By AYOOLA OLAOLUWA
Legal fireworks and political maneuvering have ensued among the 36 states of the federation and the Federal Government over a federal court ruling ceding the collection and management of Value Added Tax (VAT) and Personal Income Tax (PIT) to states.
Business Hallmark reliably gathered that while states favoured by the judgment, such as Lagos and Rivers are rooting for its enforcement, majority of the 36 states not favoured are scheming to upturn the ruling.
It would be recalled that a Federal High Court (FHC) sitting in Port Harcourt, the Rivers State capital, had on Monday, August 9, 2021, ruled that the Rivers State government, and not FIRS, is empowered to collect VAT and Personal Income Tax, PIT, in the state.
The court, which granted all the 11 reliefs sought by the Rivers government, affirmed that there was no constitutional basis for FIRS to demand 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 did 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.
According to the presiding judge, Justice Stephen Pam, only states are constitutionally entitled to impose taxes, such as consumption or sales taxes in their territories.
He, therefore, ruled that henceforth, FIRS should stop collecting VAT and personal income tax, while the Rivers State government should be in charge of the PIT and VAT collection in the state.
The judgment sent a shock-wave across the country, with legal experts arguing that other state governments are legally empowered to enforce the ruling in their jurisdictions.
Before the landmark judgment, the 36 states and 774 local government councils collect 50% and 35% VAT proceeds respectively, leaving the Federal Government with 15% (net of 4% cost of collection by the FIRS).
Meanwhile, 20% of the pool is shared based on derivation. The 20% derivation, checks revealed, was accommodated after the Lagos State government won case it instituted in court against equal sharing of VAT revenue.
While the federal and state governments are still in shock, the Rivers State government has put machinery in motion to enforce the ruling.
The state governor, Nyesom Wike, on Thursday, Augusgv19, signed into law the bill on VAT collection in the state.
While speaking at the Government House, Port Harcourt, after signing the bill into law, Wike said that the judgment had addressed the illegality perpetrated by the Federal Government in the collection of VAT in states.
According to the governor, states are deliberately strangulated and turned to beggars with the take over and collection of taxes meant for them by federal agencies.
“But we are standing on the part of history as representatives of the state to have taken the bull by the horns to challenge the illegality of the Federal Government through the Federal Inland Revenue Services.
“We are all aware that states have already been strangulated. Most states depend on allocation from federation account. States have been turned to beggars.
“Hardly will any day pass that you won’t see one state or the other going to Abuja to beg for one fund or the other”.
The governor vowed that henceforth, the state would no longer pay VAT generated in the state into the federation account.
“In Rivers State, we awarded contract to companies and within the last month, we paid over N30billion to the contractors.
“Now, look at 7.5 per cent of N30billion of contracts we awarded to companies in Rivers State, you will be talking about almost N3billion from that source alone. Now, at the end of the month, Rivers State Government has never received more than N2billion from VAT.
“So, I have contributed more through the award of contract and you are giving me less. What’s the justification for it? From now on, the 7.5 per cent deducted as VAT in Rivers will not be given to FIRS”, Wike vowed.
According to legal experts who spoke with BH, with the new law, FIRS will only be allowed to administer VAT within the Federal Capital Territory (FCT), while the Nigeria Customs Service (NCS) will collect import VAT on foreign goods brought in through the nation’s borders.
Major beneficiaries of the ruling, checks revealed, are Lagos, Rivers, Ogun Kano, Oyo, Delta States and the FCT.
While most states, particularly those from the north, are expected to be hard hit by the ruling as they currently generate low revenue and depend largely on monthly allocations from Abuja, states like Lagos, Rivers and Kano, checks revealed, will have more funds accrued to their coffers.
For instance, Lagos which received a total of N115.93 billion as Federal allocation in the year 2020, according to the NBS, would have received N380.5billionjust from local VAT of N763billion generated in 2020, assuming it realised just 50% of the revenue.
The figure is just a conservative estimate as the state, available data suggests, generate up to 70% of the VAT income.
According to data from the National Bureau of Statistics (NBS), Nigeria raked in N2.5 trillion from VAT between January 2020 and June 2021.
The breakdown shows that while total VAT collection in 2020 was about N1.53trillion, with import VAT being N348 billion (or 22.7%), foreign non-import VAT N420bn (or 27.4%) and local VAT N763bn (or 49.8%), VAT collection in the first quarter of 2021 was N496.39billion.
It increased by N15.8billion in the second quarter of 2021 to N512.25billion.
Further analysis shows that VAT generation of N187.4billion for Q2 (April to June) was from non-import VAT locally, N207.7billion from non-import VAT for foreign goods, while the balance of N117.1billion was from the Nigeria Customs Service (NCS) VAT on imports.
Meanwhile, different sources confirmed that Lagos accounts for between 55% and 70% of VAT revenue generated in the country.
The first time Nigerians had a true picture of VAT generated by states and the FCT, was in August 2017 when former Minister of Finance, Mrs. Kemi Adeosun, said during a meeting with members of the Progressive Governors’ Forum in Kebbi State that 55 per cent of VAT revenue in the country was being collected from Lagos State.
Adeosun explained that the balance of 45 per cent was generated from the remaining 35 states of the federation and the Federal Capital Territory.
According to Adeosun, while Lagos accounted for 55 per cent, FCT accounted for 20 per cent, Rivers 6%, Kano 5% and Kaduna state 1%.
This means that the four states of Rivers, Lagos, Kano and Kaduna, as well as the FCT generated 87 per cent of the entire VAT collections, while the remaining 32 states only generated the balance of 13 per cent.
“I’m hoping that one day, the finance commissioners (of the states) will stop needing to come to Abuja monthly to share Federation Account Allocation Committee’s monthly sharing of federally collected revenue) because IGR will be sufficient”, Adeosun had noted in 2017.
However, a management consulting firm, PricewaterhouseCoopers (PwC), noted that Lagos will be the major beneficiary of the court ruling on VAT, as the state accounts for 70% of collection across the country.
The Fiscal Policy Partner and Africa Tax Leader at PwC, Mr. Taiwo Oyedele, while speaking on the development, said that 70 per cent of VAT collected nationwide originate from Lagos and that if states collect personally, Lagos state would be the major beneficiary of the ruling.
“I don’t think any other state would make more money as of today from collecting their VAT than what they are sharing from the Federation. The reason is very simply, there is customs VAT that is collected by customs on behalf of FIRS, and that accounts for somewhere around 12 to 15 percent of VAT and that is a VAT no state would be able to lay claims too.
“Also, between 60 to 70 per cent of the nation’s VAT is generated in Lagos. This means all the other states are barely contributing 30 per cent”, the PwC boss stated.
Successive governments in Lagos State, findings revealed, had waged fierce legal battle for the control of consumption taxes generated in the state.
For instance, in 2014, the administration of former Governor Babatunde Fashola, had dragged the Federal Government to the Supreme Court, challenging the powers of the FG to collect VAT on goods and services consumed in the state
Some of the reliefs sought for by the state government include a ruling to repeal the VAT Act on the basis that it was outside the legislative remit of the FG to collect the tax.
However, the case suffered a setback as the Supreme Court struck it out for lack of original jurisdiction.
While ruling in favour of the preliminary objection of the Attorney General of the Federation on behalf of the Federal Government, the apex court had argued that it did not have original jurisdiction in the matter as it was a dispute between an agency of the federal government (FIRS) and Lagos State and not a dispute between the Federal and the Lagos State government.
Dismissing the suit, all the judges concurred that the case ought to have started in a lower court.
Undeterred by the initial hiccup, the state government instituted several cases in state and federal high courts. In one of the suits instituted on behalf of the state and its members by the Registered Trustees of Hotel Owners and Managers Association of Lagos versus. A. G. Federation and Others at the Federal High Court, Lagos Division the plaintiffs asked the court to declare that the Hotel Occupancy and Restaurants Consumption Law is valid, and super-cedes the law on consumption passed by the National Assembly.
In a landmark judgment passed in October 2019, the high court upheld the powers of the Lagos State Government to charge and collect consumption tax from hotels, restaurants and event centres within the state.
The court, while restraining FIRS from imposing VAT on goods and services consumed in hotels, restaurants and event centres in the state, held that based on the constitution and the Taxes and Levies (Approved List for Collection) Act, the power to impose consumption tax was a residual power within the exclusive competence of states.
While other cases instituted by the Lagos government are pending in court, the Rivers State government had also approached the court seeking to restrain the Federal Government from collecting consumption taxes in the state.
The state’s efforts eventually culminated in the recent judgment barring the FIRS from collecting VAT in the state, and ceding the power to the state government
However, the judgment is generating controversies, with many stakeholders, especially the federal government and most of the 36 state governments kicking against it.
BH gathered that apart from the federal government, many states expected to be affected by the ruling are putting pressure on the federal government to appeal it, warning that its implementation distort the current arrangement and starve them of funds.
The push against the enforcement of the court ruling, our correspondent learnt, is coming from governors in the northern parts of the country and some of their colleagues in the south.
A commissioner of finance in one of the north central states who did not want his identity mentioned, said that his state will go to any length to see that the ruling does not come to pass.
“Some of our colleagues going to court (Lagos, Rivers) are just being selfish. They want to eat their cake and have it back. That is not possible.
“They all share from revenues collected from other states shared by FAAC. Yet, they want to keep what is coming from their states to themselves.
“This is injustice and it won’t work. Other states have one area or the other where they generate revenues into the federation account.
“For instance, states in the north have hydroelectric dams and solid mineral resources. What happens if we block others from benefitting from these God-given resources?.
“I can assure you that our principals are meeting to find solution to logjam. This intervention does not exclude legal options or other states also holding on to their own resources”, the top government official warned.
The Federal Government has also mandated FIRS to challenge the ruling in court. Confirming this at the weekend, the FIRS disclosed that it had filed a stay of execution and advised all stakeholders to maintain the status quo on the issue.
Meanwhile, reactions have continued to trail the court ruling. Managing Partner at Grail Attorneys, I.E Tobi Esq, while commending the court’s decision, said it could have far reaching consequences than currently being envisaged by most Nigerians.
“The court’s decision upholds the provision of the constitution as regards collection of taxes under the concurrent list. It also helps strengthen federalism in its true sense as the state will have sufficient revenue for its development.
“Above all, if the decision is upheld by appellate courts, I think the various states can sue the FG to recover VAT already collected from businesses in their states,” he said.
Also speaking, the Fiscal Policy Partner and Africa Tax Leader at the PriceWaterCoopers (PwC), Taiwo Oyedele, said it will be necessary to amend the Nigerian Constitution to address the current challenges while retaining the positives under the current system.
“Based on the Nigerian constitution, consumption tax belongs to the states and I don’t think that anyone is debating that. So, what happened in 1993 when the VAT law was introduced was the understanding that the Federal Government had the capacity to collect.
“At the time, even Lagos state did not have the capacity to collect. So, the federal government was only collecting on behalf of the states and then keeping a percentage of the state to cover the cost of collecting.
“So, we can debate on whether the percentage is high or not and that is why they only keep 15 per cent and 85 per cent goes to the states and local governments.
“This is a judgment of the Federal High Court and I don’t think any state would want to implement it. You expect there would be an appeal to court of appeal and then Supreme Court. This is a major issue so I don’t think anyone would allow it stand at this level where it is.
“So, the reality is that it would not be implemented now, it would still be under appeal and I don’t know how many more years that would take,” Oyedele said.
In his own contribution, the Registrar, Chartered Institute of Taxation of Nigeria (CITN), Adefisayo Awogbade, said the institute was making efforts to get a certified true copy of the case.
“From the foregoing decisions, it is evident that this is not the first time that the VAT Act has been declared unconstitutional.
“As an Institute, we were waiting for the appellate courts to take a definite position on the matter before making our comments,” Awogbade stated.
Meanwhile, despite the court ruling, FIRS has directed taxpayers in the country to continue to pay their Value Added Tax (VAT) to it or risk penalties.
The warning comes after a Federal High Court in Rivers State recently ruled that the state and not federal government is constitutionally empowered to collect VAT.
The FIRS said it decided to issue the directive following numerous inquiries in view of the recent court ruling.
The FIRS, in a statement titled, “Rivers Judgment: FIRS Urges Taxpayers to Continue to Pay VAT,” argued that since it had already appealed the Rivers judgment seeking a stay of execution order, the status quo ante subsists on the VAT collection authority, hence taxpayers should continue to pay their VAT to it.
The statement issued by the Director, Communications and Liaison Department, FIRS, Abdullahi Ismaila Ahmad said the attention of the Service had been drawn to the trending report that on August 19, 2021, the Rivers State government took steps to enact a VAT Law for the state following the Judgment of the Federal High Court Port Harcourt Division on August 9, 2021 in Suit No: CS/149/2020.
“The suit was about who has the constitutional duty for the collection of VAT and Personal income tax in Rivers State,” it said.
“We wish to inform the general public that, before the above-mentioned steps taken by the Government of Rivers State, the FIRS had lodged an appeal against the above judgment and had also filed an application for stay of execution on the judgment as well asking the Court for an injunction pending determination of the appeal.
“All parties to the suit are aware that both applications were heard on the 19th and 20th August 2021, and are awaiting the decision of the Court.
“Given that the Court of Appeal is yet to rule on the Appeal from the judgement of Federal High Court and that the Federal High Court is yet to deliver a ruling on FIRS’s applications for stay of execution and injunction, members of the public are advised to continue to comply with their Value Added Tax obligations until the matter is resolved by the appellate courts,” the FIRS said