VAT: Everything You Should Know About Rivers State Government V. FIRS

The Federal High Court, Port Harcourt Division, had on August 9, 2021, declared that it was the Rivers State Government and not Federal Inland Revenue Service (FIRS) that should collect Value Added Tax (VAT) and Personal Income Tax (PIT) in RiversState.

The Rivers State Government had upon the declaration, signed into law, a bill authorizing the state government to collect VAT from September 2021.

The Governor of Lagos State, Babajide Sanwo-Olu has taken a cue from that judgment and followed suit by signing the VAT bill into law on September 10.

Prior to the above judgment, FIRS had the responsibility of collecting VAT on behalf of the Federal Government across the 36 States in Nigeria and the FCT. Section 40 of the VAT Act requires that the VAT pool be shared at 15% to the Federal Government, 50% to the states, and 35% to the Local Government.

The Federal High Court Judgment of August 9 has been appealed against by the FIRS at the Court of appeal. The appellate court, Abuja Division has made an order for Rivers State Government (RSG), the Federal Inland Revenue Service (FIRS), and the Attorney-General of the Federation (AGF) to maintain the status quo, pending the hearing and determination of the appeal.

Below is a brief fact of the case and the August 9 decision of the Federal High Court.

READ ALSO: VAT: Appeal Court Orders Rivers, FIRS To Maintain Status-quo

Plaintiff's case

The Attorney General of Rivers State (Plaintiff) argued before the Federal High Court, Port Harcourt Division that Items 58 and 59 of the Second Schedule, Part I of the Constitution limits the powers of the Federal Government of Nigeria (FGN) to enact, impose and collect taxes outside stamp duties and taxes on income, profit, and capital gain.

The implication of the above is that the imposition of taxes such as VAT, Withholding Taxes (WHT), Tertiary Education Tax (TET), and National Information Technology Development (NITDA) Levy by the FGN is ultra vires its constitutional powers, and therefore null and void.

Plaintiff further argued that the FGN, in exercising its powers to impose any tax or duty on capital gains, incomes or profits of persons other than companies, and on documents or transactions by way of stamp duties, is not permitted to delegate the power to collect any other tax or duty to any other person except the Government of a State or any other State authority.

The powers of the FGN or its agencies, such as the FIRS, are therefore limited to the administration of only the taxes specifically listed in Items 58 and 59 of the Second Schedule, Part I of the Constitution.

Consequently, Plaintiff sought the following reliefs from a declaration that only the Rivers State Government (RSG) or other authority of the State Government is empowered to collect Capital Gains Tax (CGT), income or profits tax of persons other than companies within the territory of Rivers State, and stamp duties on documents or transactions within the State.

A declaration that any legislation of the FGN, through the National Assembly or other means that purports to delegate powers to collect taxes and duties chargeable within Rivers State, by individuals or persons other than the RSG is unconstitutional, null, and void. 

A declaration that only the RSG is constitutionally empowered to impose taxes enforceable or collectible in the territory of Rivers State of the nature of consumption or sales tax, VAT, TET, and other taxes or levies other than those specifically reserved for the FGN by items 58 and 59 of Part 1 of the Second Schedule of the Constitution and as delimited by the provisions of Items 7 & 8 of Part II Concurrent Legislative List of the Second Schedule of the Constitution.

 A declaration that where the VAT Act purports to demand the collection of VAT by the FIRS or any other agency of the FGN, it is unconstitutional, illegal, null, and void.

 A declaration that the Defendants are not constitutionally entitled to impose levies, charges, or rates on the residents of Rivers State or indeed any State of the Federation and an order of perpetual injunction restraining the Defendants from demanding the residents of Rivers State to pay unconstitutional taxes in the name of enforcing legislation of the FGN, amongst other declarations.

FIRS’ case

The FIRS argued that by a combined reading of Sections 4(1) to (4)(a) & (b), 315 (1)(a), 318 (1), and Items 62, 67, and 68 of the Second Schedule, Part I of the Constitution, and Sections 1, 2(a) of Part 3 of the Constitution, the National Assembly has expansive powers to enact legislation to cover VAT, WHT, TET, NITDA, and other taxes provided by the Tax and Legal Advisors (TLA).

The FIRS also argued that where a conflict or contradiction exists between a schedule and a section of an enactment, the section prevails. Consequently, the provisions of Items 58 and 59 of the Second Schedule of the Constitution cannot override the provisions of the aforementioned sections of the Constitution.

Furthermore, WHT, NITDA, and TET are taxes on the incomes of the taxable persons, therefore fall within the purview of Item 59 of the Second Schedule.

The FIRS also submitted that the Federal Government is constitutionally empowered to delegate persons other than State Governments and their agents, as agents of tax collection.

Further, the FIRS stated that VAT is centrally administered by the FGN through the FIRS in collaboration with the Nigerian Customs Service and the various states revenue services; with about 50% of the accrued VAT allocated to the States of the Federation, 35% to Local Governments, and only 15% retained by the Federal Government.

Rivers State is a major beneficiary of the net VAT proceeds distributions and should not be allowed by the Court to approbate and reprobate at the same time.

Finally, the FIRS maintained that the TLA, although promulgated by the military government, is an existing law by virtue of Section 315 (4) (b) of the 1999 Constitution, and therefore valid and effective.

AGF’s Position

The Attorney General of the Federation (AGF) argued that VAT, WHT, TET, and NITDA Levy are within the legislative competence of the National Assembly because the FGN’s powers as regards taxation is not limited to Items 58 and 59 of the 2nd Schedule to the Constitution.

Items 67 and 68 of the Second Schedule empowers the National Assembly to impose any tax connected to all the items in the Exclusive Legislative List, including VAT, WHT, TET, and NITDA Levy.

The AGF further maintained that these taxes were rightly imposed by the National Assembly and validly administered by the FIRS. Consequently, the FGN had not imposed any tax, levy, or duty which is beyond its constitutional powers.

Additionally, the AGF posited that based on Item 8 of the Second Schedule, the National Assembly has the power to delegate the administration of the referenced taxes to the State Government or any other agency of its choice.

Consequently, the FIRS is validly empowered to administer the collection of the taxes on behalf of the FGN.

The Minister of Justice further argued that except for taxes and levies provided for in Item 9, Part II, Second Schedule of the Constitution, the Plaintiff or its House of Assembly cannot validly challenge the powers of the National Assembly which are exercised in consonance with Items 7 and 8, Part II, Second Schedule of the Constitution.

Finally, the AGF submitted that the Federal High Court is dutybound by the doctrine of judicial precedence to uphold the constitutionality of the TLA in line with the decision of superior courts.

Issues for Determination

Based on the prayers and arguments submitted by the parties, the Court adopted the three issues below for determination;

Whether the Federal Republic of Nigeria and the Federal Government of Nigeria are entitled to make laws for the purpose of taxation other than for taxation of incomes, profits, and capital gains, and if not, whether the FIRS is entitled to enforce and administer laws inconsistent with, or in excess of the authority of the Federal Republic of Nigeria or the Federal Government of Nigeria to make laws.

Whether the legislative competence of the National Assembly to impose tax or duties on capital gains, incomes or profits of persons and on documents or transactions by way of stamp duties extends to and includes the power to levy or impose any form of Sales Tax including Value Added Tax or any other form of Levy and if so, whether the power of the Federal Republic of Nigeria to delegate the power of collection of taxes can be exercised for the purpose of delegating the duty to any other person other than the government of a State or other authority of a State.

Whether the Taxes and Levies (Approved List for Collection) Decree No. 21 of 1998, now Act, in so far as it purports to legislate in respect of the responsibility for collection of taxes and levies, assessment and collection of taxes other than as provided for under items 58 and 59 of the Exclusive Legislative List, (Second Schedule Part 1) and items 7 and 8 of the Concurrent Legislative List (Second Schedule, Part II), is not unconstitutional, null and void.

Federal High Court's Decision.

After considering the argument of the parties, the court decided on the issues as follows:

The Constitution does not empower the Federal Government of Nigeria (FGN) to impose and collect taxes outside the scope of Items 58 and 59 of Part I of the Second Schedule. The provisions of Items 58 and 59 of Part I of the Second Schedule are clear and unambiguous.

Further, where a statute mentions a specific thing among other alternatives, those not mentioned are deemed excluded. Items 58 and 59 of Part I of the Second Schedule specifically designated the taxes that the FGN is empowered to impose and collect and they do not include VAT, WHT, TET, and NITDA.

The provisions of Item 7 (a) & (b) of Part II, Second Schedule do not extend the legislative competence of the National Assembly to the imposition of any form of tax outside capital gains, incomes or profits of persons other than companies; and documents or transaction by way of stamp duties. Therefore, the National Assembly is not empowered to enact any law to impose any form of sales tax, including VAT, and any other tax outside those specifically mentioned in Items 7(a) & (b) of Part II, Second Schedule. Further, Items 7(a) & (b) of Part II,

The Second Schedule is unequivocal in limiting the entities to whom the National Assembly can delegate the power to collect such tax or administer the tax law to State Government or a State Government authority.

The court, therefore, held that any delegation to any other person or entity apart from State Government or a State Government authority shall be null and void.

The Court referred to the decision of the Court of Appeal in Uyo Local Government Council V. Akwa Ibom State Government & Anor. (2020) LPELR-49691 (CA) where the Appellate court nullified the TLA for being inconsistent with the provisions of the Constitution.

Consequently, the Federal High Court relied on judicial precedent to hold that the TLA is unconstitutional, and any tax or levy provided for by it is automatically unconstitutional, null, and void, except such tax is provided for by the Constitution or any other law validly made by a competent legislature.

Based on the foregoing, the Court resolved all three issues in favor of the Rivers State Government and granted all the reliefs sought by the Plaintiff.