In Nigeria, the administration and management of Value-Added Tax (VAT) assessment and collection have long been the responsibility of the Federal Inland Revenue Service (FIRS), a federal government body. In the case of AG Rivers State v. AG Federation, the FIRS was barred from managing the VAT system in Nigeria. This was decided by the Federal High Court, Port-Harcourt Division, on August 9, 2021.
What is Value Added Tax (VAT)?
VAT is a consumption tax 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 goods and services, including medical and pharmaceutical products, are VAT-free. Medical services, vital food products, books, educational materials, exports, and so on should be included in the list. The VAT Act gave the FIRS the responsibility to oversee the collection of VAT from taxable individuals in Nigeria. This was until the lawsuit between Rivers State and the Federal Government was resolved.
The disagreement over VAT 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 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. Nigeria’s Value-Added Tax (VAT)
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Therefore, it follows that individual states have the right to pass laws governing VAT administration. 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 collecting scheme confounds business participants as states compete with the federal government for a share of the VAT. States have long complained about budget issues and the federal government’s unequal income distribution. Many states viewed the VAT revolution as a chance to increase state income.
The National Assembly declined to modify the constitution by including VAT on the exclusive list in March 2022. The National Assembly urged that the federal government and the FIRS enable the Court to make a decision on the case.
Nonetheless, prospects for the result of the Supreme Court’s decision remain high, with states and the federal government battling it out at the Supreme Court.
