Experts list major winners, losers
Scenario favours FG
Anxiety over ease of doing business
FIRS panics over likely N2.4tr loss
BY ROTIMI DUROJAIYE AND AUGUSTINE AVWODE
As the battle over the enactment of the Value Added Tax lingers at the Court of Appeal, tax and legal experts are predicting the likely consequences of the conflict that would rage for a long time to come.
They are foreseeing complications for businesses, including 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.
Amid the ongoing hostility between the states and the federal government on the VAT tussle, Lagos State Governor, Babajide Sanwo-Olu, on Friday signed into law the state VAT Bill as passed by the House of Assembly.
The Commissioner for Information and Strategy, Gbenga Omotosho, in a statement said the governor signed the “bill for a law to impose and charge VAT on certain goods and services.”
“By this act, the Bill has now become a Law,” Omotosho said.
In Rivers State, Governor Nyesom Wike, had on August 19, signed into law the bill passed by the Rivers State House of Assembly on VAT collection in the state.
Also on Friday, the Abuja division of the Court of Appeal temporarily suspended the execution of the judgment of the Federal High Court in Port Harcourt stopping the FIRS from collecting VAT and PIT in Rivers State.
The appellate court specifically ordered parties to the legal dispute to refrain from giving effect to the judgment pending the hearing of the motion filed by the FIRS for an order staying the execution of the judgment.
The court therefore adjourned till September 16 to hear the application by Lagos State government seeking to be joined in the dispute.
Justice Haruna Tsanami who led the three member panel ruled that it was for the overriding interest of justice for the parties who submitted themselves before the court not to take further steps that would destroy the res.
“It is hereby ordered that status quo ante belium should be maintained pending the hearing of the motion,” the judge said.
The court ordered the appellant to file and exchange their processes in the motion for joinder filed by Lagos State just as the respondents were equally given two days to respond.
Justice Stephen Dalyop Pam, of a Federal High Court sitting in Port Harcourt, had last Monday, dismissed an application by the FIRS seeking to stop the Rivers State government from collecting VAT in the state.
The court held that the Rivers State government law on VAT remains valid until it has been set aside by a court of competent jurisdiction.
Consumers and businesses in Rivers State have been caught between the directives of the FIRS and the state government.
Currently, section 40 of VAT Act requires that the VAT pool be shared 15 per cent to the federal government; 50 percent to states; and 35 per cent to local governments (net of 4 per cent cost of collection by the FIRS); while 20 per cent of the pool is shared based on derivation.
Available data from the National Bureau of Statistics show that in 2020, total VAT collection was about N1.53 trillion with import VAT being N348 billion (or 22.7 percent) while foreign non-import VAT was N420 billion (or 27.4 percent) and local VAT amounted to N763 billion (or 49.8 percent).
Experts predict long legal tussle
Experts are of the opinion that the parties involved in the VAT battle will not let go because of the volume of revenue generated through VAT over the years.
VAT revenue in Nigeria has grown exponentially over the years as it rose from N797.51 billion in 2017 to N1.09 trillion in the first nine months of 2018. In 2019, the figure rose to N1.17 trillion and hit N1.53 trillion in 2020. VAT in Q2 2021 was N512.25 billion against N496.39 in Q1 2021.
In its forecast, an international professional advisory service firm, PwC, said the “biggest losers” of any permanent change will be the 30 states that cumulatively generate less than 20% of Nigeria’s VAT and “will suffer significant revenue decline.”
PwC said while Lagos is by far the largest contributor, a few other states including Rivers and the northern trading hub of Kano “may experience minimal impact.”
Taiwo Oyedele, Fiscal Policy Partner and Africa Tax Leader at PwC, said “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.”
The tax expert recalled that a previous Supreme Court judgment had ruled that VAT covered the field (of consumption tax) and therefore, a state cannot impose a consumption tax in addition to VAT.
“This means any state intending to impose VAT will have to repeal its existing consumption tax,” he noted.
In considering the implications of the Rivers court judgment on VAT, Oyedele observed that, ironically, the biggest losers will be the states except Lagos.
According to him, “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 percent of VAT collection will suffer significant revenue decline. The federal government may, in fact, be better off given that the FCT generates the second highest VAT (after Lagos) in addition to import and non-import foreign VAT.”
He also noted that the judgment may have implications for taxes collectible by local governments which are currently administered by states, as well as the amendment by Finance Act 2020 which introduced electronic money transfer levy in place of stamp duties, among others.
Maintaining that it would pay more states to allow FIRS to be the collecting agency, Oyedele added, “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 simple, 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 to.
Also, maybe 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.”
He pointed out that the complexities involved in collecting VAT state by state, is a very important factor to consider.
On the way out of the quagmire, Oyedele said, “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.”
However, a legal practitioner and tax expert who would not want his name published because of his affiliations with the federal government said the claim that FIRS assumed the responsibility of collecting VAT on behalf of the states to save the states the cost of engaging in the exercise would not hold.
He maintained that the issue for determination was the constitutionality of the VAT Act.
“The constitution is the grundnorm, its provisions on taxes are clear and well spelt out. The VAT Act is also there with its provisions on taxes well spelt out. The issue at stake is whether the VAT Law should override the constitution or whether part(s) of it contradict(s) the constitution which is the supreme document,” the tax expert explained.
He emphasized on the provisions of the constitution, saying the court would look at what the issues are and give its judgment without sentiments.
He agreed that VAT matters are not as simple as they are seen because there are VATs on goods and services produced within a state and there are VATs on goods and services passing through a state.
He said the court had ruled that the latter be collected by the federal government, even though the conveyor may be using the infrastructure produced/offered by the state through which the goods and services pass.
“If you allow the states to collect such VATs, it means that an importer from Anambra State would pay VAT to the four or five states of the goods cleared at the Lagos ports being taken to Onitsha, that will be complicated,” he said.
He agreed it won’t be easy, because some states, like Lagos, Rivers and Kano will put up a strong fight, while others, like Jigawa, Kebbi, Yobe, will be on the side of the FIRS.
“The federal government may, in fact, be better off given that the FCT generates the second highest VAT (after Lagos) in addition to import and non-import foreign VAT”
Fiscal federalism sharing structure
Omotola Abimbola, an economist and macro strategist focused on the Sub-sahara African market, is more concerned on the consequences of the court judgment and what he considers to be the optimal solution.
In his opinion, the federal government could potentially end up with more than its current VAT revenue if collection becomes decentralized.
“If VAT collection becomes decentralized, one can imagine that the federal government will retain import VAT and leave the non-import VAT component to state governments. However, up to 50 percent of Nigeria’s VAT revenue is from imports, implying that state governments could end up with a lower share of the pie compared with the current model.
“Nigeria’s current VAT structure is by no means perfect, but there is already an element of fiscal federalism in the sharing structure, which one can even argue is superior to the sharing formula for oil. There is a 20 percent derivation principle in the sharing of VAT revenue (states keep 20% of their contributions) compared with 13 percent for oil.
“The derivation principle explains why Lagos took 18% of total VAT revenue shared among states in 2020, while Kano and Oyo were distant second with only 4% share in the same year. If my mathematics is correct, the distribution structure implies Lagos is contributing no less than 50% to total federation VAT revenue, and could easily become a clear winner in a decentralized structure.
“However, Lagos has other advantages working in its favour that may no longer be permissible in a more decentralized structure, particularly after adjusting for import VAT, which the federal government will lay claim to,” he explained.
On the argument that states will suddenly begin to engage in a healthy competition if VAT is decentralized, Abimbola described this as “a very odd one that doesn’t hold water, considering that VAT is a consumption tax that hardly informs business decisions because it is passed to consumers.”
According to him, “as a Lagos resident, I will not shift my consumption of Nestle’s products to Ogun because of the VAT rate, except I live in a border town in which case I can take advantage of the differential. In the same way, Chicken Republic will not close its outlets in Lagos in favour of Oyo because of a VAT rate differential. If the aim is to drive competition, there are much better tax tools to achieve this purpose than a consumption tax, and that has not even happened under the existing structure.
“PAYE tax is by far a superior tax incentive that states can offer, but none (that I am aware of) has ever offered tax rebate to any company as an incentive, so we might be overstating the willingness of states to compete or even the capacity to effectively collect this revenue. States are in full control of PAYE tax collection but only four states (Delta, Lagos, Rivers and FCT) earn more revenue from PAYE relative to VAT. Evidently, these same states will thrive in a decentralized model but even if this is just, the potential fiscal consequences on the other 33 states would be too severe.
Ekiti State’s N4 billion PAYE revenue in 2020 is barely one-fifth of its VAT revenue of N24 billion. How would Ekiti State not go completely bankrupt within a year if this policy goes through? Except of course the state government shakes down every visible large corporate in sight to plug the huge fiscal drain. Many seem to have the perception that the only acceptable form of fiscal federalism is one that is composed of federating units that are completely independent. This may sound fair, but could also be inefficient. More importantly, a federal system without some measures of fiscal equalization will cave under the weight of income inequality and social strife,” Abimbola argued.
He said the biggest losers by far will be businesses who would have to navigate government bureaucracy across 36 states.
“At best, many companies will run rings around state governments that have weak capacity to collect such a complex indirect tax, thus worsening income inequality. At worst, we will end up with a multiple tax structure that will worsen the ease of doing business. Some developing countries like India used to operate a decentralized indirect tax model but this soon became a major impediment to business, as effective tax rates in some cases exceeded 20% after accounting for multiple sales taxes. Also, you had situations where goods could not enter some states for days because local tax authorities want to compute taxes. India had to abandon this system and adopted a hybrid model in 2017 with a more centralized General Sales Tax (GST), which is now regarded as a major reform victory,” the expert noted.
He also recalled the crisis during the right of way controversy, when state governments imposed exorbitant right of way charges on telecom firms, which ended up setting the entire nation back on broadband penetration.
“Multiply this by a factor of 41 million SMEs and what we will end up with is a chaos in the administration of indirect taxes,” he warned.
Abimbola noted that controversial items such as alcohol, petroleum and agriculture products are best left to each state to determine based on its norms and culture.
Professor of Finance and Accounts at Nasarawa State University and immediate past President, Association of National Accountants of Nigeria (ANAN), Muhammad Mainoma, noted that it was the economy of collection of the VAT that made the states allow the FIRS to play that role.
According to him, the judgment has not said anything new. It was the ease of collecting the VAT that made FIRS to be the collecting agency for the states and that the proceeds are distributed to the states in accordance to how it accrued from the state.
“If every state were to collect, the cost of collection to the states would have been higher. It is the economy of collection that made the states to allow FIRS play that role,” Mainoma said.
“The federal government may, in fact, be better off given that the FCT generates the second highest VAT (after Lagos) in addition to import and non-import foreign VAT”
Our position, by CITN
On its part, the Chartered Institute of Taxation of Nigeria has recalled that there had been previous judgments nullifying the VAT Act or part of it.
In a statement signed by its Registrar/Chief Executive, Adefisayo Awogbade, CITN said, “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. The court granted perpetual injunction against FIRS from collecting VAT from hotels, restaurants and event centres in Lagos.”
Furthermore, the tax regulatory body said, “In Emmanuel Chukwuka Ukala v. FIRS & A.G. FEDERATION in Suit No. FHC/PH/CS/30/2020, Hon. Justice I. O. Oshomah sitting at the Port Harcourt Division of the Federal High Court, on December 11, 2020, expressly held that the National Assembly had no power to enact the VAT Act.
“The plaintiff had asked the court to declare that there was no constitutional basis for the imposition, demand and collection of VAT by FIRS from him since the constitutional powers and competences of the National Assembly were limited to those specifically listed in Item 59, which did not include VAT or any other species of sales tax. The court, therefore, declared the VAT Act a nullity.”
Recalling the total nullification and partial nullification of the VAT Act, the CITN summarized as follows: “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.
“From the foregoing decisions, it is evident that this is not the first time that the VAT Act has been declared unconstitutional.”
To play safe, the tax institute confirmed that it is in possession of the first and second cases mentioned, and that it is making efforts to get a certified true copy of the third and current case (the Port Harcourt High Court judgment).
“As an Institute, we were waiting for the appellate courts to take a definite position on the matter before making our comments. As soon as we receive the certified true copy of the judgment, 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,” the CITN said.
FIRS panics over N2.4trn revenue loss
The Point also gathered that it is feared in some quarters that the federal government may lose over N2.4tn revenue to the 36 state governments in 2022 if it loses its appeal which barred it from collecting the VAT and PIT.
A document made available to The Point revealed that the N2.4tn is what the FIRS had projected to collect from VAT if retains the authority to collect consumption based tax.
The Joint Senate Committees working on the 2022 – 2024 Medium Term Expenditure and Fiscal Strategy, recently expressed concerns over the development but the chairman of the FIRS, Muhammad Nami, allayed the fears of the joint panels.
The chairman of the Senate Committee on Finance who chaired the joint MTEF panels, Solomon Adeola, had specifically asked Nami why he didn’t speak on the court judgment and the revenue generating agency boss replied that the case had been appealed.
Nami said, “I did not deliberately mention the issue because doing so would be subjudice since it is already pending before the Court of Appeal.”
The FIRS boss however proceeded to present his agency’s revenue projection for 2022, 2023 and 2024 fiscal years.
A document he submitted to the joint panels indicated that the agency projected to raise N2.44tn from both import and non-import VAT in 2022.
The breakdown shows that the agency is targeting N1.83tn from non-import VAT and N610.45bn from the Nigerian Customs Service import VAT.
The agency also proposed to raise about N2.67tn from both sources in the 2023 fiscal year.
The breakdown also shows that the agency is targeting N2tn from non-import VAT and N668.31bn from the NCS import VAT.
The projection for 2024, according to the document, however, shows that the FIRS hopes to realise N2.94tn in the fiscal year from VAT.
Based on the breakdown, the agency is targeting N2.2tn from non-import VAT and N668.31bn from the NCS import VAT.
Abdullahi Ahmed, Director of Communications and Liaison Department, FIRS, could not be reached for comments as at press time.
He insisted on a statement he signed notifying the public that the FIRS had appealed the Port Harcourt High Court judgment and also sought for a stay of execution.
The statement said, “The public should continue to comply until the matter is resolved by the appellate court, in order to avoid accruing the consequent penalties and interest for non-compliance.”
The FIRS has also urged taxpayers not to panic over the recent court ruling by the Federal High Court sitting in Port Harcourt on VAT, directing taxpayers to continue to honour their tax obligations under the VAT act to the agency.
The Point had reported this advice last week as contained in a statement issued by the Special Assistant to the Executive Chairman of FIRS on Media and Communications, Johannes Wojuola, on Monday in Abuja.
“The FIRS having lodged, in the Court of Appeal, both an appeal against the decision of the Federal High Court sitting in Rivers State in Suit No. FHC/PH/CS/149/2020, Attorney General of Rivers State Vs Federal Inland Revenue Service.
“The Federal High Court ruling should not breed any confusion as to the obligations of taxpayers. Taxpayers must continue to comply with the Value Added Tax Act pending the final determination of appeal.
“Taxpayers must continue to honour their tax obligations under the VAT Act. Failure to do this would put them on collision course with the law.’’
The special assistant noted that, “For the avoidance of doubt, records of appeal had been transmitted to the appellate court adding that the FIRS is confident that, given the extant laws, the arguments and case put forward, it will get a favourable judgment at the appellate court.”
MOST FAAC DEPENDENT STATES (2020)
Jigawa: 92%; Bayelsa: 92%; Katsina: 92%; Yobe: 91%; Adamawa: 91%; Niger: 91%; Borno: 91%; Taraba: 90%; Benue: 90%; Sokoto: 89%; FCT: 51%; Lagos: 36%
MOST FAAC DEPENDENT ZONE (2020)
North East: 90.0%; North West: 84.1%; South East: 81.4%; South South: 77.6%; North Central: 76.6%; South West: 53.4%; Northern Nigeria: 83%; Southern Nigeria: 68.2%
HOW MUCH OF 2020 STATE’S IGR IS FROM PAY AS YOU EARN
Bauchi: 93.4%; Katsina: 91.3%; FCT: 90.9%; Bayelsa: 89.9%; Rivers: 82.9%; Plateau: 81.1%; Delta: 77.2%; Borno: 76.6%; Nasarawa: 76.3%; Akwa Ibom: 76.1%; Kaduna: 32.7%; Kebbi: 32.2%.
