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,economicwatcherssaytheemergingscenariosarereinforcingthecallfortherestructuring 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 collectValueAddedTax(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/1 9/2020, Àled Ey the stateAttorney-*eneral forRiversState,againsttheFIRSandtheAttorney*eneral of the Federation, the court presided over Ey-usticeStephenDalyopPamoftheFederalHigh Court, Port Harcourt ruled that the Rivers State government,nottheFederalInlandRevenueService (FIRS)hastherighttocollectValueAddedTax(VAT) and Personal Income Tax (PIT) in Rivers State.
-ustice Pam also issued an order of perpetual injunction restraining the FIRS and the Attorney*eneral of the Federation, Eoth Àrst and second defendantsinthesuit,fromcollecting,demanding, threatening and intimidating residents of Rivers StatetopaytoFIRS,personnelincometax,andVAT.
A Chain of Events
0eanZhile,inaEidtoputastampofauthorityon the judgment, the Rivers State *overnor, Nyesom Wike has signed the Valued Added Tax Law No. 4 of 2021 into law.
Wike maintained that the verdict of the Federal HighCourthadsucientlyaddressedtheillegality perpetrated Ey 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 Ànancially and turn them to Ee Eeggars.
While the Chartered Institute of Taxation of Nigeria (CITN) has explained it is reviewing the situation, the Federal Inland Revenue Service is engagingtheLagosState*overnmentontheneed to maintain the status quo till the determination of the appeal instituted Ey the FIRS.
TheFIRSdidnotstopatappealingthejudgment, itfurtherreadaRiotActtoanytaxpayerwhostops the payment of VAT and other taxes to the FIRS covers pending the determination of the appeal ÀledagainsttheRiversStateHighCourtjudgment.
´As the decision is Eeing appealed and given the pending applications for injunction and stay of execution which the FIRS has Àled in court against the judgment, memEers of the puElic are advised to continue to comply with the Value Added Tax oEligations until the matter is resolved Ey the appellate courts to avoid accruing the consequent penalties and interest for non-compliance,” the FIRS said in a statement.
ExecutiveChairman,FIRS,MuhammedNami, made this known in a letter dated August 24 and addressed to Moyosore 2nigEanjo, the attorney generalandcommissionerforjusticeinLagosstate.
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 puElic awaits the determination of the appeal, tax practitioners, economic analysts,andfrontlinelawyer,FemiFalana,Eelieve the Rivers judgment will serve as a tonic to the campaignforeconomicrestructuringinthecountry.
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 SeniorAdvocate of Nigeria also considered the favouraEle judgment as a clarion call for other statesofthefederationtoÀleapplicationstojointhe case at the Court of Appeal as interested parties to defend the judgment of the Federal High Court.
Falana pointed out that Eecause of the valid and suEsisting 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 conÀrmed the struggle for restructuring via litigation. That means that the judgment will strengthen the campaign for restructuring.”
Falana also oEserved 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 Àve per cent to .5 per cent last year Ey the National AssemEly. Right now, VAT collected is Eetween 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 Ee such that will give states where such VAT is generated an upper hand in the allocation of VAT proceeds.
Speaking on a television programmemonitored in Lagos last week, Oyedele said what it means, for instance, is that states which forEid the sale of certain products in their domains will not stand to EeneÀt 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 Eound to trigger more legal Eattles Eetween the states and the federal government, especially on issues Eordering on the revenue sharing formula.
Like Rivers, Like Other States
Responding to the Erewing controversies, the foremost tax audit Àrm, 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 VATwithintheirterritory.Byimplication,FIRSwill 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 5 of the revenues generated from VAT. However, this may not Ee the case.
Sifting the :heat froP the Cha;
However, a recent PWC report explained that the judgment, if upheld Ey a higher court, could spell doom for some states which currently do not generate enough economic activities to Eoost their VAT numEers. According to PWC, states such as Lagos, Rivers, and .ano might just Ee the only EeneÀciaries of this ruling, considering the signiÀcant level of economic activity in the states that can generate high VAT revenues.
The auditing Àrm Eelieves 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 suͿer signiÀcant revenue decline.
It is Eelieved the federal government may Ee Eetter oͿ, given that FCT generates the secondhighest 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 *overnor, Alhaji Aminu Bello Masari to the victory of the Rivers State government.
He descriEed the Federal High Court judgment as capaEle of causing chaos across the states of the federation, vowing that, “we will resist its implementation.”
Masari spoke when a delegation from the Revenue MoEilisation and Fiscal Commission (RMAFC) paid him a sensitisation visit at the *overnment 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 Eegin to pay douEle VAT Eecause 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 Ering a lot of Eurden 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 Eattle, given the sheer amount of money it currently generates to the federal government for onward distriEution among the three tiers of government.
VAT has since its introduction in 1993 continued to Ee one of the most staEle and highest yielding sources of tax revenues for the federation account. In the second quarter of 2021, VAT collections rose Ey 5 per cent to N512 Eillion from N32 Eillion 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 Eelieved that the Federal High Court·s decision Erings far-reaching consequences ²ranging from renewing discussions around revenue sharing formula to the possiEility of aggressive taxpayers challenging the powers of the FIRS to collect VAT from them.