June 8, 2021
Since its introduction in 1993, Value Added Tax (VAT) has continued to be the one of the most stable and highest yielding sources of tax revenue for the Federation. Statistics show that VAT has contributed ₦1.108 trillion, ₦1.19 trillion and ₦1.5 trillion respectively in the last three years of, 2018, 2019 and 2020. Despite its huge contribution to national revenue, the validity of VAT has been a contentious issue especially in the light of Consumption/Sales Tax imposed by some States of the Federation. This issue has been a subject of litigation in different courts up to the Supreme Court and the various judgments have reflected the divergent views on its validity or otherwise.
In yet another judgment delivered on 11 December 2020, the Federal High Court (FHC) in Emmanuel Chukwuka Ukala v. FIRS (Ukala’s Case) held that the powers of the National Assembly to make laws imposing taxes is limited to the profits/income of persons/companies, capital gains and stamp duties on instruments but does not extend to VAT. Given the far reaching pronouncements made by the FHC in this case, this article seeks to analyse the potential effect of the decision and its implications on the continued imposition of Value Added Tax in Nigeria.
As a background, the 1979 Constitution omitted sales or consumption from the taxing powers under both the Exclusive and Concurrent Lists, prompting the reasonable assumption that taxation of sales and consumption was a matter reserved for the States to legislate and administer. Following this development, many States enacted and administered sales tax laws although this did not go without a challenge as was seen in AG Ogun State v. Aberuagba, where the Supreme Court held that the Sales Tax Law of Ogun State was invalid as it encroached the Exclusive Legislative powers of the Federal Government. The Court of Appeal however, upheld the Lagos State Sales Tax Law in Nigerian Soft Drinks v. Attorney- General of Lagos State, when it held that the Lagos State Law did not seek to tax items covered in the Exclusive Legislative List. This was the state of affairs, until the Value Added Tax Act was introduced in 1993 to replace the sales tax laws of the States. This was not immediately challenged, since it was introduced under the Military Regime.
With the return of democracy and the fact that the Exclusive Legislative list under the 1999 Constitution mirrored that of the 1979 Constitution coupled with the increased clamour for fiscal federalism, some states started to introduce consumption taxes, which were invariably challenged. The VAT Act therefore came into focus and this culminated with the Supreme Court decision in Attorney General of Lagos State v. Eko Hotels and Another (Eko Hotels Case), where the Supreme Court held that the VAT Act, being an enactment of the National Assembly, had covered the field on the issue of Sales Tax and must prevail over the Sales Tax Law of Lagos State. Accordingly, this upheld the validity of the Value Added Tax Act and its supremacy over Sales / Consumption taxes introduced by the States
However, in October 2019, the FHC in The Registered Trustees of Hotel Owners and Managers Association of Lagos v. AG of the Federation & Others, which concerned the validity of the Hotel Occupancy and Restaurant Consumption Law of Lagos State upheld the powers of Lagos State to charge and collect Consumption Tax (a sales tax) from hotels, restaurants and event centres within the state. The Court held that based on the provisions of the 1999 Constitution and the Taxes and Levies (Approved List for Collection) Act, the power to impose consumption tax was a residual power within the exclusive competence of the states and further restrained the Federal Inland Revenue Service (FIRS) from imposing VAT on goods and services consumed in hotels, restaurants and event centres as this was already covered by the Lagos State Law. Interestingly, the FHC in this case did not follow the reasoning in the Eko Hotels case or even an earlier 2018 FHC decision in Nigeria Employers Consultative Association (NECA) & Anor v Attorney General of the Federation & Two Others, where the Kano State Consumption Tax Law was nullified on the basis that it imposed consumption tax at 5% on goods and services which were already subject to VAT.