States may wait longer for appellate court to decide on VAT

Nigerian states will no doubt wait longer than expected for the Appeal Court to decide on whether it is truly the states and not the Federal Inland Revenue Services (FIRS) that should collect Value Added Tax (VAT) and Personal Income Tax (PIT).

Recently, the Federal High Court sitting in Port Harcourt and presided over by Justice Stephen Dalyop Pam declared that it was the Rivers State government and not the FIRS that should collect VAT and PIT in the state.

The Rivers State government had among others urged the court to declare that, by virtue of the provisions of items 7 and 8 of the Part II (Concurrent Legislative List) of the Second Schedule of the Constitution, the power of the Federal Government to delegate the collection of taxes can only be exercised by the State Government or other authority of the state and no other person.

But not satisfied with the court decision in Rivers State, the FIRS appealed the judgment, saying it had sought an injunction pending appeal and a stay of execution of the said judgment.

“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 continue to collect import VAT on international trade,” said Taiwo Oyedele, fiscal policy partner and Africa Tax Leader at PwC.

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VAT was introduced via Decree No.102 of 1993. It replaced sales tax operated under Decree No.7 of 1986, which was administered by states and the FCT. By contrast, VAT is administered by the FIRS and the revenue is shared among all three levels of government. Both VAT and sales tax fall under the category of consumption tax.

Currently, Section 40 of VAT Act requires that the VAT pool be shared 15 percent to the Federal Government; 50 percent to states, and 35 percent to LGs (net of 4% cost of collection by the FIRS). 20 percent of the pool is shared based on derivation.

“It will be necessary to amend the Constitution to address the current challenges while retaining the positives under the current system. For instance, states will have to rely on the Federal Government to enforce the Significant Economic Presence requirement for global tech companies. Ultimately, Nigeria can learn from other climes, but we must figure out our most suitable form of fiscal federalism,” Oyedele said.

He believes that the Federal High Court of Rivers State judgment may also have implications for taxes collectible by Local Governments, “which are currently administered by States as well as the amendment via Finance Act 2020, which introduced Electronic Money Transfer levy in place of stamp duties, among others.

“In addition, complications may arise for businesses including Small and Medium Enterprises (SMEs) who may have to deal with multiple tax authorities for VAT purposes and consequently a decline in Nigeria’s ease of paying taxes and doing business ranking.

“Ironically, the biggest losers will be the states except Lagos. A few states like Kano, Rivers, Oyo, Kaduna, Delta and Katsina may experience minimal impact, while at least 30 states which account for less than 20% of VAT collection will suffer significant revenue decline. The federal government may in fact be better off given that FCT generates the second highest VAT (after Lagos) in addition to import and non-import foreign VAT,” Oyedele noted.

“As the decision is being appealed and in view of the pending applications for injunction and stay of execution, which the FIRS has filed in court against the judgement, members of the public are advised to continue to comply with the VAT obligations until the matter is resolved by the appellate courts in order to avoid accruing the consequent penalties and interest for non-compliance,” FIRS said in a statement by its director, communications and liaison department, Abdullahi Ahmad.

“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.

“In view of the length of time that it takes for an appeal to be determined in our country, we think it will be in the public interest not to wait any longer”, according to Adefisayo Awogbade, registrar/chief executive, Chartered Institute of Taxation of Nigeria (CITN).

“As soon as we receive the certified true copy of the judgement, our legal advisers will study it and advise us accordingly. When that is done in the next few weeks, the Institute will take an informed position and the public will be duly communicated.

“We are mindful of our statutory mandate as the only Institute that controls and regulates the tax profession and tax practice in all its ramifications, and we will not shirk our responsibility to the public in all matters relating to taxation in Nigeria,” CITN said in a recent statement made available to BusinessDay on the judgment of The Federal High Court in suit between the Attorney General of Rivers State versus FIRS and The Attorney General of the Federation.