Background
VAT was introduced via Decree No.102 of 1993. It replaced sales tax operated under Decree No.7 of 1986 which was administered by states and the FCT. By contrast, VAT is administered by the FIRS and the revenue is shared among all 3 levels of government. Both VAT and sales tax fall under the category of consumption tax.
What the new judgement says
The Federal High Court in Port Harcourt on Monday 9 August 2021 ruled that the Rivers State Government (and not the FIRS) is entitled to collect VAT in the state. This is on the premise that only the state is constitutionally entitled to impose taxes in its territory of the nature of consumption or sales tax.
What does the Constitution say?
Sections 3&4 of the Constitution empower the National Assembly to legislate on matters contained in the Exclusive Legislative List and certain items under the Concurrent Legislative List.
The 2nd Schedule to the Constitution, items 7 & 8 of Part II (Concurrent Legislative List) provide that the National Assembly in exercise of its power to impose tax or duty on persons other than companies, may prescribe that such tax or duty be collected or administered by the state.
What it means
If the judgement is enforced or upheld on appeal, it will apply to other states and not just Rivers State. This means each state would administer VAT within their territory. By implication, FIRS will administer VAT within the FCT and non-import foreign VAT while the Nigeria Customs Service will continue to collect import VAT on international trade.
Implications
Ironically, the biggest losers will be the states except Lagos. A few states like Kano, Rivers, Oyo, Kaduna, Delta and Katsina may experience minimal impact, while at least 30 states which account for less than 20% of VAT collection will suffer significant revenue decline. The federal government may in fact be better off given that FCT generates the second highest VAT (after Lagos) in addition to import and non-import foreign VAT.
Currently, section 40 of VAT Act requires that the VAT pool be shared 15% to the FG; 50% to states; and 35% to LGs (net of 4% cost of collection by the FIRS). 20% of the pool is shared based on derivation.
In 2020 for instance, total VAT collection was about N1.53 Tr with import VAT being N348 Bn (or 22.7%) while foreign non-import VAT was N420 Bn (or 27.4%) and local VAT amounted to N763 Bn (or 49.8%).
Federal government is likely to retain more than the 15% it currently shares, while states and LGs will have less to share especially if we consider VAT on FG contracts included in Local VAT which will also be due to the FG.
A previous Supreme Court judgement had ruled that VAT covered the field (of consumption tax) and therefore a state cannot impose a consumption tax in addition to VAT. This means any state intending to impose VAT will have to repeal its existing consumption tax.
This judgement may also have implications for taxes collectible by Local Governments which are currently administered by States as well as the amendment via Finance Act 2020 which introduced Electronic Money Transfer levy in place of stamp duties, among others. In addition, complications may arise for businesses including SMEs who may have to deal with multiple tax authorities for VAT purposes and consequently a decline in Nigeria’s ease of paying taxes and doing business ranking.
So, what next?
Given the significance of this judgement, it is expected that the FIRS will appeal the decision. Therefore the status quo is likely to continue in the meantime.
It will be necessary to amend the Constitution to address the current challenges while retaining the positives under the current system. For instance, states will have to rely on the federal government to enforce the Significant Economic Presence requirement for global tech companies.
Ultimately, Nigeria can learn from other climes, but we must figure out our most suitable form of fiscal federalism.