Overview of the Administration of Value Added Tax in Nigeria by Moshood Yahaya
The idea behind taxes is not alien to many as it has long existed and been recognized in our social and religious history. Taxes are lump-sum charges imposed by the government to raise revenue used for the development of the state. While the idea of taxation has settled well with people, the multiplication in its form has caused people to raise their brows and question the essence of each form of taxation. This article seeks to give an insight into Value-Added Tax.
Just like every other tax, Value Added Tax is imposed and collected by the government to serve as revenue for the state. One sacrosanct feature that distinguishes Value-added Tax from other taxes is that it is an Indirect Tax collected on a product at every stage of its production during which value is added to it, from its initial production to the point of sale. This may serve as a description of the tax itself. Value Added Tax is the tax levied on the gross margin at each point of manufacturing, distributing and selling an item. Permit me to cite an illustration to drive home my definition.
Kunle buys flour for 200 Naira and pays VAT of 20 Naira payable to the government totalling 220 Naira, the 20 Naira here is the VAT collectible at the production stage. He makes doughnuts out of the flour and sells them for 500 Naira to the retailer plus a VAT of 50 Naira totalling 550 Naira. At this stage again (the distribution stage), a VAT of 30 Naira is deductible. This 30 Naira is the gross margin of 50 Naira and 20 Naira. Finally, when the retailer sells the doughnut to the consumer for the price of 1000 Naira plus a VAT of 100 Naira totalling 1100 Naira, the retailer renders 50 Naira to the government as VAT on consumption.
From all the above, the initial 20 Naira VAT on manufacture, 30 Naira VAT on distribution and 50 Naira VAT on consumption represents 10% of the gross margin. This also illustrates that VAT is collectible at every stage from production to consumption. Another feature of VAT is that the payable amount is based on the product minus the cost of materials used in products that have already been taxed. That is why, at the consumption stage, only 50 Naira was charged as VAT out of the 100 Naira since 20 Naira and 30 Naira totalling 50 Naira were initially charged during the production process. This also demonstrates that a certain percentage of VAT is being charged on all production processes, unlike progressive income tax which levies more taxes on the wealthy, or the regressive income tax which places undue economic duress on low-income earners.
Value-added tax (VAT) is a consumption tax payable on the goods and services consumed by any person, business organization or individual. VAT can also be defined as a tax on spending/consumption levied at every stage of the transaction but eventually borne by the final consumer of such goods and services.
GENESIS OF VAT
Many European Countries enacted a VAT law in the 1960s and 1970s while in other countries, Value Added Taxation began to unfold in the 1980s when most industrial countries started to adopt the tax system[i]. Recently, Value-added Tax has been embraced and implemented by many nations around the globe. The reason behind the prevalence of the adoption of this tax system is because, like sleep, it is difficult to evade and relatively easy to administer. Just as VAT has become one of the main streams for government to fetch its revenue in many industrial countries, Nigeria has also refused to be a spectator but rather a participant in the awesome sport.
The introduction of VAT in Nigeria can be traced to the Dr Sylvester Ugoh led study group on indirect taxation in November 1991. Subsequently, a committee was set up under the chairmanship of Mr Emmanuel Ijewere to conduct extensive research and make recommendations. VAT was finally introduced in Nigeria in 1993 by the VAT Act No. 102 of 1993 as a replacement for the sales tax which had been in operation under the Federal government Legislated decree No.7 of 1986 but administered by the states and the Federal capital territory.[ii]
Since its introduction, the VAT Decree had since addressed the administrative issues around the logistical challenge for companies with operations across the various States, who were subjected to different sales tax regimes across the country. One major existing tax which caused dissatisfaction was the Sales Tax which was poorly administered under the state governments. Due to the newly promulgated decree’s commendable provisions, the VAT Decree was received by companies with welcoming hands like a bouncing baby boy. Upon the return to democracy in the fourth republic, the VAT Decree was legislated upon by the National Assembly, christening it the VAT Act.
By the VAT Act, Value Added Tax was introduced at 5 per cent. This is undoubtedly one of the lowest VAT per cent rates in the world. Many other countries have a VAT rate of between 10 and 25 %. In 2007, some members of the National assembly made futile attempts to increase the rate to about 10% through the enactment of the Value Added Tax Act No.2 of 2010. This attempt encountered an epic fail and died a natural death as the Nigerian Public resisted and protested against the increase. The 5 percentage VAT rate remained the status quo until 2020 when the Finance Act increased the percentage of Value Added tax to 7.5 %.
AN X-RAY OF THE VAT ACT
The Value-added Tax Act, CAP V1, LFN 2004 was introduced in 1993. It is composed of six (6) parts of 48 Sections and Two (2) schedules. Part 1 which contains the first six sections is on the imposition of the tax, taxable goods and goods exempt from VAT, the rate of tax and the value of taxable goods. Part 2 which contains Sections 7-11 is authoritative on the administration of VAT. Section 7, which is often a point of controversy, vests the administration of VAT on the Federal Board of Inland Revenue. Part 3 which contains Sections 12-20 is on returns, remittances, recovery and refund of tax. Part 4 which has sections 21 and 22 establishes the VAT Technical Committee and enumerates its functions. Part 5 which is composed of Sections 25-37 creates offences and stipulates their penalties. Lastly, Part 6 which is composed of Sections 38-47 is on Miscellaneous.
By the provisions of Sections 2 and 3 of the Act, VAT is imposed on the supply of all goods and services except the goods and services listed in the 1st Schedule to the Act. The exempted goods include medical and pharmaceutical products, basic food products, books and academic materials, basic food items, exports etc. The services exempted include medical services, community services, exported services etc. The VAT Act set the rate of the tax at 5% pursuant to Section 4. However, the Finance Act of 2020 has increased this rate to 7.5%.
Section 7 of the Act provides for the administration (collection and assessment) of the tax by The Federal Board of Inland Revenue. It is instructive to note that the VAT revenue is not paid into the federation account at inception but into a VAT pool account. It is only after it has been shared and allocated to the three tiers of Government that the portion due to the Federal Government goes into the relevant consolidated revenue account. By the current arrangement, 35% goes to the Local Governments, 50% goes to State Governments and 15% goes to the Federal Government. By this arrangement, 85% of VAT collected goes to the States and Local Governments while 15% goes to the Federal Government.
Although VAT is centrally administered by the Federal Inland Revenue Service (FIRS), it has always been largely for the benefit of the states in Nigeria. The VAT pool is shared with 15 per cent going to the Federal Government; 50% to states; and 35% to local governments (with a net of 4% as the cost of collection by the FIRS).[iii]
The offences contained in Part 5 of the Act are offences which render the offenders liable to fines or imprisonment for up to 5 years or both as the circumstance may demand.
TWO SIDES TO A COIN
This is the part where this piece becomes interesting. This part borders on the dual claim to the administration of VAT. This is exactly similar to a competitive claim to the throne by royal nobles. It concerns the struggle of each face of the coin to triumph every time the coin is tossed. I am talking about the Federal Government and the State Government.
In a country like Nigeria, which generated an estimated amount of 1.53 Trillion Naira revenue from Value Added Taxes in 2020,[iv] one should not be caught in a storm of surprise that the administration of such a stringent but lucrative levy will generate a sustainable controversy between two entitled tiers of government. In fact, to not expect a controversy is like to expect a child who carries gold past bandits to return safely without glitches.
As a federation, Nigeria has three constituent units, the Federal, state and local governments. The powers and limitations of each of these constituents are supervised by the provisions of the constitution. At the Federal level, the law-making power lies with the National Assembly while the law-making power of the state lies with the States’ Houses of Assembly. The matters on which each of the constituent units can make laws are contained in the schedules of the constitution.
Consequently, the question of who can make laws on VAT and who is constitutionally established to administer the same has generated controversy. The subject of the controversy is that the federal government lays claim to the collection of VAT because Section 7 of the VAT Act empowers the Federal Inland Revenue Service (FIRS), an agency of the Federal government, with the administration of the tax. The VAT Act is a law made by the National Assembly under its inherent powers recognized and guaranteed by Section 4 of the constitution.
On the other end of the controversy is the State government which also lays claim to the collection of VAT. Their claim is premised on the notion that the constitution lists matters relating to tax collection in the concurrent list, which inadvertently entitles the state government to the collection of VAT. They also contend that the Federal Government may only delegate the power to collect taxes under Item 58 and 59 of the Exclusive Legislative List to the state government, relying on Item 7 of the concurrent list. In addition, they contend that the power of the federal government to impose taxes is limited to the taxes listed in Item 58 and 59 of the Exclusive Legislative List, which excludes VAT.
Furthermore, about 30 states account for less than 20% of VAT collection, while Lagos and Rivers States, currently in the eye of the storm, are estimated to account for over 70 per cent of the VAT pool in Nigeria, with Lagos as a standalone contributing about 55 per cent due to the high concentration of economic activities in the State as a result of its strategic importance as the commercial capital of Nigeria. The low returns on VAT received by Lagos and Rivers States therefore remains a major source of agitation by the concerned state governments.
Having considered the claim of the two tiers of government, and the statutory provisions they rely upon, let us now pry into what the courts have decided in previous cases where similar issues came up before them.
To start with, the 2020 case of Ukala v. FIRS[v] comes in handy in this regard. In this case, the Federal High Court took the judicial reasoning that the National Assembly is statutorily barred from making law on a head of taxation not covered in Items 58 and 59 of the Exclusive Legislative List. As such, the VAT Act which empowers the Federal Government with the collection of VAT is unconstitutional. This automatically expunges the power of VAT collection from the Federal Government and grants it to the state government. This reasoning has also been upheld in various other cases including the recent case of A.G Rivers State v. FIRS.[vi]
Interestingly, the position of the courts on this issue does not enjoy uniformity[vii]. There is a contending and contrary opinion by the courts concerning the legally entitled tier to collect VAT. Recourse must be made to the reasoning of the Supreme Court in the famous case of A.G Lagos State v Eko Hotels Ltd.[viii] where the court held that the VAT Act had covered the field of Sales Tax, thus, the VAT Act applies to invalidate any legislation made by the state on the same or similar subject matter. The issue of collection of the tax was resolved in favour of the Federal Government. The Federal High court also appreciated and upheld this reasoning in the case of Incorporated Trustees of Kogi State v Kogi State Board of Inland Revenue and Ors[ix].
LESSONS FROM OTHER JURISDICTIONS
The United States employs a retail sales tax rather than the Value Added Tax. However, it is worthy of note that the sales tax is also a kind of consumption tax like its counterpart, the Value-added Tax. The United States Sales Tax is administered by and imposed at the State and Local government levels. On the flip side, for inter-state transactions and imported goods and services, an Integrated (goods and Services Tax) GST is levied by the federal government. From a more narrow perspective, it can be said that the Goods and Services Tax (GST) as practised in the United States, is more similar to VAT[x].
In the Federation of India, the administration and collection of Goods and Services Tax is the duty of both the State and the Union governments. GST is levied on Transactions which are made within a state by the state government while GST is levied on transactions made between states by the Central Government. The implication of this is that India practices a two-way consumption tax administration system
RECOMMENDATIONS
- Whilst it is natural to agitate, it is more honourable to seek ways to get the appropriate system of governance to look into the plight. Thus, the concerned government authorities are implored to derive practical lessons from other jurisdictions. As can be seen in the United States, the GST itself is collectible by the Federal Government, which enhances the spirit of federalism as it will promote even and equal development of constituent states. However, the Sales Tax is left at the disposal of the State governments. The Nigeria Government is encouraged to take this approach. If this is the case, the constitution should be amended to include VAT in the exclusive legislative list to bar future controversies.
- On the other hand, the VAT collection may be divided between the Federal and state government with consideration being made to whether the VATABLE transaction is made within a state or between states. in such transactions that are made in a state, the VAT should be administered by the concerned state. Relatively, transactions made between states should be left within the ambit of the Federal Government to administer. Imported Goods and services should also be administered by the Federal Government.
Lastly, it is suggested that this incessant dispute between the Federal and State governments should be resolved politically, as opposed to legally. Political resolution involves peaceful negotiation between the parties concerned where propositions will be made of policies of VAT administration that will favour both parties. In Nigeria, attempts at legal resolution of fundamental issues as this is usually stringent, and frightening as a simple case can remain in court for years.[xi] To add fuel to the fire, both parties may not be satisfied with the decision of the courts. Hence, political resolutions have proven to yield better results, hence recommended for this problem
[i] The Tax Policy Center’s Briefing Book https://www.taxpolicycenter.org/briefing-book/what-history-vat
[ii] Akinlooye James: Understannding Nigeria’s VAT administration: A historical perspective https://dailypost.ng/2021/09/20/akinloye-james-understanding-nigerias-vat-administration-a-historical-perspective/
[iii] https://dailypost.ng/2021/09/20/akinloye-james-understanding-nigerias-vat-administration-a-historical-perspective/
[iv] Samuel Oyekanmi ‘Nigeria generates N1.53 Million VAT in 2020, grows by 29%’ january 7 2021 https://nairametrics.com/2021/01/27/nigeria-generates-n1-53-trillion-vat-in-2020-grows-by-29/ accessed December 22, 2021.
[v] Suit No (FHC/PH/CS/30/2020)
[vi] Suit No: FHC/PH/CS/149/2020
[vii] Halima Abiola ‘Takeaways from the Supreme Court Decision in AG Lagos v Eko Hotels Limited & FBIR (8th December, 2017) vis-à-vis the AG rivers State v FIRS Decision of the Federal High court, and related cases. https://loyalnigerianlawyer.com/takeaways-from-the-supreme-court-decision-in-ag-lagos-v-eko-hotels-limited-fbir-8th-december-2017-vis-a-vis-the-ag-v-rivers-state-v-firs-decision-of-the-federal-high-court-and-related-cases/ accessed December 22, 2021.
[viii] (2018) 36 TLRN1
[ix] Suit No: (FHC/LKJ/CS/58/2018).
[x] Value-added Tax- Wikipedia https://en.m.wikipedia.org/wiki/Value-added_tax
[xi] The case of R. Ariori and Ors v. Moraino Elemo and Ors (1983) 1 SCNLR was filed in 1963 where final judgement was delivered in 1983, 22 years after.
