Nigeria VAT: Tax, legal experts weigh in on Port Harcourt judgement

Expert taxation legal fireworks are currently raging among different groups weighing in on the recent Federal Harcourt Port Harcourt judgement stopping the Federal Inland Revenue Service (FIRS) from continuing to collect  Value Added tax (VAT) in Rivers State, a judgement with nationwide implication for the revenue service, which yearly has a target set by the Nigerian federal government.

“It is on point sir. The FIRS has no business collecting VAT on intra state transactions. The current administrative system for VAT in Nigeria is patently unconstitutional, downright inequitable and completely immoral,” said one of the tax experts.

Those with a contrary position on the matter doubted how the judge arrived at his decision. “While I don’t disagree with this position, my concern is violation of the extant laws in force at the time of this ruling. The right process should be followed to change the laws and enshrine justice and equity rather than following this back door approach. I’m still at a loss as to how the judge arrived at his conclusion,” said another expert.

“It should be clear that taxation is an intendment. If a law is ultra vires the National Assembly, then it is void and of no effect. Ordinarily, such laws ought not to be obeyed. So, there is no need for an order of court to strike it down. I also do not disagree with his views however, no matter how bad a law is, it remains the only valid means until it is changed. I think most of these judges need to be sensitized on taxation just like you said. I don’t understand how the judge arrived at such conclusions knowing full well that only FIRS is given that role by law,” said another leaning on the Denning legal school of thought.

But another countered him: “I agree that an order of court is required as has been done in this case on grounds of principle and the need to ensure social order. However, if an act was done pursuant to a void law, is it not arguable to say such an act was built on nothing?”

Yet another expert argued that there are still many rivers to cross by Rivers State before shouting legal victory. “No matter how sound the judgement of FHC is, it is at the court of first instance to which appeals lie up to the Supreme Court. But methinks that with the earlier Supreme Court decision in AG Ogun v Aberuagba, which is the locus classicus on the doctrine of covering the field as regards VAT, hence, it’s the appellate courts, especially the Supreme Court, that would decide if the facts of Aberuagba can be distinguished from the instant case, and would have to uphold or reverse itself on the earlier decision on VAT. It’s not over until it’s over.

“It should also be known that there’s what is called VAT attribution which is to state what is collected for ease of distribution among states. The states still collect 50% of the VAT, LGs share 35%. Invariably, the states collect 85% because the LGs are not autonomous, only 15% goes to the FG”.

But another expert on the tax forum pointed out a problem with the VAT Act: “It’s not a tax on value added. It’s a tax on supply of goods and services.”

The court, presided over by Stephen Dalyop 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, personal income tax (PIT) and VAT. The judge granted all the 11 reliefs sought by Rivers State government; stating that there is no constitutional basis for the FIRS to demand for 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 is limited to taxation of incomes, profits and capital gains which does 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 (ELL) of the Constitution.

The judge dismissed the preliminary objections filed by the defendants that the court lacked jurisdiction to hear the suit, and that the case should be transferred to the Court of Appeal for interpretation. He also dismissed objections raised by the defendants that the National Assembly ought to have been made a party in the suit, declaring that the issues of taxes raised by the state government are issues of law that the court is constitutionally empowered to entertain.

“After a diligent review of the issues raised by both the plaintiff and the defendants, the plaintiff has proven beyond doubt that it is entitled to all the 11 reliefs it sought in the suit,” said judge Pam.

The court agreed with Rivers State that it is the state, and not FIRS, that is constitutionally entitled to impose taxes enforceable or collectable in its territory of the nature of consumption or sales tax, VAT, education and other taxes or levies, other than the taxes and duties specifically reserved for the federal government by items 58 and 59 of part 1 of the second schedule of the 1999 Constitution, as amended. Also, the court declared that the defendants were not constitutionally entitled to charge or impose levies, charges or rates (under any guise or by whatever name called) on the residents of Rivers State, and indeed any state of the federation.

Donald Chika Denwigwe, senior advocate of Nigeria and lead counsel for Rivers State government, explained that the case is all about the interpretation of the constitution as regards the authority of the government at the state and federal levels to collect certain revenue, particularly VAT.

“In summary, it is a determination that it is wrong for the federal government to be collecting taxes which are constitutionally reserved for the state governments to collect.  The implication of the judgement is that the government (Federal and State) as an authority under the constitution, should be advised by the judgement that it is the duty of all government authorities to comply with and obey the law so long as the court has interpreted it and said what that law is. In other words, the issue of Value Added Tax (VAT) in the territory of Rivers State and Personal Income Tax should be reserved for the government of Rivers State”.

For the experts, one said it was instructive to cite the landmark judgement won by Lagos State with Yemi Osinbajo (now vice president) then as the commissioner for justice and attorney general. He (Osinbajo) went to court to challenge the equal sharing of VAT proceeds in Nigeria by 36 states. He won, and the narratives changed.

“There was a Supreme Court judgment on similar matter instituted by Lagos State in which the Supreme Court declined jurisdiction on the ground that the matter was not one of the matters on which the Supreme Court could exercise its primary jurisdiction. In that case, the Supreme Court advised Lagos State to commence the matter de novo at the FHC. Rivers State just took a hint from the Supreme Court decision.  The federal government has no reason to collect VAT from states and share the revenue back to states on a discretionary basis. It is robbing Paul to pay Peter!” said one of the tax and legal experts commenting on the Port Harcourt judgement.

For Teju Somorin, a professor of law, while commenting on the Monday 9 August ruling by Stephen Dalyop Pam of federal high court, Port Harcourt, said: “With respect to the VAT collection solely by the FIRS/FGN, the order of perpetual injunction issued by the Court, restraining the FIRS and the Attorney General of the Federation from collecting the VAT and other two taxes may likely lead to a fresh legal tussle between the FGN and the States. At the inception and early implementation of the VAT, the states challenged it; that it was unconstitutional. The Study Group 2003 at paragraph 3.2.3 observed amongst others that – VAT as a federal tax is unconstitutional, by virtue of section 4(7)a of the Constitution, since it is neither listed on the ELL [exclusive legislative list] nor the CLL [concurrent legislative list]. The continued exclusion of the VAT revenue from the Federation Account violates section 162 (1) of the constitution”.

He said, “the separate sharing formula applied to VAT revenue is also unconstitutional by virtue of section 162 (3) of the constitution. The states have to date condoned this unconstitutional sharing formula for VAT because they gain more revenue from VAT than would have been the case had VAT revenue been turned over into the federation account”.

Value Added Tax was introduced in Nigeria in 1993 with the VAT Act 102 of 1993. It was made to replace the Sales Tax. According to TejuTax Reference Book volume 2 under the heading “Value Added Tax – Recommendations of the 2003 Study Group, in paragraph 3.2.4 of the main report of the study group, it recommended “a speedy constitutional amendment”. That “the current federal Value Added Tax should be included in the Exclusive Legislative List in the 1999 Constitution before January 1, 2004”.

Yet another expert comment said: “VAT Act 102 of 1993 is an oppressive law and unconstitutional. The constitution of Nigeria is very clear about any law that goes against the constitution; it is null and void. The 1999 constitution is categorical in listing the items that the federal government can impose taxes and duties in item 58 and 59 of Part 1 of the Second Schedule. Any other practice is dictatorial and unconstitutional!”