Judgment on VAT as Triggers for Agitation for Restructuring

As the nation awaits the Court of Appeal ruling against the judgment of the Federal High Court, Port Harcourt, which conferred the right to collect the Value Added Tax (VAT) on the Rivers State government, economic watchers say the emerging scenarios are reinforcing the call for the restructuring of revenue sharing in the country, reports Festus Akanbi

Reactions over the August 9, 2021 court victory invalidating the right of the Federal Inland Revenue Service (FIRS) to collect Value Added Tax (VAT) and Personal Income Tax (PIT) in Rivers State have continued to pour in, almost a month after the controversial judgment.

Delivering judgment in suit No. FHC/PH/CS/149/2020, filed by the state Attorney-General for Rivers State, against the FIRS and the Attorney-General of the Federation, the court presided over by Justice Stephen Dalyop Pam of the Federal High Court, Port Harcourt ruled that the Rivers State government, not the Federal Inland Revenue Service (FIRS) has the right to collect Value Added Tax (VAT) and Personal Income Tax (PIT) in Rivers State.

Justice Pam also issued an order of perpetual injunction restraining the FIRS and the Attorney-General of the Federation, both first and second defendants in the suit, from collecting, demanding, threatening and intimidating residents of Rivers State to pay to FIRS, personnel income tax, and VAT.

A Chain of Events

Meanwhile, in a bid to put a stamp of authority on the judgment, the Rivers State Governor, Nyesom Wike has signed the Valued Added Tax Law No. 4 of 2021 into law.

Wike maintained that the verdict of the Federal High Court had sufficiently addressed the illegality perpetrated by the FIRS. He claimed that when agencies of the federal government are allowed to illegally demand and collect taxes meant for states, they strangulate the state financially and turn them to be beggars.

While the Chartered Institute of Taxation of Nigeria (CITN) has explained it is reviewing the situation, the Federal Inland Revenue Service is engaging the Lagos State Government on the need to maintain the status quo till the determination of the appeal instituted by the FIRS.

The FIRS did not stop at appealing the judgment, it further read a Riot Act to any taxpayer who stops the payment of VAT and other taxes to the FIRS covers pending the determination of the appeal filed against the Rivers State High Court judgment.

“As the decision is being appealed and given the pending applications for injunction and stay of execution which the FIRS has filed in court against the judgment, members of the public are advised to continue to comply with the Value Added Tax obligations until the matter is resolved by the appellate courts to avoid accruing the consequent penalties and interest for non-compliance,” the FIRS said in a statement.

Executive Chairman, FIRS, Muhammed Nami, made this known in a letter dated August 24 and addressed to Moyosore Onigbanjo, the attorney general and commissioner for justice in Lagos state.

The Lagos State government had directed the FIRS to stop issuing demand notices for payment of VAT in the state and to render accounts, within seven days, of all sums collected as VAT in the current accounting circle in the state.

The state government premised its demands on the decision of the federal high court in Port Harcourt, Rivers State.

Mobilisation for Legal Battle

While the Nigerian public awaits the determination of the appeal, tax practitioners, economic analysts, and frontline lawyer, Femi Falana, believe the Rivers judgment will serve as a tonic to the campaign for economic restructuring in the country.

Falana explained that the judgment of the Federal High Court was consistent with Items 58 and 59 of Part 1 of the Second Schedule of the 1999 Constitution, which according to him, did not encompass the VAT or consumption taxes.

The Senior Advocate of Nigeria also considered the favourable judgment as a clarion call for other states of the federation to file applications to join the case at the Court of Appeal as interested parties to defend the judgment of the Federal High Court.

Falana pointed out that because of the valid and subsisting judgment of the Federal High Court, the Rivers State Value Added Tax Law No. 4 of 2021, “has not impugned any provision of the 1999 Constitution (as amended).”

The senior advocate explained that the judgment of the federal high court, “has confirmed the struggle for restructuring via litigation. That means that the judgment will strengthen the campaign for restructuring.”

Falana also observed that the judgment, “has a lot of implications for the dwindling revenue of the state and local governments across the federation,” which according to him, reinforced the call for other state governments to join the suit at the appellate court.

“VAT was increased from five per cent to 7.5 per cent last year by the National Assembly. Right now, VAT collected is between N1.5 trillion and N1.8 trillion per annum.”

A foremost tax consultant, who is also the Fiscal Policy Partner and Africa Tax Leader at PwC, Mr. Taiwo Oyedele, said a likely scenario if Rivers State court victory is upheld will be such that will give states where such VAT is generated an upper hand in the allocation of VAT proceeds.

Speaking on a television programme monitored in Lagos last week, Oyedele said what it means, for instance, is that states which forbid the sale of certain products in their domains will not stand to benefit from the tax paid on such products.

Watchers of the unfolding scenario explained that irrespective of what happens in days to come, the fact is that the Rivers State’s victory is bound to trigger more legal battles between the states and the federal government, especially on issues bordering on the revenue sharing formula.

Like Rivers, Like Other States

Responding to the brewing controversies, the foremost tax audit firm, PwC Nigeria stated, “If the judgment is enforced or upheld on appeal, it will apply to other states and not just Rivers State. This means each state would administer VAT within their territory. By implication, FIRS will administer VAT within the FCT and non-import foreign VAT, while the Nigeria Customs Service will collect import VAT on international trade.”

The judgment on paper is likely to favour state and local governments who currently receive 75% of the revenues generated from VAT. However, this may not be the case.

Sifting the Wheat from the Chaff

However, a recent PWC report explained that the judgment, if upheld by a higher court, could spell doom for some states which currently do not generate enough economic activities to boost their VAT numbers. According to PWC, states such as Lagos, Rivers, and Kano might just be the only beneficiaries of this ruling, considering the significant level of economic activity in the states that can generate high VAT revenues.

The auditing firm believes that a few states like Kano, Rivers, Oyo, Kaduna, Delta, and Katsina may experience minimal impact, while at least 30 states account for less than 20% of VAT collection will suffer significant revenue decline.

It is believed the federal government may be better off, given that FCT generates the second-highest VAT (after Lagos) in addition to import and non-import foreign VAT.

Dissenting Voices

It is in the light of this that one understands the opposition of the Katsina State Governor, Alhaji Aminu Bello Masari to the victory of the Rivers State government.

He described the Federal High Court judgment as capable of causing chaos across the states of the federation, vowing that, “we will resist its implementation.”

Masari spoke when a delegation from the Revenue Mobilisation and Fiscal Commission (RMAFC) paid him a sensitisation visit at the Government House.

According to Masari, “We have heard the judgment of the state High Court in Rivers and we have appealed against that judgment.

“It means people will begin to pay double VAT because if you pay VAT in Kano, at the point of departure it means when you come to Katsina you pay another VAT.

“If you pay VAT in Lagos it means you also pay VAT all along the way until you reach your destination.

“II will bring a lot of burden on the people. That judgment is not fair. “It is other parts of the country that make Lagos and Rivers states what they are.

“We have to work together as a nation and come up with something that will work for all of us.”

VAT, the Golden Eggs

Experts were not surprised that VAT was the focus of the legal battle, given the sheer amount of money it currently generates to the federal government for onward distribution among the three tiers of government.

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 per cent to N512 billion from N327 billion in the corresponding period of 2020, a relief to cash-strapped states who pocket 50 per cent of VAT collected.

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

Experts believed that 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.

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 per cent formula. The FIRS keeps four per cent as the cost of collection.

In 2020, for instance, total VAT collection was about N1.53 trillion, with import VAT being N348 billion (or 22.7%) while foreign non-import VAT was N420 billion (or 27.4%) and local VAT amounted to N763 billion (or 49.8%). The federal government is likely to retain more than the 15% it currently shares, while States and LGs will have less to share, especially if we consider VAT on FG contracts included in Local VAT which will also be due to the FG.

States will also need time to set up the machinery required to collect VAT, a luxury they probably cannot afford in the short term. This means they could be on the hook to lose significant revenue, putting them in a more precarious situation.