VAT not possible at states, sub-national levels, FIRS insist

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The Federal Inland Revenue Service (FIRS) has said it will be impossible to operate value added tax (VAT) in states or at the sub-national level.

Group Lead, Special Tax Operation Group of the FIRS Matthew Gbonjubola said this at a press briefing Wednesday in Abuja.

He said if not checked, this could result in confusion and multiple collection of taxes, and that differences in the rates of VAT between states could lead to losses for vendors.

The ruling

A Federal High Court in Port Harcourt,  Rivers state, had 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 VAT.

The presiding judge, Justice Stephen Dalyop Pam, gave the ruling while delivering judgement in Suit No. FHC/PH/CS/149/2020, filed by the Attorney General for Rivers State (plaintiff), against the FIRS (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 is 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 is limited to taxation of incomes, profits and capital gains which does 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 lacks 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 is 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 is entitled to all the eleven reliefs it sought in the suit.

The court agreed with the Rivers State Government that it is the State and not FIRS that is 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.

FIRS speaks

Speaking to journalists Wednesday in Abuja, Gbonjubola,  however, said the federal agency had appealed the ruling.

Making some clarifications into the working of VAT, he said: “If for example, Osun State charges VAT, let’s say at 10 per cent. Sokoto State charges VAT; let’s say at five per cent. And so, at the point of procuring the goods, this guy would have paid VAT at ten per cent, but when he’s going to sell, he will only charge at five per cent.

“As such, the input suffered is greater than the output and the question is: who bears the shortfall of five per cent? Will you go to Osun state to collect that five per cent or will you ask Sokoto state to reimburse the merchant of five per cent?”

Explaining further, he said:  “You will find out that these two reasons are why it is extremely difficult, if not impossible, to operate VAT at sub-national level, and that is why there is no country in the world that does that.”

 “VAT is practiced on an input and output mechanism. What it means is that for a business either importing or buying products, that business will pay VAT either at the port if it importing or with the manufacturer if it buying from a local manufacturer.

“And when that business pays VAT, it is accounted for that business as an input tax, such that if it begins to sell in any part of Nigeria, and charges VAT from its own customers, it is able to rescue the importers pay either by port if it is an imported item or to the manufacturer if it was obtained from local producers.

“And this works only at the national level, VAT can’t work at the sub-national level and there is no country in the world where VAT works at a sub national level. This is because the VAT depends on the input-output mechanism

“For instance, if a business person buys an item in Osun State and paid VAT, takes the goods to Sokoto state to sell, remember this business person had paid VAT when purchasing the product in Osun state.

“So, when selling in Sokoto state, he will be charged VAT and by the operation of the input-output mechanism, this business person will deduct the input VAT payment in Osun state, from the output charged in Sokoto state, and remit any difference to the relevant tax authorities, in this case because there is a single tax authority handling VAT, it is the same Authority that will receive the VAT in Osun and Sokoto states.

“And so, it is easy to work out the input-output mechanism, businesses won’t be short-changed; there is no issue of consumers having to pay VAT more than once.

“However, if this is operating at a sub national level it will mean that when businesses are paying VAT at the state level, the business would have to pay VAT twice in two different States,” the FIRS chief said.

He said the revenue from VAT “is administered under an arrangement that allows the Federal Government to collect 15 per cent, States 50 per cent and Local Government 35 per cent.

“The implication of this is that the State and Local Government takes about 85 per cent of VAT proceeds. The VAT is not paid to the Federation Account but into a VAT pool account for distribution to the three tiers of government. It is after the sharing that the portion of the Federal Government is paid to the Consolidated Revenue Fund Account.”

…Disowns social media bill

On speculations around the social media tax bill,Gbonjubola   said: “I am not aware that FIRS has presented any bill to the National Assembly to request for any social media tax and I can tell you, on behalf of my Executive Chairman, very clearly that this is not from us. So, if there is any such bill at the National Assembly, the FIRS is not the sponsor and we have not seen it.”

 Lagos set to commence

 Meanwhile, the Lagos state government Wednesday said it’s poised to execute judgement granting states the power to collect VAT, saying no booby trap will affect its implementation.

 The state’s Attorney-General and Commissioner for Justice, Mr. Moyosere Onigbanjo (SAN)  revealed this at a public hearing at the State House of Assembly on ‘A Bill for law to impose and charge Value Added Tax on certain goods and services provided for the administration of the tax and other Related Matters.’

 Onigbanjo was responding to a representative of civil society organisations, Mr. Adeola Samuel, who cautioned the state government over the execution of the judgement in favour of Rivers state.

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