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Legal battle over VAT collection stirs debates on equity, fiscal federalism (II)


The debate over the right authority to collect value added tax was arguably one of the highlights of 2021, especially in the fiscal space. While the Federal Government fought to retain the collection, Rivers State, joined by Lagos State, also made frantic efforts to make sure the courts affirmed states as the right authority to collect the tax.

Ordinarily, the judiciary should be the final arbiter in such issues, and many people indeed expected the judiciary to resolve the matter timeously, given the apprehensions it generated. The matter at some point degenerated to ethnic and religious sentiments and divided governors along ethnic lines.

But, months after the case got to the Court of Appeal, the appellate court has yet to rule on the matter, a development legal and economic experts describe as unfortunate.

On August 10, 2021, the Federal High Court sitting in Port Harcourt, the Rivers State capital, ruled that Rivers State and not the Federal Inland Revenue Service should be the authority collecting VAT and Personal Income Tax in the state.

Aggrieved by the ruling, the FIRS on August 15 approached the Court of Appeal in Abuja to challenge the judgement. It then applied to the Federal High Court for a stay of execution of its judgement and wrote to the National Assembly to seek the inclusion of VAT collection in the exclusive legislative list.

On August 19, the Rivers State Government enacted a law to empower the state to collect VAT, as the governor, Nyesom Wike, signed the bill into law.

On September 6, the Federal High Court dismissed the application for the stay of execution, saying granting the application would negate the principle of equity.

On September 10, Lagos State applied to be a co-respondent in the appeal filed by the FIRS at the Abuja division of the Court of Appeal. On the same day, the governor, Babajide Sanwo-Olu, signed the state’s VAT bill into law.

The Appeal Court on September 15 reserved ruling on Lagos State’s application for joinder, but on September 30, it joined the state as a respondent in the appeal.

While these were ongoing, the Rivers State government directed that in accordance with its law, VAT should be paid to the state Internal Revenue Service. The governor said, “All corporate bodies, business entities and individuals are advised to willingly, truthfully and promptly comply with their tax obligations under this law to avoid the full weight of the stipulated sanctions, including having their business premises sealed-up.”

But on August 23, the FIRS in a statement by its Director, Communications and Liaison Department, Abdullahi Ahmad, asked that VAT be paid to it, since the matter was on appeal.

Meanwhile, after approving Lagos State’s request for joinder as a co-respondent, the Court of Appeal on September 15 had also ordered all parties to maintain status quo ante bellum on the matter, a ruling the Rivers State Government had approached the Supreme Court to set aside.

On September 27, the Oyo State Government also applied as joinder in the appeal filed by the FIRS.

The Court of Appeal also directed that the matter be moved from Abuja to its Port Harcourt Division for further hearing.

Since the September 15 ruling on maintaining status quo, the court has yet to give its ruling on the substantive suit as of the time of filing this report.

Meanwhile, given the slow pace of the court case, the Federal Government mulled the idea of an out-of-court settlement. The Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed, said efforts were ongoing to resolve the matter.

But, as if all odds were against the resolution of the VAT row, the Lagos State Government said it did not receive any communication from the Federal Government, which deflates expectations that conversations had indeed begun over the matter. The Rivers State Government did not speak on the matter, though the governor said previously that the law should take its course first, even if there would be a conversation after the court declares the right authority to collect the VAT.

The minister said, “I’m not supposed to be talking about issues in court but I do hope that this problem can be solved by sitting on the table; not on the pages of newspapers or disagreements in court because it is possible to solve it on the table, talking of political solutions.”

When asked if the Federal Government was reaching out to the governors and if its representatives had met any of the governors over the matter, she said, “There are a lot of efforts going on right now. As I said, I don’t want to discuss it because it’s in court so I have to be careful. But there will be a positive political solution. We are working towards an out-of-court solution.”

At the moment, nothing has been heard of the out-of-court settlement; the case has not been withdrawn from the court, the Court of Appeal sitting in Port Harcourt has yet to rule on the matter, but ironically, the Finance Minister said the ministry was closely following the legal tussle.

Why government should use intelligence

Meanwhile, there are strong indications that the states and the Federal Government had been fixated on the VAT issue because of low revenue in the face of rising debts at over N35tn. Thus, governments at all levels are striving for ways to generate more revenue.

But according to experts, the government could make use of data and intelligence to increase its revenue significantly, rather than introducing new taxes, which imposes a higher burden on the poor.

The Finance Minister at the public hearing on the 2021 Finance Act indicated the possibility of the government introducing new taxes, tariffs and levies to boost revenue. She said the ministry was following issues such as “acceleration of projected increase tariff and excise duties on tobacco, alcohol and carbonated drinks to fund vital expenditure on health, education and security; wholesale reform of antiquated stamp duties and capital gains tax regime; and Possibility of introduction of new taxes, tariffs and levies, as the economy recovers.”

But the Fiscal Policy Partner and Africa Tax leader at PwC, Taiwo Oyedele, faulted the government’s mentality to want to take more from few people rather than look at how to expand the tax base. He said the tax system needed to be reformed because, according to him, the “poor people in Nigeria today bear a disproportionately higher burden of taxation than any other country that I can think of, even within the ECOWAS sub-region and that is not sustainable.”

He added, “I do not think that the government should focus on raising new taxes, introducing new ones or increasing the rate of existing ones. That is not what we need. That is a counter-productive strategy. Nigeria can increase its revenue base by more than 200 per cent in one to two years. What we need to do is have data and intelligence.

“For example, you have two houses in Nigeria, one in Dubai and a loaded domiciliary account and people are closing contracts and they are not paying taxes. But you are chasing people over PAYE.

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“If government uses data and intelligence, when people have money, whether it is legitimate or not, they do three things; spend, save and invest. What you need to do is to track all of these and it’s easier now with technology and Covid-19.”

He said using technology to ensure that people pay the right taxes is easier because most human activities have to do with the government, especially when it has to do with registration.

He explained, “When I buy a car, the state would register it, when I buy land, I go to the state for documentation, when I want to travel abroad, they give me a passport and I buy foreign exchange from them. Almost everything you do in life involves the government. Even to open a bank account, the government knows; the CBN is aware.

“What the government should do is to connect the dots and see that people with ability to pay and are evading taxes in Nigeria are unbelievably high. Those are the people to be targeted. Tax them because they can pay and use that money judiciously to stimulate the economy and support the vulnerable households.

He said the government should focus on creating wealth because when people do not have hope or means of survival, insecurity would increase. He stressed that increased revenue and judicious use of it were tied to economic prosperity and even security.

He noted, “Taxation is how the government shares in the prosperity of people and enterprises. So, Nigeria has to focus on how to create prosperity for people and businesses and take a fraction of it for taxes. Just by Elon Musk crystallising his share options that he sold, his tax bill was somewhere around $15bn. But does he care? No. If you are worth $300bn, about $15bn is not a big deal.

“Nigeria has to focus on how to create prosperity for people and businesses and then take a fraction of it in taxes.”

Emphasising the need for data and intelligence rather than lamenting over poor revenue and looking for ways to introduce new taxes, Oyedele pointed out that despite having a smaller economy and population when compared to Nigeria, South Africa raised about N14tn (naira equivalence) from Personal Income Tax alone, despite that the poor were exempted from the tax.

He explained, “If the people paying Personal Income Tax are those earning PAYE on salaries of N50,000 per month, you can’t be prosperous like that as a country.

“South Africa just released its fiscal report for last year and they generated tax revenue of about N40tn equivalence. Personal income tax alone was about N14tn and they have exempted their poor people from paying personal income tax. Nigeria has never generated N1tn from PIT, because we are taxing the people earning low income. That’s a problem with our tax system and we need to fix that.”

Similarly, the Chief Executive Officer, Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, decried the slow speed of justice delivery on the VAT issue, saying such could be a disincentive to investment.

He explained that the matter ought to have been dispensed with timeously, adding that the way deadline was given for election matters to be dispensed with should be replicated in commercial disputes, whether between states or not. He said being a tax issue, investors would take interest in it.

He added, “Such delays have an impact on investment and it is a very big problem, because if you have a commercial dispute, you can be in court for five to 10 years by which a business could have died. If you talk about the ease of doing business, one of the challenges in the business environment is the speed at which commercial disputes are heard. They are too slow and not investment-friendly.

“Generally when it comes to issues of business decisions, our court system generally is not investment-friendly and we need some major reforms in this regard. If we dispense with cases like this timeously, it will send a positive signal to investors that we are serious about attracting investment into this environment.”https://321b06f06779be3bdd584bc2ed2db873.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.html

Yusuf, who is a former Director-General of the Lagos Chamber of Commerce and Industry, said there was the need for the government to build a reliable and robust database for eligible taxpayers to generate more revenue, rather than considering introducing new taxes.

He added, “This is not the time to put additional burden on people already in the tax net. The burden is huge enough, particularly for those in business. They pay all manner of taxes to all levels of government and regulatory agencies. They even pay unofficial taxes and they still provide some very important services the government should be providing for them, like roads, security and power generation.

“Those who are not in the tax net should be brought in. The rich people are supposed to pay more. How do you identify them and their income if not through data? When it comes to income tax, in many other jurisdictions, only about 15 per cent of the population pays about 80 per cent of the tax, because they target the rich and spare those who are at the bottom of the pyramid. Redistribution of income is part of the qualities and a major objective of a good tax system.”

Credit: PUNCH

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