VAT: More States To Challenge FG’s Power To Collect Tax

By Tosin Olatokunbo

There are indications that more state governments will go to court to challenge the power of the federal government to continue to collect value added tax or personal income tax in their states, following the ruling by a federal High court in Rivers state which ruled against the status quo where federal authorities such as the Federal Inland Revenue Service, FIRS collect such taxes.

Before the ruling, many analysts have contended that the current arrangement is against the spirit of fiscal federalism where the states are expected to collect the taxes, and remit some percentage to the federation Account.

They insist that some states are benefitting from VAT without making serious contributions, while states which have banned the consumption of certain items are sharing from VAT collected from the same items in others states.

For instance, some Northern states such as Kano, Kaduna, Zamfara which operate the Sharia legal system, where alcohol consumption is not allowed are sharing from VAT collected on the same items from other states, particularly in the south where the consumption of alcohol is not banned.

In May, the Kano State Hisbah Board, a local police authority confiscated 8,400 bottles of beer in Dawakin Kudu and Kura Local Government Areas, LGAs. The decision, according to the Commander-General of the board, Dr. Harun Ibn-Sina, was taken because “Hisbah Board has prohibited the sale of beer in the state to avoid being intoxicated.”

According to the National Bureau of Statistics, NBS close to N500 billion was collected from VAT in the first half of the 2021 financial year, and shared by all the 26 states of the federation and FCT. A huge chunk of that amount was collected from on VAT from alcohol.

The perceived injustice in the sharing of VAT prompted the Rivers state government to go to court, a matter in which the court has now given a judgment.

Presided over by Justice Stephen Dalyop Pam, the court also issued an order of perpetual injunction restraining the FIRS and the Attorney General of the federation, both first and second defendants in the suit, from collecting, demanding, threatening and intimidating residents of Rivers State to pay to FIRS, personnel income tax and Value Added Tax.

Justice Pam made the assertion while delivering judgement in Suit No. FHC/PH/CS/149/2020, filed by the Attorney General for Rivers State (plaintiff), against the Federal Inland Revenue Service (first defendant) and the Attorney General of the Federation (second defendant).

The Court, which granted all the eleven reliefs sought by the Rivers State Government, stated that there was no constitutional basis for the FIRS to demand for and collect VAT, Withholding Tax, Education Tax and Technology levy in Rivers State or any other State of the Federation, being that the constitutional powers and competence of the federal government was limited to taxation of incomes, profits and capital gains, which did not include VAT or any other species of sales, or levy other than those specifically mentioned in items 58 and 59 of the Exclusive Legislative List of the Constitution.

The judge dismissed the preliminary objections filed by the defendants that the Court lacked jurisdiction to hear the suit and that the case should be transferred to Court of Appeal for interpretation.

Justice Pam, who also dismissed objection raised by the defendants that the National Assembly ought to have been made a party in the suit, declared that the issues of taxes raised by the state government were issues of law that the court was constitutionally empowered to entertain.

He declared that after a diligent review of the issues raised by both the plaintiff and the defendants, the plaintiff has proven beyond doubt that it was entitled to all the eleven reliefs it sought in the suit.

The court agreed with the Rivers State Government that it was the State and not FIRS that was constitutionally entitled to impose taxes enforceable or collectable in its territory of the nature of consumption or sales tax, VAT, education and other taxes or levies, other than the taxes and duties specifically reserved for the federal government by items 58 and 59 of Part 1 of the Second Schedule of the 1999 constitution as amended.

Also, the court declared that the defendants were not constitutionally entitled to charge or impose levies, charges or rates (under any guise or by whatever name called) on the residents of Rivers State and indeed any state of the federation.

Among the reliefs sought by the Rivers State Government, was a declaration that the constitutional power of the federal government to impose taxes and duties was only limited to the items listed in items 58 and 59 of Part 1 of the second schedule of the 1999 constitution as amended. The Rivers State Government had also urged the court to declare that, by virtue of the provisions of items 7 and 8 of the Part II (Concurrent Legislative List) of the Second Schedule of the constitution, the power of the federal government to delegate the collection of taxes can only be exercised by the State government or other authority of the state and no other person.

The State government had further asked the court to declare that all statutory provisions made or purportedly made in the exercise of the legislative powers of the federal government, which contained provisions that were inconsistent with or in excess of the powers to impose tax and duties, as prescribed by items 58 and 59 of the Part I of the Second Schedule of the 1999 constitution, or inconsistent with the power to delegate the duty of collection of taxes, as contained in items 7 and 8 of Part II of the Second Schedule of the Constitution, were unconstitutional, null and void.

Lead counsel for the Rivers State Government, Donald Chika Denwigwe (SAN), who spoke to journalists after the court session, explained that the case was all about the interpretation of the constitution as regards the authority of the government at the state and federal levels to collect certain revenue particularly, VAT.

“So, during the determination of the matter, some issues of law were thrown up like, whether or not the case should be referred to the Court of Appeal for the determination of some issues.

“The court noted that the application is like asking the Federal High Court to transfer the entire case to the Court of Appeal. In which case, if the court so decides, there will be nothing left to refer back to the Federal High Court as required by the constitution.”

The magazine learnt that some states already brazing up to go to court over the issue will further be spurred to do so following the judgement by a federal court in Rivers state.

Meanwhile, some analysts who spoke to the magazine over the issue said, when states are allowed to collect VAT it will reduce the financial problems they are facing, particularly states that are making efforts to generate economic activities in their various jurisdictions.

Apart from this, the contention is that when states are allowed to collect VAT it will address the problems of fiscal federalism that have formed the planks of major agitations across the country for years, as the federating units demand that they be allowed to control their resources.