on VATable transactions with non-resident companies within the country; government ministries, statutory bodies and other agencies of government, and companies operating in the oil and gas sector.

In the last three years (2018, 2019 and 2020), VAT contributed N1.108 trillion, N1.19 trillion and N1.5 trillion, respectively, to the national coffers. But despite its huge contribution to national revenue, the validity of who collects VAT has been a contentious issue till lately.

What is Personal Income Tax

Personal Income Tax (PIT) is guided by the Personal Income Tax Act Cap P8 LFN 2004 (as amended). The tax is imposed on income of individuals, corporate sole or body of individuals, communities, families and trustees or executors of any settlement- An individual is entitled to a Consolidated Relief Allowance of N200,000 or 1 percent of gross income, whichever is higher, plus 20 percent of gross income. The rate of the PIT ranges from 7 percent to 24 percent, depending on the amount of chargeable income – individuals are subject to minimum tax of 1 percent of gross income where the income is less than N300,000 per annum

The PIT is administered by FCT/States Internal Revenue Service (IRS) in respect of their residents. This tax is also administered by FIRS on non-residents, members of the Armed Forces, Police, Officers of Nigerian Foreign Service.

The court sees no constitutional basis for the FIRS to demand for and collect VAT, others

The judge dismissed the preliminary objections filed by the defendants that the court lacked jurisdiction to hear the suit and that the case should be transferred to the Court of Appeal for interpretation.

Justice Pam, who also dismissed the objection raised by the defendants that the National Assembly ought to have been made a party in the suit, declared that the issues of taxes raised by the state government were issues of law that the court was constitutionally empowered to entertain.

He declared that after a diligent review of the issues raised by the plaintiff and the defendants, the plaintiff had proven beyond doubt that it was entitled to all the 11 reliefs it sought in the suit.

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 of the nature of consumption or sales tax, VAT, education and other taxes or levies, other than the taxes and duties specifically reserved for the Federal Government by items 58 and 59 of Part 1 of the Second Schedule of the 1999 Constitution as amended.

Also, the court declared that the defendants were not constitutionally entitled to charge or impose levies, charges or rates (under any guise or by whatever name called) on the residents of Rivers State and indeed any state of the federation.

Among the reliefs sought by the Rivers government is a declaration that the constitutional power of the Federal Government to impose taxes and duties is only limited to the items listed in items 58 and 59 of Part 1 of the second schedule of the 1999 Constitution as amended.