Appeal Court Order as Game Changer in FIRS, States’ Tax War

Last Friday’s order of the Court of Appeal on Rivers and Lagos State governments to stay action on their bids to collect Value Added Tax (VAT) pending the resolution of the legal dispute on the matter is bound to slow down agitation by state governments to take charge of VAT matters in their domains, but whether the judicial intervention is capable of tackling the restiveness over the prevailing flawed revenue sharing formula is a different ball game, writes Festus Akanbi

The supremacy battle between the Federal Inland Revenue Service (FIRS) and some states over the collection of the Value Added Tax (VAT) snowballed into an unprecedented number of actions by officials of the federal and state governments last week, with tax experts warning that corporate taxpayers and other business owners will be the ones to bear the brunt when the dust finally settles.

However, the Court of Appeal in Abuja, on Friday, ordered the Rivers and Lagos state governments to stay action on their bids to collect Value Added Tax (VAT) pending the resolution of the legal dispute on the matter.

A three-man panel of the appellate court ordered that the enforcement of the judgment of the Federal High Court, Port Harcourt, latched on to by the state governments be put on hold.

So, as the waiting game for the Appeal Court’s decision on the earlier judgment of the Federal High Court continues, and as the two opposing camps continue to fight for the soul of taxpayers, especially in the states, tax experts say corporate organisations especially in Rivers and Lagos States (the two states which have so far passed own tax laws) may be left with the bloodied nose when normalcy returns, given the confusing orders of the FIRS and some state governments to businesses to pay VAT to them.

Like Rivers, Like Lagos

But despite the controversy the VAT issue has generated, Rivers State, said it had commenced full implementation of its VAT law, while the Lagos government announced the passage of its version on Thursday. Wike spoke about the take-off of the Rivers VAT laws during an interactive session with representatives of corporate organisations in Port Harcourt.

Analysts, however, said the latest order from the Appeal Court will force Rivers and Lagos to go back to drawing boards on the issue.

Wike said the enforcement would prevent members of the business community from falling prey to the antics that could be deployed by FIRS officials, whom he said could attempt to use force to collect “what does not belong to them.”

Wike alleged that FIRS had in the past collected VAT in the state with impunity, knowing it was unconstitutional for them to do so. He pointed out that his administration challenged the matter at a Federal High Court in Port Harcourt, where it secured a positive judgment on the matter.

As tension mounts, there are feelers that the governments of Lagos and Ekiti State have concluded plans to file applications to be joined in the ongoing legal battle between the FIRS and Rivers.

Just like the Rivers State government, Lagos passed its laws on Thursday while Ekiti State is on the verge of enacting similar laws on VAT collection. It was gathered that some southern states are on the verge of rolling out their tax laws.

Marching Orders to Business, Corporate Taxpayers

Wike urged business operators to be ready to pay VAT for September 2021 and subsequent months to the Rivers State Internal Revenue Service. He said he had already assented to the Rivers State VAT law passed by the State House of Assembly.

The governor warned corporate organisations not to feign ignorance of the state VAT law and declared that the government would not hesitate to seal up the premises of any company that defaulted.

He explained, “Let me tell you the injustice in this country. In June 2021, which we shared in July, VAT collected in Rivers State was N15.1billion. What they gave us was N4.7 billion. See the gross injustice, and the money includes contracts awarded by the Rivers State Government.

“This is not an issue of party, it is the issue of infraction of the constitution, issues of illegality. Look at Lagos, it is not the same party as me. In June 2021, the VAT collected in Lagos was N46.4 billion but see what Lagos got – N9.3 billion.

When Two Elephants Fight…

Analysts said given the speed of implementation of the Rivers and Lagos state VAT laws, members of the organised private sector are in a dilemma on who to pay tax to.

Confirming the state of confusion of corporate taxpayers, especially in Rivers and Lagos, the Fiscal Policy Partner and Africa Tax Leader at PwC, Mr. Taiwo Oyedele, said the implementation of the Rivers State Tax laws will put business organisations in a difficult position.

Oyedele said the Rivers State Government (and by implication, Lagos State) should have waited for the full determination of the case up till the Supreme Court level before coming up with its tax laws, to avoid going back and forth on the issue.

However, he cautioned taxpayers in the affected jurisdiction to be cautious in remitting tax proceeds.

He said: “Corporate taxpayers and businesses have up to 21st of October before they remit any VAT collected under the state law. This is based on the provisions of the law which requires VAT to be filed and paid by the 21st day of the succeeding month. Affected businesses can also seek a court ruling as to which authority they should pay to. Hopefully, there will be an accelerated hearing by the court given that it is a declaratory judgment on such a crucial national matter.

“If the issue is not resolved by the due date to file and pay the VAT, then taxpayers can pay based on the subsisting court judgment and seek a refund or offset against other taxes due to the state in the future if the decision is upturned by a court of higher jurisdiction.”

“Imagine you start paying VAT to Rivers State now and the Court of Appeal quashes the Federal High Court ruling, it means the corporate taxpayers will revert to FIRS for the payment of VAT. If again, the Rivers State eventually wins at the Supreme Court, it means taxpayers will go back to the Rivers State board of internal revenue,” the tax expert stated.

The PwC official, who disclosed that states cannot collect VAT, however, made the case for the review of the existing tax laws by the national assembly.

“I think what we should do is to allow FIRS to collect VAT from states, and ensure such is given back to the states. Whatever is collected from international trade, import duties, and federal government contracts should be shared by all the tiers of government. In that case, nobody will feel short-changed,” he suggested.

On his part, financial analyst, Chapel Hill Denham, Omotola Abimbola, believed that businesses will be at the receiving end should states take control of VAT collection.

According to him, “The biggest losers by far will be business promoters, who would have to navigate government bureaucracy across 36 states. At best, many companies will run rings around state governments that have a weak capacity to collect such a complex indirect tax, thus worsening income inequality. At worst, we will end up with a multiple tax structure that will worsen the ease of doing business environment.”

Meanwhile, Executive Director, Cordros Capital Limited, Mr. Femi Ademola, in his response to THISDAY inquiries explained that the FIRS lacks the power to bully taxpayers judging by the Rivers judgment. He said: “Based on the judgment, which interestingly was delivered by a Federal High Court, the FIRS does not have the powers to compel taxpayers to remit VAT to the federal government. And as a law-abiding agency, it is expected that the FIRS will comply with the judgment, especially in Rivers State.

“The FIRS has taken all the right steps by appealing against the judgment and also seeking a stay of execution of the earlier judgment. Unfortunately, the court rejected the request for a stay of execution since the state government has already enacted a VAT Law and since the state law has not been set aside by a court of competent jurisdiction, the stay of execution cannot be granted; hence Rivers State Government will continue to collect VAT within its jurisdiction.”

Ademola explained it would be difficult for the FIRS “to bully taxpayers to continue to pay VAT until the issues are resolved. And we can relate this to the conflict between the FIRS and the NIPOST on the collection of Stamp Duty which was on for some years before the final resolution. During the conflict period, taxpayers had the choice of either paying to any of the two federal government entities or setting the fund aside to pay to the right agency when the imbroglio was over. We may have to apply a similar approach in this case, so as not to break some important canons of taxation, that is “Certainty” and “Convenience”.”

Many commentators said the decision of the appeal court and subsequent decision of the Supreme court will bring peace, Ademola however explained that whatever may be the outcome of court proceedings, the fact remains that there is a need to revisit the nation’s fiscal structure.

He said: “Regardless of the outcome of the appeal, there would be the need for serious engagements between the federal government on one side and the states on the other on how to move forward. It would appear that the much-talked-about restructuring will need to happen as part of the resolution of the ‘crisis’. The revenue sharing formula will have to change to accommodate states that are contributing more to the centre and also to push more funds to the states and local governments while transferring more responsibility to them.”

FIRS: VAT Cannot Be Bandled at Sub-national Level

Meanwhile, the FIRS explained its opposition to the administration of VAT by states in the country, saying it might stifle businesses and investments.

It argued that the decision of the Federal High Court to grant powers to states to administer VAT would make it difficult for businesses to thrive.

The Group Lead, Special Operations Group, FIRS, Mathew Gbonjubola, insisted that there was nowhere in the world, where the administration of VAT was done at the sub-national level, adding that the service cannot afford to devolve such powers to states.