Introduction
Since its inauguration in August 2023, the Presidential Fiscal Policy and Tax Reforms Committee (the “Committee”) has proposed sweeping reforms to the Nigerian fiscal framework to address the many issues and challenges that appear to be plaguing the Nigerian tax system. One of the primary challenges of the Nigerian tax system is the issue of multiplicity of taxes and addressing this issue appears to be a key priority of the Fiscal Committee.
To address the issue of multiplicity of taxes, the Committee has reportedly proposed the harmonization of the various taxes and levies at the different levels of government into the following eight categories of taxes: income tax, property tax, value added tax (“VAT”), customs duties, excise tax, stamp duties, special levy, and harmonised levy.
According to the Committee, income tax would comprise companies income tax, withholding tax, capital gains tax etc., tertiary education tax and police levy will be merged into special levy, consumption taxes will be subsumed under VAT while the harmonised levy will comprise road and market taxes. While this proposal apparently aims to provide certainty for taxpayers and ease the compliance burden that naturally comes with the multitude of taxes, there are serious practical challenges to implementation. In addition, the proposal also raises questions about necessity and utility. Will the merger of taxes result in lower or higher effective tax rates for businesses or will it produce administrative efficiencies and ease of compliance? This article examines the potential challenges and issues with the proposed harmonisation of taxes and recommends possible steps to address the challenges and issues.
Potential challenges to implementing the proposed tax harmonisation
To implement the proposed harmonisation of taxes and levies, the Fiscal Committee needs to address and overcome constitutional and political constraints. The Federal and State Governments derive their taxing powers from the Constitution of the Federal Republic of Nigeria, 1999 (as amended) (the “Constitution”) and are required to exercise these powers within the bounds prescribed by the Constitution.
By section 4 of the Constitution, the Federal Government is only empowered to legislate on matters on the Exclusive and Concurrent Legislative Lists and on any other matters it is expressly empowered by the Constitution to legislate. The states on the other hand, are empowered to legislate on matters on the Concurrent Legislative List to a limited extent and enjoy exclusive legislative powers over matters in the residuary list, that is, matters that are not in either legislative list in the Constitution. Presently, stamp duties, and taxation of incomes, profits and gains are contained in the Exclusive Legislative List and the Federal Government exercises exclusive legislative powers to impose income tax, capital gains tax and stamp duties. The States are only empowered to collect these taxes as prescribed by Acts of the National Assembly. This means that no State Government can validly impose taxes on incomes, profits or gains, or prescribe stamp duties.
In view of the Federal Government’s exclusive legislative authority over taxes on incomes, profits and gains, and on stamp duties, there are no foreseeable constitutional hurdles to the harmonisation of taxes in this category, or any other taxes within the legislative purview of the Federal Government. The harmonisation of these taxes therefore comes down to political will.
However, sales and consumption taxes, market levies, development levies, tenement rates, radio and television levies, road taxes, property taxes etc. are not provided for in the Exclusive and Concurrent Legislative Lists. These taxes and levies are therefore residuary list items and are within the legislative purview of the States. The Federal Government therefore lacks the competence to legislate on these taxes and cannot validly amend, merge or eliminate any of these taxes.
Concrete results or meaningful progress on the harmonisation of taxes that are within the legislative authority of the States can only be achieved by the Federal Government with a constitutional amendment to confer legislative powers on the Federal Government over all forms of taxes. This will effectively strip the states of the power to legislate on taxes and further undermine the concept of fiscal federalism. The questions which the Fiscal Committee needs to think seriously about and propose means of addressing is whether the States will give up their limited taxing powers, and whether weakening our fledgling fiscal federalism is a desirable sacrifice to achieve tax harmonisation.
Historically, the Federal Government appears to have accepted the limitations of its legislative powers with respect to taxes such as development levy, market levies, road taxes, radio and television taxes and has not attempted to encroach on the states’ powers over these taxes and levies. It has however not exercised a similar restraint in respect of VAT.
Since the introduction of the Value Added Tax Decree in 1993 which became the Value Added Tax Act with the transition to democratic government, the Federal Government has continued to collect VAT across the country.
There is however no provision in the Exclusive or Concurrent legislative Lists empowering the Federal Government to enact laws on VAT, sales tax or consumption tax for the entire federation. This point was affirmed by the Supreme Court in AG OGUN STATE v. ABERUAGBA & ORS, where the Court held that the power to enact sales tax laws is incidental to the legislative powers over trade and commerce. The Court further held that “… international trade and commerce and inter-State trade and commerce are specifically reserved for the Federation. While trade and commerce within a State is left as a subsidiary matter for the States.” On this basis, the Court concluded that “… the Federation has implied exclusive power to make sales tax law in all matters within the Exclusive and Concurrent Lists while the States have implied or residuary powers to enact sales tax law on all matters outside the said Lists.”
By the decision in the Aberuagba case, the Federal Government is only empowered to impose and collect VAT, sales tax or consumption tax on international trade and commerce and inter-state trade and commerce. The States, on the other hand, are empowered to impose and collect sales tax or consumption tax on intra-state trade and commerce. In defiance of this constitutional delimitation of taxing powers over trade and commerce, the Federal Government continues to collect VAT on intra-state trade and commerce. But this has not stopped some states from imposing sales and consumption taxes which have been administered simultaneously with VAT. Given that both VAT and consumption taxes apply to supply of goods and services and are directly related to consumption, consumers in states like Lagos that have introduced consumption taxes are made to suffer double taxation on the purchase of the same goods or services.
The States have continuously asserted their right to impose sales and consumption taxes and there is no indication of willingness to give up this right. But even if some States agree to suspend their sales and consumption taxes, this will only provide a temporary solution in the absence of a constitutional amendment. Provided that the States retain the power to legislate on sales and consumption taxes, these powers will continue to be exercised.
However, a constitutional amendment to centralise and consolidate the powers to impose taxes in the Federal Government will be an uphill climb in view of the arduous process required to amend the Constitution. By section 9 of the Constitution, any amendment to the Constitution requires the support of a two-thirds majority of the National Assembly and a two-thirds majority of the 36 States Houses of Assembly. It is doubtful that the two-thirds of the States will support an amendment that would strip them of the power to impose and collect any taxes.
In the light of the constitutional hurdles to the harmonisation of federal, state and local government taxes, and the unlikelihood of achieving the proposed harmonisation through a constitutional amendment, it would be more productive for the Committee to concentrate the reform efforts on federal taxes. Instead of embarking on the near impossible task of persuading States to surrender their taxing rights over trade and commerce within their States, the Committee could consider a proposal to limit VAT to imports and interstate transactions to allow the States to impose and collect sales and consumption taxes without interference from the Federal Government. This will address the issue of double taxation associated with the simultaneous implementation of VAT and consumption taxes, strengthen fiscal federalism and encourage competition amongst the States. With respect to local government taxes, the Committee may provide support to the States to harmonise these taxes according to their own priorities, and without any federal legislation.
