States, FIRS’ claim to VAT deepens

With the judgment delivered in favour of Rivers State by Justice Stephen Pam of a Federal High Court in Port Harcourt, on August 10, the stage was set for what would become long-drawn arguments and counterclaims between the Federal Inland Revenue Service (FIRS) and states on whose right it is to collect sales tax.

While the federal tax authority relies on the VAT Act 1993, which it argues empowers it to collect VAT centrally, the state, notably Rivers and Lagos are flaunting the Federal High Court’s judgment, which vests the right to VAT and Personal Income Tax (PIT) on state governments.

Aside from the VAT Act 1993, the FIRS is also contending that states and local governments lack the required mechanism to administer VAT. It further argues that vesting that powers on states will disrupt an already perfectly run system, put more burden on businesses and lead to multiple taxation. For the FIRS, businesses cannot afford to bear brunt of multiple value-added tax given the prevailing environment in Africa’s biggest economy.

Putting this argument forward, Mathew Gbonjubola, group lead, special tax operation, FIRS, says the Service will continue to demand VAT from businesses pending the position of an Appeal Court to which the federal tax authority has appealed the ruling of the court in Port Harcourt.

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“VAT works only at the national level, it cannot work at the sub-national level. There is no country in the world where VAT works at sub-national level. This is because it depends on the input-output mechanism,” notes Gbonjubola.

Arguing further with a specific example, Gbonjubola says: “Assuming a business person bought an item in Osun State and paid VAT in the state and then takes the goods to Sokoto to sell. When selling in Sokoto, he will charge VAT on his consumers, so by the operation of the input-output mechanism, this business person will deduct the input tax paid in Osun State from the output charged in Sokoto State.

“But because there is a single tax authority handling VAT, it is the same authority that received in Osun that will receive the additional VAT payable in Sokoto State. It is easy to work out the input-output mechanism and there is no issue of the business person being short-changed or the consumer having to pay VAT more than once.

“The mechanism involved in collecting VAT makes it impossible to be administered at the sub-national level. According to him, doing so will short-change businesses; citizens will pay double VAT and this will create confusion.”

He further contends that VAT is administered on behalf of the federation and not on behalf of the Federal Government, meaning that tax revenue is shared to the three tiers of federal, state and local government on agreed formula.

“By that I mean that VAT is administered on behalf of the three tiers of government we have in Nigeria: the 774 LGAs, 36 states and the FCT. The revenue arising from VAT is shared based on the extant provisions. Currently, 35 percent goes to the local government, 50 percent goes to the state while only 15 percent goes to the Federal Government,” he says.

He also points out that VAT revenue is not paid into the federation account at inception, but goes into a VAT-owned account. “It is only after the sharing and allocation that the Federal Government’s share goes to the federation account” he explains.

Chiaka Ben-Obi, group lead, digital and innovation support, FIRS, explains that leveraging on digital platform it has built and perfected over the years, the FIRS was able to generate N1 trillion from VAT in the first six months of 2021, a feat the Service believes will prove herculean for state governments which currently lack such structure.

But these arguments have failed to sway the state governments, some of whom have gone ahead to enact their own VAT law and they push to begin collection within their jurisdictions.

Leading the pack are Rivers and Lagos as they insist on the enforcement of the judgment of the Federal High Court to deepen fiscal federalism in Nigeria.

In Rivers, Governor Wike and the state House of Assembly had since enacted the state VAT law, making it legally mandatory for businesses in Rivers to pay VAT to the state government.

In addition to the law, Wike has warned the FIRS to stop “bullying” businesses in Rivers to pay to the Service, as doing so would be tantamount to going against an extant law in Rivers.

Rivers has threatened to seal off FIRS’ offices if the Service continues to insist on collecting VAT.

“An agency of government cannot dictate to a state government. If they will ever dictate, not to a state like Rivers.

“We have challenged VAT collection in court, and we have no apologies to anybody. And the problem in this country is that no one wants to come out.

“I will not be a party to injustice, but let history be that some of us stood up and challenged the illegality. Until we leave May 29, 2023, I will continue to challenge what I think is not right,”Wike said.

Rivers is not alone in this push for true federalism. Lagos, Nigeria’s commercial capital and highest contributor to the VAT pool, has also enacted its own VAT law, setting the stage ready for collection.

Notwithstanding a ruling by an Appeal Court in Abuja to parties to the VAT ‘war’ to maintain the status quo ante, states have continued to push for their VAT laws.

Justice Haruna Tsammani, who delivered the lead ruling of the three-man panel of the appellate court, ordered that the “the status quo ante bellum” be preserved, as it adjourned the matter to Thursday, September 16, to enable the parties to file their response to the application for joinder filed by the Lagos State government.

On Friday, Governor Babajide Sanwo-Olu signed into effect the Lagos VAT law, and signed the “bill for a law to impose and charge VAT on certain goods and services” at about 11.45am on Friday, September 10, after returning from an official trip to Abuja.

The state House of Assembly had on Thursday, September 9, passed the State Value Added Tax (VAT) Bill and the Bill on Prohibition of Open Cattle Grazing in the state.

Mudashiru Obasa of the House had immediately directed the acting clerk of the Assembly, Olalekan Onafeko, to transmit a clean copy to Governor Sanwo-Olu for assent.

Obasa believes VAT will lead to increase in revenue and increase in infrastructure development in Lagos, as “this is in line with fiscal federalism that we have been talking about.”

Similarly, Ogun and Akwa Ibom have indicated their readiness to enact laws that will enable them to collect the tax in their states.

Other states such as Edo, Ondo, Oyo and Taraba say they are studying the ruling of the Federal High Court in Port Harcourt on the matter, while Delta says it is consulting before it will take a position on the issue.

On Friday, speaker of Ogun State House of Assembly, Olakunle Oluomo, said the Assembly had started working on the bill.

“We are already working on the VAT law for Ogun State. If not for the recess, you would have seen actions on it but by the time we resume next week, you will see actions on it. The VAT law would have the same treatment as the Anti-Open Grazing Bill. You know we passed our anti-open grazing bill into law on July 8.”

In Akwa Ibom, chairman, state House Assembly committee on information, Aniefiok Akpan, said the Assembly was looking forward to having a meeting with the chairman of the state Internal Revenue Service, after which it would come up with the bill.

In Edo, speaker of the state House of Assembly, Marcus Onobun, said the House would consider enacting a law to enable the state to collect VAT.