Funmilayo Odude, Legal Practitioner, Damod Law Practice

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It’s time for the Supreme Court to resolve the VAT controversy 15 Oct 2021

In the November 2019 edition of this magazine, I posited that a holistic and comprehensive tax reform was needed in order to, among other things, ensure certainty in the administration of taxation in the country. It has become clear that any reform in this regard would have to begin with the Constitution as opposed to mere enactments and amendments of legislations to reflect tax policies of a sitting administration.

The judgment of the Federal High Court (FHC) in Rivers State, delivered on the 9th of August 2021, has generated controversy on the appropriate level of government to impose and collect Value Added Tax (VAT). The litigation of this issue is, however, hardly new. The Lagos State Government had in the case of A.G. Lagos State vs A.G. Federation (2014) LPELR-22701 (SC) sued the Federal Government over the imposition and collection of VAT in the state.

Then there is the famous A.G. Lagos State vs Eko Hotels, where the Supreme Court held that the Value Added Tax Act covered the field of consumption tax in Lagos State and consequently decided that the Federal Inland Revenue Service (FIRS), a federal tax agency, was the body entitled to collect consumption tax paid by customers to Eko Hotels in Lagos.    

The question on who has the powers to impose and collect VAT – a consumption tax – cannot be answered without first determining who has the powers to legislate on it. Strange enough, in Nigeria, there are really no taxing powers. Instead, what we have are legislative powers, from which taxing powers are derived. Therefore, a level of government with legislative powers over a matter will invariably possess the taxing power with respect to such matter. It is the constitutional legislative authority that determines who imposes and collects taxes in Nigeria. Thus, while the Constitution does not directly state who imposes and collects certain taxes, it prescribes the authority that legislates on it.

A good example to highlight the difference between the two is Personal Income Tax (PIT) that falls under the Exclusive List, thereby making the National Assembly (the Federal legislative arm of government) the authority to legislate on it. The Personal Income Tax Act, however, provides that collection is to be done by the states. This is pursuant to Paragraph D7 of the Concurrent Legislative List, which empowers the federal government to delegate collection of some federal taxes to the states.

To properly decipher the VAT controversy therefore, it is important to lay the foundation of legislative powers under the Constitution. The provisions of section 4 of the Constitution vest the legislative powers of the country in the National Assembly. The National Assembly is empowered to make laws on matters contained in the Exclusive Legislative list set out in Part I of the second schedule to the Constitution “to the exclusion of the Houses of Assembly of States” as well as on matters included in the Concurrent Legislative List set out in Part II of the second schedule of the Constitution “to the extent prescribed” in the list.

The legislative powers of a state in the Federation are vested in the House of Assembly of the State and the legislative body has the powers to make laws on “any matter not included in the Exclusive Legislative List” and on any matter included in the Concurrent Legislative List “to the extent prescribed” in the list. Judicial interpretation of this section of the Constitution is to the effect that matters that are neither in the exclusive nor concurrent legislative lists, referred to as the residual list, are within the exclusive legislative competence of the state houses of assemblies.

Taxation is covered by items 58 and 59 of the Exclusive List, as well as items 7 to 10 of the Concurrent List. The former puts “stamp duties” and the “taxation of incomes, profits and capital gains, except as otherwise prescribed by this Constitution” within the exclusive legislative competence of the National Assembly. The latter permits the National Assembly in the “exercise of its powers to impose any tax or duty on capital gains, incomes or profits or persons other than companies; and documents or transactions by way of stamp duties”, to provide that the collection of such taxes or the administration of the law imposing it be carried out by a state government or its authority. A house of assembly under the Concurrent List may “make provisions for the collection of any tax, fee or rate or for the administration of the Law providing for such collection by a local government council.”

Thus, constitutionally, the National Assembly has powers to legislate over income taxes, profit and capital gains taxes and stamp duties. The implication is that all other taxes save those to be collected by a local government council and which are neither in the exclusive nor concurrent lists will, therefore, be regarded as being in the Residual List. It was on this basis that Hon. Justice Pam, in the suit brought by the Rivers State Government against the FIRS and the Federal Government, reached the conclusion that “the 1999 Constitution has specifically designated the taxes that the Federal Government is empowered to impose and collect in Items 58 and 59 of Part I of the Second Schedule thereof and this must be read to exclude other species of taxes like VAT, withholding tax, education tax and technology tax.”

The VAT Decree (Decree 102) was promulgated in 1993 and thus predates the 1999 Constitution. Apart from four laws – National Youth Service Corps Decree 1993, Public Complaints Commission Act, National Security Agencies Act and Land Use Act – which were to continue as federal enactments as if they related to matters included in the Exclusive List upon the coming into effect of the 1999 Constitution, all other pre-existing laws were to have effect with such modifications as may be necessary to bring them into conformity with the Constitution, only to the extent that they were laws passed by the levels of government with the requisite legislative competence under the Constitution.

Lagos State Government in A.G. Lagos State vs A.G. Federation, referred to above, thus challenged the validity of the VAT Act in view of the coming into effect of the 1999 Constitution. LASG sought a declaration that: “the House of Assembly of Lagos State of Nigeria is the body entitled, to the exclusion of any other legislative body, to enact laws with regard to the imposition and collection of tax on the supply of all goods and services within Lagos State of Nigeria and that Lagos State of Nigeria, or any agency of the State, is the body entitled, to the exclusion of any other body, to assess and collect such tax, and that the revenue of the Lagos State Government has been and continues to be affected by the enforcement of provisions of the Value Added Tax Act.” The suit, which would have earlier on resolved this issue once and for all, was, however, not determined on its merits. This has led to uncertainty over the years on the appropriate authority to impose, collect and by extension utilize VAT and/or sales and consumption taxes leading to several cases and different decisions on the issue.

This has generally led to a situation where businesses and by extension, consumers, were being taxed by both federal and state authorities on the same goods and services. At first, this was held by the Supreme Court to amount to double taxation in a suit filed by Eko Hotels in 2004. The hotel had filed an interpleader suit at the Federal High Court seeking judicial determination of whom between Lagos State Government and the Federal Government was entitled to consumption tax paid by its customers. It was an indirect challenging of the sales tax charged by the Lagos State Government in view of remittance of VAT to FIRS.

The courts had in the case upheld the superiority of the VAT Act over the Sales Tax Law of Lagos State, under the doctrine of covering the field. The Supreme Court expressly stated that “it would amount to double taxation for the same tax to be levied on the same goods and services, payable by the same consumers under two different legislations.”

Thereafter, the Taxes and Levies (Approved List for Collection) Act (TLA) was amended in 2015 to include additional taxes chargeable by the state, such as Hotel, Restaurant or Event Centre Consumption Tax, Entertainment Tax, Animal Trade Tax, Produce Sales Tax, Property Tax and Economic Development Levy.

Thus, when the Hotel Owners and Managers Association of Lagos approached the Federal High court over the charge of hotel and restaurant tax, which they argued was another consumption tax, like VAT, the court in a judgment delivered on the 3rd of October 2019 upheld the statutory power of Lagos State to impose consumption tax on hotels and restaurants in line with the TLA. The court, in that case, similar to the position held in the Rivers State judgment, held that the VAT Act did not cover the field, given that the Constitution did not vest powers on the Federal Government to legislate over consumption tax on individuals or goods and services consumed in hotels, restaurants and event centres.

Therefore, the court invariably held that the power to impose consumption tax was a residual power within the exclusive competence of the states. The court was also of the view that the TLA being a subsequent legislation had impliedly repealed the provisions of the VAT Act, particularly the power to impose tax. The court did not have to rely on the TLA having upheld the right of Lagos State to impose sales and/or consumption tax by its own laws as the TLA being an act of the National Assembly could not validly legislate on taxes that did not fall under any of the species of income taxes, profit and capital gains taxes or stamp duties.

The TLA itself was declared to be unconstitutional in a judgment delivered by the Court of Appeal in May 2020, in a tax dispute between Uyo Local Government and the Akwa Ibom State Government, over the charging and collection of motor park fees and levies from commercial vehicles. The Court’s grouse with the TLA is with its commencement clause, section 1(3), which states that its provisions are “notwithstanding anything contained in the Constitution of the Federal Republic of Nigeria …” The court took the view that the introductory clause which undermines the supremacy of the Constitution was a ‘virus’ that “infested the entire Act and thereby rendering it unconstitutional.”

While there are valid concerns regarding the internal capacity of states to properly collect VAT, and the financial viability of some states following their inability to share in VAT generated by other states, it is the duty of the court to interpret and give effect to the Constitution. It is, therefore, hoped that the Supreme Court will rise to the challenge when the VAT suit is properly constituted before it and determine the issues on their merits, thereby giving clarity and a clear precedent to be followed by lower courts. This is not a case to be dismissed on some technical grounds or pursuant to some political resolution.

Funmilayo Odude is a Partner at Commercial and Energy Law Practice (CANDELP).