• FIRS banks on stay of execution order ahead Appeal Court ruling
• States now custodians of collection until subsisting order is reversed, say analysts
• Lagos IGR to grow by N400b yearly with new VAT law, annual revenue may exceed N1tr
• Consumption has huge cost borne by states, says Owoh
Ahead of September 20 deadline when businesses are expected to file value-added tax (VAT) claims, the control of the tax regime between the Federal and state governments and conflicting statements on the current position is stirring unease in the business community, The Guardian has learnt.
This comes as the Federal Inland Revenue Service (FIRS) insists it will collect the juicy taxes despite a contrary judicial pronouncement in anticipation of obtaining a stay of execution in the coming days.
A Federal High Court sitting in Port Harcourt, Rivers State, had issued an order restraining the FIRS from collecting VAT and personal income tax (PIT) in the state.
Following the ruling, the Lagos State Government, at the weekend, asked the FIRS to stop giving 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.
Expectedly, the Federal Government is kicking against losing a big chunk of its projected revenue, especially after recording a revenue shortfall of N1.76 trillion in the first half of this year.
According to a revenue performance report, which was obtained from the Budget Office of the Federation, Federal Government’s projected revenue for 2021 was N7.9 trillion, of which N3.9 trillion was earmarked as pro rata target for the first six months.
As at June 2021, the government had only generated N2.3 trillion, or 44.1 per cent of the pro rata estimate, indicating a revenue gap of N1.8 trillion.
In the same period under review, the Federal Government generated N512.25 billion as VAT. This was against N496.39 billion generated in the first quarter (Q1) 2021 and N327.20 billion generated in Q2 2020.
The National Bureau of Statistics (NBS) said the manufacturing sector generated the highest amount of VAT with N44.89 billion and closely followed by professional services generating N29.30 billion.
Commercial and trading generated N21.96 billion, while textile and garment industry generated the least and closely followed by pioneering and pharmaceutical, soaps and toiletries with N77.74 million, N169 million and N188.71 million generated respectively.
If Lagos State government perfects its books for the collection of Value Added Tax (VAT) and followed it up by collecting the tax directly, then the state’s Internally Generated Revenue (IGR) may grow with about N400 billion yearly and the state’s annual revenue may be above N1 trillion.
This is because in 2020, the total VAT the Federal Government collected was put at about N1.53 trillion, of which import VAT contributed N348 billion, foreign non-import VAT was N420 billion and local VAT was N763 billion.
And going by the revelation of the former Minister of Finance, Mrs. Kemi Adeosun, that 55 per cent of FG’s VAT revenue in 2017 was collected from Lagos, then on the average, Lagos may be generating N400 billion into its coffers from VAT as Internally Generated Revenue (IGR).
A 55 per cent of the N763 billion that the FG realised from local VAT in 2020 showed the state might have contributed over N400 billion as VAT last year alone.
In 2020, it was recorded that Lagos generated N418.99 billion as IGR and got N115.93 billion as federal allocation. So, if the state starts collecting VAT, its IGR may exceed N1 trillion.
So, other states in Nigeria, except Katsina, are lashing on the Rivers judgment to argue that they could go ahead to collect VAT within their jurisdictions.
It is on this basis that Lagos has directed FIRS to stop issuing demand notices for payment of VAT in the state and demand that FIRS renders accounts, within seven days, of all sums it collected as VAT in 2021 in the state.
Katsina State governor, Aminu Bello Masari, however, has frowned on the recent VAT ruling, saying it is a recipe for potential economic chaos across the states. He unequivocally said the decision would not stand and vowed to resist the implementation.
Masari made the declaration when a delegation from the Revenue Mobilisation and Fiscal Commission (RMAFC) paid him a sensitisation visit at the Government House. He also called for a review of the current revenue sharing formula, which he described as unfair and unjust as it gives more resources to the Federal Government to the detriment of the states and local governments.
Reacting to Lagos State position, FIRS Executive Chairman, Muhammed Nami, said it has appealed, as well as filed a stay of execution, advising the public for a status quo on the payment of the taxes.
Nami also said: “The instant judgment of the Federal High Court, Rivers State, is in conflict with the extant judgment of the Federal High Court, Kogi State on the same subject matter i.e. the validity of VAT Act as administered by the Service.
“The conflict created by the later judgment can only be resolved by the appellate court; and the right of the appellate court in this wise should not be compromised. In view of the foregoing, parties have to maintain the status quo ante (i.e. their positions before the instant judgment of the Federal High Court, Rivers State).
“The FIRS shall continue to collect VAT and administer the VAT Act until the final resolution of the legal dispute by the relevant appellate court.”
But Lagos State Commissioner for Information, Gbenga Omotoso, insisted that the state would soon starting collecting VAT.
Although, unlike Rivers State, that has passed a bill, which was signed into law by Governor Nyesom Wike, to enable it collect VAT, Lagos has not given a formal legal backing to collecting VAT in the state.
BUSINESS executives, who spoke on the issue at the weekend, said the conflicting directives from the states, especially Lagos, and the FIRS has left much room for assumption of who the consumption should be remitted to in the meantime, leaving economic actors in confusion on who controls the taxes.
A former chairman, Lagos State chapter of the Nigerian Bar Association (NBA), Monday Ubani, said: “The appeal by FIRS does not imply stay of action and state governments are the legal custodian of VAT until the Port Harcourt judgment is reversed by a higher court.”
On how the stalemate could be resolved, the Director of Communications of FIRS, Dr. Abdullahi Ismaila, told The Guardian that he could not make any comment as the matter was before the appeal court. He, however, said the stay of execution “is being determined.”
State governments across the country are currently awaiting the final pronouncement on the matter, it was gathered at the weekend. A spokesperson to a southern state governor said “the states’ political leaders are excited about the ruling and only hope the Court of Appeal discharges in no distant time to enable the federating units know where they stand on the issue.”
Most states are currently battling liquidity challenges, with many already exceeding debt limits. Hence, they are desperately scouting for avenues to shore up their finances to support bloated consumption, service debts and fund existing capital projects. The current arrangement where VAT is remitted to the Federation Account for sharing among the federating units is often dismissed as unfair to some states.
Last year, the states’ recurrent expenditure to total income was 86 per cent while the debt to IGR was 240 per cent. In the first half of the year, Lagos alone generated 33.37 per cent of the total aggregated IGRs of all the states and the Federal Capital Territory (FCT).
Economists have weighed in on the controversy, insisting that consumption, on which VAT applies, comes at a cost to states. The argument is that the location where the consumption takes place needs the proceeds to address the socio-economic costs of such consumptions.
A professor of applied economics, Godwin Owoh, said pooling VAT together to share among the states would continue to fuel idleness and leave the country perpetually poor. He said state governments could only be motivated to support an increase in economic activities if they take charge of the proceeds.
Describing the control of VAT by the Federal Government as an aberration, the economist argued that “VAT is location-specific”, hence it is not listed on the exclusive list.
“VAT is a consumption tax, and you cannot consume in proxy. I cannot eat bread in Enugu on behalf of somebody in Lagos. So, VAT should be location-specific, which is the intention of the Constitution.
“Some states in the country forbid alcohol consumption. So, why should a state allow the consumption of alcohol and bear the consequence while the proceeds of the sale of the commodity are shared to another state that does not allow its consumption?” he asked.
He also described as contradictory the move to include the administration of VAT on the exclusive list, noting that FIRS itself, which has hitherto administered the consumption, is a product of the Act of the National Assembly and not the Constitution.
Owoh added that there were many other anomalies in the administration of VAT and withholding taxes, which the country must seize the moment to correct. For instance, he queried the bracket classification of four per cent of its generated revenue as cost of collection.
“If a state issues a contract, for instance, and deducts withholding tax and is remitted to FIRS, for instance, what cost does FIRS as an organisation incur in the collection process? Why should it deduct four per cent as cost of collection from the amount involved?” he asked.
A former member of the Monetary Policy Committee (MPC) and renowned economist, Prof. Akpan Ekpo, said the Federal Government only took charge of VAT administration strictly on convenience rationale.
He said: “Technically, VAT is the old sales tax, which should be collected by the state government. There should not be controversy. The Federal Government has, over the years, settled for juicy and buoyant taxes, which should not be.”
Reacting, the Chartered Institute of Taxation of Nigeria (CITN) said the Rivers court ruling has legal precedence. In a statement, CITN Registrar/Chief Executive, Adefisayo Awogbade, explained that the Rivers case was not the first that the VAT Act had been declared unconstitutional.
Rivers State Governor Nyesom Wike
Awogbade said CITN was mindful of its statutory mandate and would not shirk its responsibility to the public in taxation matters.
“These do not in any way include VAT or any other levy other than those mentioned in Items 58 and 59 of the Exclusive Legislative List of the Constitution. The Institute is restricting itself to the vexed issue of the constitutionality of VAT.”
Listing previous decisions nullifying VAT Act, Awogbade said: “For instance, in the Registered Trustees of Hotel Owners and Managers Association of Lagos v. A.G. Federation, the court invalidated some of the provisions of the VAT Act. In Ukala v. FIRS, the court nullified the VAT Act. In A.G. Rivers v. F.I.R.S., it has been reported that the court has nullified the VAT Act and empowered the states to impose, demand and collect VAT within their states.
“Also, in October 2019, the Federal High Court, Lagos Division, in the Registered Trustees of Hotel Owners and Managers Association of Lagos v. A. G. Federation & Others, while considering the validity of the Hotel Occupancy and Restaurants Consumption Law of Lagos State, 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 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. It restrained the FIRS from imposing VAT on goods and services consumed in hotels, restaurants and event centres as this was already covered by the Lagos State Law.
“The court proceeded to declare sections 1,2,4,5 and 12 of the VAT Act as being inconsistent with section 4(2),(4) (a) & (b), (7)(a) & (b) of the Constitution and consequently unconstitutional and invalid,” he added.
ALSO, tax law expert, Dr. Jerome Okoro, said the life or death of every law in Nigeria depends on its conformity with the 1999 Constitution (as amended). According to him, by the supremacy of the Constitution, any part of a law that is out of tune with it must wither as a “dead branch of a living tree.”
When the very existence of a law, he stated, offends the Constitution, then the entire law must lose force and wither for lack of substratum.
He added: “There are two modes in which the existence of a law can be supported by the Constitution. Either the law is enacted by the tier of government constitutionally empowered to enact it under the Exclusive, Concurrent and Residual Legislative Lists, or the law is preserved as an Existing Law (laws predating the Constitution, and preserved by the Constitution). The VAT Act, 1997 clearly fails the first mode of existence. It is a federal law but does not stem from the Exclusive List. Then its support in the second mode – as an Existing Law – is not strong.
“Some Existing Laws are specifically mentioned and specially preserved in Section 315 of the Constitution, e.g. the Land Use Act, 1978 and the NYSC Act, 1973. These ones are not subjected to any further conditions of existence. The VAT Act is not one of these sacred cows. It rather falls under the general class of the Existing Laws, which are further subjected to the conditions of the Legislative Lists.”
According to him, the decision of the Federal High Court in Attorney-General of Rivers State v. Attorney-General of the Federation that the VAT Act is unconstitutional is the law for now, much as the right of appeal up to the Supreme Court is open. A confusing circumstance, he noted, is that taxpayers are left at a loss as to whether to maintain their VAT compliance with FIRS or direct it to the states, or suspend it until the Supreme Court ultimately resolves the matter.
Okoro, therefore, advised that considering the controversy, both tiers of government should suspend VAT enforcement until the Supreme Court decides. He explained that the matter, ideally, ought to have originated at the Supreme Court, with all the other states joined in the suit, to lay it to rest. He added that since it went the route of the Federal High Court, the other states should join the appeal as interested parties.
“On the socio-political angle, the clamour for fiscal federalism, true federalism, is rife. It is widely viewed as an instrument of sustainable peace and unity as well as geographically spread rapid economic development in Nigeria. It is high time the culture of states leaning on revenue distribution from the centre ended. The power of VAT collection should be restored to states as a step in the right direction. Let the states be enabled to look inwards and activate their potentials in commerce and industry,” he advocated.