FHC Nullifies VAT Act, Other Taxes & Levies Beyond The Scope Of The Constitution – Tax – Nigeria – Mondaq News Alerts
The Federal High Court (FHC or “the Court”) Port Harcourt Division, recently delivered judgement in the case between the Attorney General for Rivers State (AGRS or “the Plaintiff”) and Federal Inland Revenue Service (FIRS or “1st Defendant”) & Attorney General of the Federation (AGF or “2nd Defendant”) collectively referred to as (the Defendants), stating that the Federal Government of Nigeria (FGN) lacks the power to impose and collect taxes that are not listed under Items 58 and 59 of Part I of the Second Schedule of the Constitution of the Federal Republic of Nigeria 1999 (as amended) (“the Constitution”). Consequently, taxes such as Value Added Tax (VAT), Withholding Tax (WHT), Tertiary Education Tax (TET), the National Information Technology Development Agency (NITDA) Levy, etc., which are not specifically listed under the said Items are outside of the jurisdiction of the FGN.
The Court also noted that the provisions of Item 7(a) and (b) of Part II of the Second Schedule of the Constitution do not extend the legislative competence of the National Assembly beyond capital gains, incomes or profits of persons other than companies, and documents or transactions by way of stamp duties. Therefore, the National Assembly lacks the power to enact any law to impose any form of sales tax, including VAT, and any other tax outside of those specifically mentioned in Item 7(a) and (b) of Part II of the Second Schedule of the Constitution.
Finally, the Court noted that the Taxes and Levies (Approved List of Collection) Act (TLA) is unconstitutional, hence, any tax or levy provided for in the Act is also unconstitutional, null and void, except such tax or levy is provided for in the Constitution or any other law made validly by a competent legislature.
We have summarised the arguments of the parties to the case below:
The Plaintiff argued that Items 58 and 59 of the Second Schedule, Part I of the Constitution, limits the powers of the FGN to enact, impose and collect taxes outside stamp duties and taxes on income, profit, and capital gain. Consequently, the imposition of taxes such as VAT, WHT, TET and NITDA Levy by the FGN are ultra vires its constitutional powers, and therefore null and void.
Further, the AGRS 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. Therefore, the powers of the FGN and/ or its agencies, such as the FIRS, are limited to the administration of only the taxes specifically listed in Items 58 and 59 of the Second Schedule, Part I of the Constitution.
The AGRS also argued that the TLA is unconstitutional, null and void to the extent that it provides for taxes and levies beyond the scope of Items 58 and 59 of the of the Second Schedule, Part I (Exclusive legislative List) and Items 7 (a) and (b) of Part II (Concurrent legislative List) of the Constitution.
Consequently, the Plaintiff sought the following reliefs from the Court:
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 (Supplemental and Interpretation) of the Constitution, the National Assembly has expansive powers to enact legislations to cover VAT, WHT, TET, NITDA, and other taxes provided by the 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. Further, 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 is valid and effective.
The 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. Further, the AGF 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 2nd Defendant 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 is exercised in consonance with Items 7 and 8, Part II, Second Schedule of the Constitution.
Finally, the AGF submitted that the FHC is dutybound by doctrine of judicial precedence to uphold the constitutionality of the TLA in line with the decision of superior courts.
Based on the prayers and arguments submitted by the parties, the Court adopted the three main issues for determination as follows:
After considering the argument of the parties, the FHC decided on the issues as follows:
The issue of the powers of the FGN to enact legislation which imposes taxes other than those provided for under Items 58 and 59 of the Executive Legislative List in Part I of Second Schedule has been topical for a number of years. It is therefore not surprising that the matter has now been referred to the law courts for adjudication. However, the ruling of the FHC, though clear may not immediately bring the certainty that taxpayers require as a key tenet of taxation.
The FIRS has since announced that it has filed a notice of appeal at the Appellate Court and a stay of execution and injunction at the FHC. It therefore insists that until both applications are determined by the Courts, the status quo should remain, and taxpayers should continue to charge and remit VAT to it.
The RSG however, has taken a different view with the passage of its Value Added Tax Law on 19 August 2021. It appears that their position is that until the decision of the FHC is overturned by a court of competent jurisdiction, they retain the authority to levy and collect VAT on transactions in the State. The RSG, through the Rivers State Board of Internal Revenue have also began to issue notices to taxpayers' resident in the State, reminding them of their obligation to account for VAT on transactions conducted in the State to them.
It is therefore important that the pending appeal and all other judicial process are quickly dispensed of to provide much needed clarity to taxpayers.
According to the National Bureau of Statistics' VAT report for 2020 fiscal year, VAT contributed ₦1.53 trillion to the Federation account which was shared amongst the 36 States and FGN. VAT is typically levied on supply of goods and services which are driven by business activities; therefore it is trite that some States may contribute more to the VAT collections than others depending on their level of economic activities. The effect of decentralising the VAT system may therefore negatively impact some States more than others. There are also potential administrative issues around the logistical challenge for companies with operations across the various States who would then be required to file different VAT returns for each of these States. This is without consideration for how the input and output VAT offset mechanism – a key tenet of any successful VAT system – would work where the input tax is incurred and paid in a different State from where the output tax is charged and collected.
It is therefore obvious that several conversations would still be required after the completion of the judicial process irrespective of its outcome. At the end of the day, it is important that the taxpayer is taken into consideration in all of this conversations in order to ensure that the Nigerian tax system continues to play a positive role in Government's plan to improve the ease of doing business in the country.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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