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In Nigeria, the administration and management of Value Added Tax (VAT) assessment and collection have long been under the jurisdiction of the Federal Inland Revenue Service (FIRS), a federal government agency. The FIRS was banned from administering the VAT system in Nigeria in the case of AG Rivers State v. AG Federation. This was ruled by the Federal High Court, Port-Harcourt Division, on August 9, 2021.
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What is Value Added Tax (VAT)?
VAT is a consumption tax that is imposed on all products and services provided in Nigeria or imported into the country. Individuals, enterprises, and governmental entities are all obligated to pay VAT. It is now charged at a rate of 7.5% because of the Finance Act of 2022.
Many products and services are exempt from VAT, including medical and pharmaceutical products. To add to the list are medical services, essential food items, books, educational materials, exports, and so forth. The VAT Act delegated to the FIRS the authority to supervise the collection of VAT from taxable people in Nigeria. This was until the conclusion of the case between Rivers State and the Federal Government.
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The VAT issue between Nigerian states and the federal government
The Federal High Court gave a literal interpretation of the Constitution of the Federal Republic of Nigeria, 1999, as amended (Constitution) in the case of AG Rivers State vs AG Federation. It held that the National Assembly is only authorized to enact laws relating to stamp duties and the taxation of income, profit, and capital gains.
The court further ruled that following the Constitution, neither the Federal Government nor any of its agencies may impose or collect VAT. This applies to any other tax that is not expressly mentioned in the Constitution.
The VAT Act and its amendments are effectively nullified by the Federal High Court’s ruling. This is only unless it is overturned by a higher court.
Therefore, it follows that individual states have the right to pass laws governing the administration of VAT. They also have a right to designate their tax administrations to oversee the collection of taxes within their borders. However, the Federal Capital Territory will still be subject to the provisions of the VAT Act, and the FIRS will continue to be in charge of managing its VAT.
Additionally, the VAT from each state will no longer be combined into the Federation Account. Instead, each state will be entitled to the income resulting from the VAT it collects.
The Lagos Value Added Tax Law
States like Lagos State and Rivers State have rushed to the drawing board to create their own VAT laws. This will regulate the administration of VAT in their states as a result of the Federal High Court’s decision regarding VAT.
A bill to impose and charge VAT on specific goods and services as well as to establish rules for VAT administration in Lagos State, for instance, has been passed. The Lagos State House of Assembly has approved the value-added tax bill (the “Bill”). This now awaits the governor of Lagos State’s approval. The following highlights some of the bill’s most important clauses.
1. Tax rate reduction
The tax rate is reduced to 6% of the value of goods and services from the current rate of 7.5% mandated by the Finance Act of 2022.
2. VAT administration
In Lagos State, VAT is managed by the Lagos State Internal Revenue Service (LIRS). Within six months of the start of the VAT Law, all taxable individuals are required to register with the LIRS.
The penalty for noncompliance is a fine of N50,000 (fifty thousand Naira) for the first month of default. For each subsequent month, it is N100,000. Returns to the LIRS: Taxpayers must submit returns to the LIRS by the 21st day of the month following the delivery of goods and services, at the latest. For every month of noncompliance, the offender will be subject to a fine of N500,000 (five hundred thousand Naira).
3. Treatment of non-resident businesses
Businesses that operate in Lagos State but are not based there must register with the LIRS. They do this using the address of the party with whom they have an active agreement to provide goods and services.
The non-resident business must include VAT in its invoice. The same goes for the recipient of the services or the recipient of the goods.
4. Establishment of the Value Added Tax Tribunal
The bill also creates the Value Added Tax Appeal Tribunal. This will help the LIRS settle disagreements relating to tax assessments.
5. Sharing formula for VAT revenue
According to the bill, local and state governments will receive a 75% to 25% split of the VAT revenue that the Lagos State Government receives.
The Court of Appeal and the VAT issue
Despite the Federal High Court’s denial of a stay of execution, the Court of Appeal in Abuja granted an injunction pending appeal. This was directing the parties to maintain the status quo ante in response to a request made by the FIRS.
The Court of Appeal then put the case on hold while it heard arguments regarding the Lagos State Government’s application for a joinder and the FIRS’s application for a stay of execution. Both Rivers and Lagos States were required by the injunction to stop enforcing their VAT laws. (until the Court of Appeal rules).
On July 1st, 2022, the Court of Appeal ruled in favor of the federal government to collect VAT taxes. According to the Court of Appeal, the VAT is contained on the concurrent list, and the federal government’s legislation on the VAT has covered the field.
Conclusion
The VAT collection regime leaves players in the business community in confusion as states jostle the federal government for a chunk of the VAT. States have long complained about funding concerns and the unfair manner of revenue sharing by the federal government. The VAT revolution was seen by many states as an opportunity to gain additional revenue for the state.
In March 2022, the National Assembly refused to amend the constitution by putting the VAT on the exclusive list. The National Assembly demanded the federal government and the FIRS allow the Court to rule on the matter.
Nonetheless, hopes are high for the outcome of the Supreme Court’s decision, with states and the federal government running a final battle at the Supreme Court.