A federal high court sitting in Port Harcourt, Rivers State, has declared the collection of Value Added Tax (VAT) and Personal Income Tax by the federal government unconstitutional.
The judgment was delivered in the suit (FHC/PH/CS/149/2020) between the attorney general for Rivers state and Federal Inland Revenue Service (FIRS) as the first defendant and the attorney general of the federation, Abubakar Malami as the second defendant.
The Rivers State Government had last year, approached the court, seeking declaration that the constitutional power of the federal government to impose taxes and duties is only limited to the items listed in items 58 and 59 of Part 1 of the second schedule of the 1999 constitution as amended.
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The court declared Rivers the rightful body to receive personal income tax and VAT emanating from the state.
Presiding judge Stephen Pam ruled that the federal government’s constitutional powers do not include VAT collection but those items in 58 and 59 of the Exclusive Legislative List.
Mr Pam issued an order of perpetual injunction restraining FIRS and the attorney general from coercing or intimidating residents of Rivers state to pay VAT and personal income tax to FIRS.
The court declared that FIRS is not entitled to receiving VAT, education tax, technology levy and withholding tax from any state in Nigeria and further dismissed the objections the defendant filed that hearing the case was not within the court’s jurisdiction.
The court granted all the 11 reliefs sought by the Rivers State Government on the basis that the federal government has no constitutional backing to collect VAT, Withholding Tax, Education Tax and Technology levy in Rivers State or any other state of the federation. According to the ruling, the constitutional powers and competence of the federal government was limited to taxation of incomes, profits and capital gains which does not include VAT or any other levy other than those specifically mentioned in items 58 and 59 of the Exclusive Legislative List of the constitution.
What it means for states and federal government.
In February 2020, the implementation of 7.5% VAT charges on consumption goods and services in Nigeria went into force, following the enactment of the Finance Act 2019. The federal government had directed businesses in Nigeria to ensure that the VAT increment is implemented in sales and remitted accordingly to the government’s coffers. VAT had been reviewed from 5% to 7.5%, and the federal government was poised to use the revenue generated from it to cushion the effect of plummeted oil revenue.
However, the development did not augur well with some state governments as it means relinquishing a large share of their tax revenue from businesses under their jurisdiction.
The court ruling means the federal government’s VAT revenue plan has been altered and the states will have to reap the benefits of the 7.5% VAT increase. It also means that the federal government will no longer have to collect VAT from businesses operating in states and share between states under the Federation Account Allocation Committee (FAAC), a practice that has fueled the call for restructure due to the injustice it portends. Many states in northern Nigeria, under sharia law, prohibit the sale of alcohol but share the revenue derived from VAT on alcoholic beverages sold in the south.
While the judgment empowers states to take control of tax from businesses within their territory, it also exposes them to the harsh realities that come with. It’s only a few states in Nigeria, including Lagos, Kaduna and Rivers, that can boast of financial independence from the federal government. Which means, many states will face the challenge of poor revenue generation.
The judge dismissed the defendant’s plea for the case to be transferred to the Court of Appeal for interpretation. The ruling has been hailed by many as a bold step in attaining true federalism in Nigeria, if every state will act upon the judgment and take control of their VAT and income tax revenue.