The Institute of Chartered Accountants of Nigeria, ICAN, has enjoined Rivers State and the Federal governments to seek amicable solution to the issue of Value Added Tax (VAT) collection to protect the taxpayers and provide certainty to businesses.
Reacting to the recent ruling of a Federal High Court in Port Harcourt, which gives power to Rivers State government to collect VAT as against the Federal Inland Revenue Service (FIRS), ICAN leadership posits that the issue should not be allowed to degenerate given the country’s precarious tax revenue position and the general business environment.
In a position paper signed by Prof. Ahmed M. Kumshe, Registrar/Chief Executive, ICAN says the latest “development presents an opportunity to us to re-examine our fiscal federalism and leverage on the ongoing Constitutional review to fashion out the most suitable fiscal structure for the country in a manner that strengthens the subnational level of government while ensuring uniformity of treatment as much as possible. This process should include a review of the VAT law, its administration and revenue sharing formula.”
Rivers State Governor Nyesom Wike
The position is reproduced below:
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA’S POSITION ON:
THE RIVERS STATE VALUE ADDED TAX LAW FURTHER TO THE JUDGMENT OF THE FEDERAL HIGH COURT IN SUIT NO. FHC/PH/CS/149/2020 BETWEEN THE ATTORNEY GENERAL OF RIVERS STATE V. FEDERAL INLAND REVENUE SERVICE AND THE ATTORNEY GENERAL OF THE FEDERATION
Preamble
In what appears a seminal judgment on the case between the Attorney General of Rivers State and the Federal Inland Revenue Service and the Attorney General of the Federation, the High Court ruled in favour of Rivers State in respect of power to collect Value Added Tax (VAT). Essentially, the court gives power to Rivers State to collect VAT as against the Federal Inland Revenue Service (FIRS). This judgment has been greeted with mixed reactions.
Given the rapid development of events since the judgment there is the need to guide our members, share our view with policymakers and educate the public and other stakeholders on the possible implications.
Historical perspective
Prior to the introduction of VAT in Nigeria in 1993, some States in Nigeria administered sales tax. However, the VAT Law replaced the sales tax effective from 1994. The law empowered the FIRS to collect the tax which is to be shared among the three tiers of government – 15% to the Federal Government, 50% to States, and 35% to Local Governments.
There have been a series of legal cases against the National VAT law, its administration by FIRS and powers of states to enact similar laws such as sales or consumption tax which was enacted by Lagos state in 2009. Subsequently, other states have enacted similar laws including Kano, Edo, Ogun, Rivers and Yobe state. The consumption tax is often described as Hotel Occupancy and Restaurant Consumption Tax or Entertainment Tax.
In Registered Trustees of Hotel Owners and Managers Association of Lagos v. Attorney General of Lagos State and Federal Inland Revenue Service, the Supreme Court held that the VAT Act, being an enactment of the National Assembly, has covered the field on matters relating to sales or consumption tax, and prevails over any similar tax law of the state. The case however did not address the constitutionality of the National VAT Act.
Various cases addressing issues pertaining to VAT, power to collect and possible overlap with other forms of consumption taxes include:
- Attorney General of Lagos State v. Eko Hotels Limited & Federal Board of Inland Revenue where the Supreme Court held that VAT covered the field over Sales Tax introduced by Lagos State
- A.G. Ogun State v. Aberuagba where the Supreme Court struck down the Ogun State sales tax because by the Constitution the Federal Government had exclusive competence to legislate over inter-state trade and commerce though recognising the state’s power to legislate over intra-state trade provided there is no conflict with federal law
- Nigerian Soft Drinks Limited v. A.G. Lagos where the courts held that the Sales Tax Law in Lagos imposed on persons, was valid, unlike the Ogun State Sales Tax which imposed tax on goods brought into the state.
The Rivers State VAT Law 2021
A cursory look at the Rivers State VAT law indicates that it was fashioned after the extant VAT Act.
While the rate is 7.5%, taxable persons are to register for the tax within 6 months of the commencement of the law or 6 months of commencement of business whichever is earlier. This means businesses which have been in business for at least 6 months are to register immediately while new businesses have up to 18 February 2022 to register.
Monthly remittance and returns are due by the 21st of the succeeding month in a manner specified by the Rivers State Internal Revenue Service. This means the first return under the law will become due by 21st of September 2021.
The VAT revenue is to be shared 70% to the State and 30% to the Local Governments.
We note that there is no exemption for small businesses with turnover below N25 million as is the case under the national VAT Act.
Implications
While the move by the Rivers State government seeks to promote the principle of fiscal federalism, we are of the view that the matter should be approached carefully to achieve a win-win outcome for all stakeholders and address the following areas of concern:
- Impact on the Ease-of-Doing Business – if the position is sustained and replicated by other states, it will increase the cost and time required for compliance by businesses in addition to the complexity of administering VAT at the subnational level such as treatment of international and inter-state transactions.
- Multiplicity of Taxes – Many states still have various taxes which are similar in nature to consumption tax including the Hotel Occupancy and Restaurant Consumption tax, Entertainment Tax etc. Administering VAT at the state level may add to the myriad of taxes across different levels of government many of which are targeted at the same tax base.
- Capacity of Tax Administration – Collection of VAT by States may be more demanding, especially in the short to medium term, in the aspect of VAT skills and knowledge, dealing with digital transactions, VAT audit, and dispute resolution.
- Impact on Vulnerable Households and Small Businesses – In the absence of exemption threshold for small businesses and limited list of exempt goods and services, there may be adverse effect on the masses in Rivers State especially poor households and SMEs.
Conclusion
We implore the government of Rivers State and the Federal government to seek an amicable resolution of this issue sooner rather than later. It should not be allowed to degenerate given the country’s precarious tax revenue position and the general business environment. It is important to protect the taxpayers and provide certainty to businesses.
We believe that this development presents an opportunity to us to re-examine our fiscal federalism and leverage on the ongoing Constitutional review to fashion out the most suitable fiscal structure for the country in a manner that strengthens the subnational level of government while ensuring uniformity of treatment as much as possible. This process should include a review of the VAT law, its administration and revenue sharing formula.
Ahmed M. Kumshe (Prof.) FCA, Registrar/Chief Executive
