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VAT: Matters arising from the Federal High Court ruling

The Federal High Court (FHC) Port Harcourt Division, recently ruled that the Federal Government (FG) and or its agencies, including the Federal Inland Revenue Service (FIRS) were not constitutionally empowered to impose and or collect Value Added Tax (VAT).

The ruling, which was issued in a case instituted by the Rivers State Government (RSG) through its Attorney General is considered epochal as it basically ends the current centralisation of VAT administration in Nigeria in favour of a decentralised system, wherein each individual State is now empowered to enact legislation which imposes VAT in their respective regions and collect the tax so imposed.

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The issues for determination in the case were summarised by the Judgement as follows:

• Whether the Federal Republic of Nigeria (FGN) and the FG are entitled to make laws for the purpose of taxation other than for taxation of incomes, profits and capital gains owing to corporate entities, and if not, whether the FIRS is entitled to enforce and administer laws inconsistent with, or in excess of the authority of the FGN to make laws?

• Whether the legislative competence of the National Assembly to impose taxes or duties on capital gains, incomes or profits of persons and on documents or transactions by way of stamp duties extends to and includes the power to levy or impose any form of Sales Tax including Value Added Tax or any other form of levy and if so, whether the power of the FGN to delegate the power of collection of taxes can be exercised for the purpose of delegating the duty to any other person other than the government of a State or other authority of a State?

• Whether the Taxes and Levies (Approved List for Collection) Decree No. 21 of 1998, now Act, in so far as it purports to legislate in respect of the responsibility for collection of taxes and levies, assessment and collection of taxes other than as provided for under items 58 and 59 of the Exclusive Legislative List, (Second Schedule Part 1) and items 7 and 8 of the Concurrent Legislative List (Second Schedule, Part II), is not unconstitutional, null and void?

The Court ruled in favour of the RSG on all the issues. There are conversations around the proprietary of the judgment and the FIRS has since announced that it has filed both a notice of appeal at the Appeal Court as well as a notice for stay of execution at the FHC. The intent of this article though is not to discuss the legal issues around the judgment as that would be left for the courts to determine. However, the RSG has gone ahead, in the absence of any contrary judgment to pass the Rivers State VAT Law which ordinarily should herald the decentralisation of Nigeria’s VAT system.

This article therefore seeks to discuss the key issues which stakeholders may need to consider under a decentralised VAT system.

Basis for imposition of the tax

There are two established bases for the imposition of VAT globally; the destination and the origin principes. Nigeria’s current federal VAT Act (VATA) is based on the destination principle where the tax is levied by the jurisdiction where the service is consumed rather than where it originated, as would have been the case under the origin principle. Although the destination principle is widely recommended for ease of international trade, no jurisdiction is compelled to apply it.

Consequently, a system where various States in Nigeria enact VAT laws based on conflicting principles may lead to significant difficulties for businesses and the taxpayers who are supposed to bear the brunt of any VAT charged.

Imagine a scenario where Lagos State enacts a VAT law which requires companies in the State to charge and account for the tax on any good manufactured there in while Edo State requires companies to only charge the tax on goods sold in the State. Therefore, a good manufactured in Lagos and sold in Edo would be chargeable to two different forms of VAT. This obviously would lead to increased cost for consumers.

It may therefore be necessary under a decentralised system to have a structure where every State applies the same principle in enacting a VAT law.

Input – output mechanism

A typical VAT system allows for the claim of VAT incurred on factors of production from that collected from the sale of the finished goods so that at the end of the day, the total VAT paid by the consumer does not exceed that due on the value of the finished goods. This is seamless in a central system where the same tax authority is responsible for administering the collection of both the input and the output tax. Under a decentralised system, it is possible that input VAT may be incurred in a state separate from that in which the output tax is earned.

For example, will Adamawa State be willing to grant input credit incurred in Imo State or will it insist that both States are different and therefore companies can only offset input taxes paid to the Adamawa government from output tax earned in the same jurisdiction. Again, this would be counter-productive as it would lead to increased cost and administrative efforts.

It would also mean that customers would not have to pay for more than the value added in a particular State as if the entire production process were started and finished in the State even though that is not the case and the VAT has already been charged and collected in a separate State.

Logistic considerations

Today, every company is expected to file just one VAT return regardless of the number of States where it has operations. The Company has one tax identification number and one tax office where its file is domiciled. Obviously, that would no longer be the case as companies may now have to register with multiple tax authorities and file multiple tax returns monthly. This obviously would create some logistical challenges for companies.

Alternatively, others have argued that the additional obligation may not be as onerous as it appears. Most of these companies already maintain decentralised records in all of these locations which feed into the central report used in preparing the central return at the end of the day. The central station responsible for preparing this final report would typically review all the source information from the various stations and certify them before including them in the final report.

The only thing that may therefore change is rather than include them in the final report, the individual stations would just be authorised to walk into the tax office where they are located and file their own returns. This argument though does not appear to consider the potential issues with multiple audits from various tax authorities and the amount of time and effort required to resolve these audits which would now be replicated across different locations.

International trade

Nigeria’s federal VATA recently introduced new rules around the taxation of non-resident companies (NRCs) which are meant to mirror the destination principles in use in the country. NRCs which provide services to Nigerian companies are now expected to register for the tax in the country and file returns accordingly, regardless of whether they perform the service or have any physical presence in the country.

This new requirement is already a cause of concern for Nigerian businesses who deal with international vendors as it is unlikely that NRCs which do not have presence in the country would be keen to register for tax in Nigeria in order to provide a service offshore. Furthermore, the responsibility for accounting for the tax due on such transactions lie with the Nigerian recipient of the service regardless of whether the NRC is registered or not and whether they charge the tax on their invoice. This is therefore an additional cost of doing business for the Nigerian customer.

The question now is who would be responsible for collecting the taxes under those circumstances under a decentralised tax system? Can the FG argue that the taxes arose from international trade which is under the purview of the FG even under any form of decentralised Government and so should be administered by the FIRS?

Or would the States insist that to the extent that the services are consumed in their jurisdiction the taxes should accrue to them? Would this make an already cumbersome obligation even more difficult if a German company which provide services from Germany to its related party in Nigeria (with operations in multiple Nigerian States) now has to register for and file VAT returns in all of those States despite the fact that it does not have any physical presence in the country and does not to come into the country for the purpose of providing the service?

There is also the issue of duties paid at the port. A look into the VAT law passed by the RSG shows that it referred to the valuation of imported goods and how VAT would be determined on such goods under the law. However, the VAT on these goods are typically assessed and collected at the port of entry by the Nigerian Customs Service (NCS) as the ports are under the control of the FG, regardless of the fact that they are located in different Nigerian States.

Will the States now seek to co-ordinate with the NCS for the purpose of recovering the VAT collected on imported goods or would they expect companies to pay VAT to the NCS upon importation and thereafter, still pay VAT on the same goods to the relevant State Tax Authority? This is unclear and may create potential issues for businesses under a decentralised system if not properly addressed.

Re-allocation of revenue

The current VAT system provides a basis for the re-allocation of revenue across the federation. The quantum of VAT generated in any jurisdiction is a function of the level of economic activity in the area. There is a significant discrepancy in the level of economic activities across the various States in the country. The collection of VAT at a central point therefore currently enables the FG to reallocate resources to economically-disadvantaged areas.

It must be said that it is probably not in the best interest of the economically buoyant States to allow significant differences in the quality of life between them and other States as this may encourage migration to such advanced States which would primarily put the relevant State Government under undue pressure as it may not be able to expand infrastructure at a commensurate speed to which its population grows. It is therefore in the overall interest of everyone to ensure that some reallocation occurs to ensure even development across the country.

Notwithstanding, some have argued that leaving every State to their own devices would stimulate competition as they would have to generate ingenious ideas to attract economic activities and independently grow their revenue. This would in no small way improve the ease of doing business in the individual States and the country at large, which can only be good for the economy.


There has been a lot of talk about the structure of the Nigerian federation and what constitutes true federalism. A decentralised VAT system is only a subset of the conversation exacerbated by the recent ruling of the FHC and until the judgment is overturned, if ever, the issue must be addressed.

However, there are a myriad of issues that would need to be resolved if Nigeria must transit to a decentralised VAT system. A key question would even be “can we have a fully decentralised system within a federating unit”? A lot of collaboration would be required to ensure that such a system does not create an unnecessary burden for businesses.

It is in the best interest of all parties for Nigeria to continue to remain competitive when compared to other countries in the continent, especially with the introduction of the African Continental Free Trade Agreement. We therefore need to ensure that other than the ongoing legal processes, all the relevant stakeholders need to continue to engage with each other to ensure that Nigeria’s VAT system meets the aspirations of all parties without minimal to zero transitory issues.

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