Economic posterity is a matter that would always top the priority list of every person, group, or country. This is due to the ease of operation that access to financial wealth brings. Like every other nation of the world, Nigeria’s government understands and appreciates the need to have this economic posterity. In this context, economic posterity entails having a steady medium through which the government could have access to a large pool of funds to deliver on its duties, actualize plans, and sustain existing infrastructure.
The rapid decline of crude oil has put revenue generation on the front burner of national discussion. While there is no telling of when the use of crude oil will be put to abeyance, reduced demand in the international market would hurt the country in many ways. For years now, crude oil has been the primary revenue-generating medium for the federal government, and the country’s overreliance on crude oil has killed off several other sectors, such as agriculture, that could have cushioned the harsh effect we will be exposed to and keep the revenue flowing in. Due to this, the government has turned to taxation in securing the capital needed to grease its operations.
Taxation is one of the most efficient means of generating income for the government. In its very nature, tax is a social duty imposed on everyone within a jurisdiction. The government has the right to issue and administer it without stating what use such tax collected will be put to. Logically, the taxes collected are what the government uses to develop infrastructure, settle current expenditure, and foster wealth creation and sustenance in the country. Thus, it operates as a cycle; the government charges taxes, they use it to develop the country, the citizens enjoy and, in turn, are expected to pay taxes.
Like several sectors of the country, the tax regime operated in the country is plagued with a myriad of issues. Its imposition, implementation, and administration have been fraught with problems that have made it difficult for the government to reap maximally from the sector. For example, Denmark generates over 49% of its revenue from taxes, which has helped in the country’s sustenance. In Nigeria, however, our Gross Domestic Product (GDP) to tax ratio is one of the lowest in the world despite our vast population. This evidences the fact that the administration of taxes has not been adequately done, and consequently, the government has not been able to realize revenue from it.
Despite all these issues associated with the country’s tax regime, the tax regime has thrived in some aspects. Value Added Tax (VAT) is one of the most effective taxes in the country. In 2020, the government generated N1.53 trillion in revenue from VAT, a 29.3% increase from the N1.18 trillion generated in 2019. The reason for the success of the tax is not far-fetched. VAT applies to the consumption of goods and services, and its burden is borne by the consumer who purchases a good or service. By its nature, VAT is an indirect tax, and hence it is not charged directly. Instead, it is included in the price of goods and services, and upon purchase, the tax is deducted and later remitted to the Relevant Tax Authority (RTA). This makes it easy and affordable to administer and implement as the consumer might not even be aware that they have paid taxes on a good or service.
Suppose VAT is an effective tax that is generating this much revenue for the government with ease and convenience, why should issues be shrouding its implementation and administration in the country? One might ask. The answer has its roots in the law, specifically in the constitution. While it would be impossible not to refer to provisions of the law and find guidance in decided court cases, this writer will do so in a way that would make for good digestion and understanding of this subject matter without an excessive use of legal jargons.
The power to make law is the power to make taxes. Although taxation is a fiscal policy instrument, it finds its legal backing in the constitution. This means that the constitution’s unchangeable provisions guide and direct the implementation and administration of these taxes in the country. For every tax in existence, its implementation must be grounded on the provision of the constitution. Any act that is done or tax imposed that contravenes the constitution’s provision in this regard will therefore be considered null and void to the extent of its inconsistency.
On the power to make laws touching on specific subject matters, the constitution creates and operates three legislative lists. As per the federal nature of Nigeria, there are three tiers of government, and these legislative lists apply to different tiers, and detail what each tier of government can make laws on. As provided in the constitution, the three lists are: (i.) The Exclusive Legislative List contains subject matters only the federal government can legislate on; (ii.) The Concurrent Legislative List which includes matters both the Federal and State government can legislate on. However, in an instance where the Federal government has made a law on any matter contained in this list, the State is barred from making a law in that regard, and if it does, it would be considered null and void; (iii.) The Residual Legislative List, which the State has total dominion on, and has as its content, matters not contained in the Exclusive and Concurrent Legislative Lists. The knowledge of this will aid a proper understanding of the issues to be addressed in this work.
Without dabbling much into legal technicalities, like every other tax, VAT is a creation of the constitution which means ascertaining who has the right to impose it, and the implementation of the tax must be in line with the provision of the constitution. This is the root of the contention between the Rivers State government and FIRS. However, this is not the first time this dispute is coming up between the FIRS and a State government.
The landmark case of Alhaja Ayinke Aberuagba v. Attorney General of Ogun State is instructive on this matter and would guide and direct whatever conclusion that shall be reached at the end of this piece. In that case, the appellant, Alhaja Ayinke Aberuagba, had sought the court’s guidance on who she should remit her taxes to. There was a VAT Act, a Federal statute, under which taxpayers had been charged, but the Ogun state government had created a similar tax too, Sales Tax, which imposed taxes on goods already covered in the VAT. Thus, to avoid multiple taxations on the same goods, Alhaja Ayinke Aberuagba instituted a case in court to determine who is the RTA vested with the authority to collect her taxes.
As it was a matter that touched the Federal Government, the attorney general of the Federation was invited to join the case. The argument espoused by the attorney general of Ogun State was that the power to impose Sales taxes, although included in the Exclusive Legislative List in the 1960 and 1963 constitution as a matter that falls under the legislative competence of the Federal government, was omitted in the Exclusive Legislative List of the 1979 constitution. By implication, it falls under the Residual Legislative List, which the State has exclusivity on. The attorney general of the Federation, Chief Rotimi Williams, countered that despite the express omission, its coverage should be implied under item 61 of the Exclusive Legislative List on Trade and Commerce.
In reaching a decision, the court didn’t declare the VAT and Sales Tax illegal but made the limitation on which they could be applicable territorial. It held that while the Federal government could impose sales tax on international and inter-state trades, the State can only charge sales tax on intra-state trades. With due respect to the learned Justices who presided over the case, the decision wasn’t satisfactory, and this has been echoed in numerous criticism that emerged afterwards. Tax laws are to be interpreted literally, and if sales tax, which was a matter of federal legislative competence, was removed in the 1979 constitution after its inclusion in two preceding constitutions, it is this writer’s opinion that the drafters of the constitution wanted to make it a matter of State competence and the court, rather than creating a dichotomy, should have invalidated the VAT and upheld the Sales tax of Ogun State as the applicable law. However, as has been expressed in several other commentaries, the court’s decision was reached for political consideration rather than the correct application of the law.
Considering these issues and their consequences, one would have thought the drafters of 1999 would have settled any raging debate on who should charge sales tax in the country. Surprisingly, the same provision of the 1979 constitution was repeated, and consequently, sales was not included on the Exclusive Legislative List. Logically, it falls under the Residual Legislative List and thus became a subject matter on which only the State government should have dominion. However, the Federal government has continued to impose VAT and collected proceeds accruing therefrom despite lacking legislative competency.
Lagos State has made repeated attempts to impose its own sales tax, which taxpayers have challenged in several instances in the court of law. In the case of Eko Hotels v. Attorney General of Lagos State, the appellant, Eko Hotels, sought the court’s guidance on who sales tax collected by it should be remitted to. In a surprising wave of judgment, the court, in this case, detracted totally from its earlier decision in Aberuagba’s case and held the Sales Tax law of Lagos illegal. The decision sure did raise a lot of commentaries, with most hits on the erroneous decision it arrived at, and the need for the courts to decide, once and for all, that sales tax was a matter of State legislative competence and should be administered as such.
Considering these past precedents, the decision of the Federal High Court is thus a much-awaited one. It represents the first time a court pronounces the illegality of the VAT imposed by the Federal government and holds the State government as the right body that should assess and administer sales tax in the country. However, the implication of this decision stretches beyond mere power to impose and administer sales tax in the country. It touches on the revenue sharing of the Federal and State governments.
Upon the remittance of the revenue generated to the Federal government, the Federal government redistributes back to all the States of the Federation through the Federal Allocation Account Committee (FAAC). Such redistribution is not based on how much a State must have generated to the total revenue realized from VAT. Lagos State, for instance, generates close to 55% of the VAT in the country, yet only a paltry 10% is redistributed to it. It is the same with Rivers State, too. The injustice associated with this redistribution was one of the motivating factors that made Rivers State institute an action at the Federal High Court and enacting their own Sales Tax.
Aside from the inequitable sharing of the revenue, this reallocation has created a sort of dependency and hindered economic development in some States. Most states depend on the fund from the FAAC to run their government due to their inability or lack of desire to improve the form of their Internally Generated Revenue (IGR). Thus, the country is put in a state where some States work to generate revenue from their States while other States lay back and expect their share of the reallocation. Further, the fact that Northern States benefit massively from this has also raised concerns. An example of this is the fact that Kano gets reallocated an amount equal to what it generates.
While it is definite that the FIRS will appeal the decision of the Federal High Court, there is no reassurance that the Court of Appeal will reach the same decision as the Federal High Court. And if it does, such fear will still prevail upon a further appeal to the Supreme Court in whose yard the final and binding decision will be reached. The FIRS has been on its toes, too, since the judgment of the court. It has reached out to the National Assembly and requested an amendment of the constitution to include sales as a matter on the Exclusive Legislative List, which will vest the Federal Government with the legal backing to impose and administer sales tax in the country.
The decision of the court offers a lot of benefits. It would allow States to enact their own sales tax and derive revenue exclusively from it. This access to more income will allow for more productivity and infrastructural developments in these States. Further, it could serve as a call to action to States that have developed an unhealthy dependency on the reallocation from the FAAC. If put on their toes and forced to seek more revenue-generating means, then the country’s overall growth could be improved and lead to more wealth creation means in these states.
On the other hand, the creation of sales tax by different States, as already done by Rivers State and as put in contention by Lagos State, could create a regime of double-taxation and put an unfavorable burden on the taxpayers who purchase these goods and services. Further, varying Sales tax rates in different States could foster developments in some and hinder them in others. For instance, people will generally prefer to live and work in a place with a lower tax rate compared to other states.
In conclusion, it might be audacious to presume that the Court of Appeal or the Supreme Court will uphold the decision of the Federal High Court and hold the VAT Act as invalid. Nonetheless, it is a welcome development, considering its effect on revenue generation and allocation in the country. As it is in its infancy stage, the States should focus more on devising ways to adequately impose and administer sales taxes in their territories rather than putting all thoughts on how much revenue they could realize. Also, States that do not generate enough revenue through VAT should get back on their feet and explore ways to generate income in their territories. It is left to be seen what decision will be reached at the Court of Appeal and the Supreme Court on this matter.
 Editor. (2021, September 21). Why Status Quo on VAT Collection Must Be Maintained. THISDAYLIVE. https://www.thisdaylive.com/index.php/2021/09/22/why-status-quo-on-vat-collection-must-be-maintained/
 Lagos Generates 55% Of Value-Added Tax In Nigeria, Gets Only 10%—Lawmaker Says State Will Implement VAT Law. (2021, September 13). Sahara Reporters. http://saharareporters.com/2021/09/13/lagos-generates-55-value-added-tax-nigeria-gets-only-10%E2%80%94lawmaker-says-state-will
 LawCareNigeria, (2021, August 20). Case Summary of Attorney General of Ogun State v. Alhaja Ayinke Aberuagba https://lawcarenigeria.com/the-attorney-general-ogun-state-v-alhaja-ayinke-aberuagba-ors1985/
 Oyekanmi, S. (2021, January 27). Nigeria generates N1.53 trillion VAT in 2020, grows by 29%. Nairametrics. https://nairametrics.com/2021/01/27/nigeria-generates-n1-53-trillion-vat-in-2020-grows-by-29/
 Reporters, O. (2021b, September 9). 30 states risk bankruptcy as Lagos, Rivers set for new VAT regime. Daily Trust. https://dailytrust.com/30-states-risk-bankruptcy-as-lagos-rivers-set-for-new-vat-regime
Abdulrasaq Ariwoola is currently a 400 level law student at the University of Lagos. He has interests in creative writing and has previously published one of his short stories on The Kalahari Review. He can be reached via email@example.com