By Efe Etomi and Elvis Asia
The opening sentence of Jean-Jacques Rousseau’s 1762 Social Contract Treatise that ‘man is born free, yet everywhere he is in chains’, aptly describes Nigeria’s federalism. Nigeria declares itself a Federation but is shackled by the centralization of power in everything that matters. The taxation system operating in the country is an example of Nigeria’s chained federal structure. This problem was largely created by military incursions with unruly decrees. However, with the coming into effect of the 1999 Constitution, the chains must be within Constitutional limits.
Value Added Tax (VAT) was first introduced by the Value Added Tax Decree No. 102 of 1993. The decree was deemed an Act of the National Assembly under section 315(1) (a) of the 1999 Constitution. The decree consequently became the Value Added Tax Act (VATA). In 2007, VATA was amended to principally expand the scope of VAT to practically all goods and services in Nigeria except those specifically exempted in the First Schedule to the Act without constitutional considerations.
Expectedly, VATA has been the subject of litigation with respect to Sales Tax Laws in the states and now consumption taxes. The decision of the Federal High Court in The Registered Trustees of Hotel Owners and Managers Association of Lagos v. AG Lagos & Anor has reignited the debate on the constitutionality of the VAT regime in Nigeria.
The Nature and Scope of Nigeria’s VAT Regime
VAT is a consumption tax on goods and services payable by consumers with the obligation to collect the tax vested on the supplier of the goods or services. The persons being taxed under the VAT system are the consumers. The supplier of goods and services merely act as collecting agents for the government. The tax is imposed on ‘value added’ to goods and services at every level from production to when the goods or services reaches the final consumer. The rate of VAT in Nigeria is 7.5% and is applicable to all goods and services except those specifically exempted under the VATA. It is a flat rate with no relationship to the income, profit or capital gains of the consumer. The application of the tax is not predicated on the income sources or capacity to pay by the consumer. The tax has wide application, it applies to entities exempted under the Personal Income Tax Act (PITA), Companies Income Tax Act (CITA) and Capital Gains Tax Act (CGT), except goods purchased for use in humanitarian donor funded projects.
VAT replaced sales tax that hitherto existed under decree No.7 of 1986. The replacement was expedient because Sales Tax had a limited scope. It covered only nine (9) categories of goods, sales and services in registered hotels, motels and similar establishments. Sales Tax also did not apply to imported goods and services. It was therefore ineffective in achieving one of the principal goals of consumption tax- the control of the general consumption behaviour of people. VAT was therefore given an expanded scope with application to imported goods and services.
A major issue with the VAT system in Nigeria is that it deprives the States of the Federation the right to make laws and regulations on consumption tax within the states. A combined reading of the VATA leaves no one in doubt that the Act centralized consumption tax in Nigeria. Any doubt on the scope and effect of the Act in this regard is cured by the fact that the tax is administered by the Federal Inland Revenue Service to be distributed to all levels of government. Section 36 was technically inserted in the Act to silence opposition with a ‘Greek Gift’ to the States and Local Governments in the country. The section provides:
36 Notwithstanding any formula that may be prescribed by any other law, the revenue accruing by virtue of the operation of this Act shall be distributed as follows
(a) 15% to the Federal Government;
(b) 50% to the State Governments and the Federal Capital Territory, Abuja; and
(c) 35% to the Local Governments.
Provided that the principle of derivation of not less than 20% shall be reflected in the distribution of the allocation amongst States and Local Governments as specified in sub-paragraphs (b) and (c) of this section.
Constitutional Provisions on Taxation in Nigeria
Under the 1999 Constitution, the legislative powers of the Federation are divided into two lists namely, the Exclusive and concurrent Legislative Lists. Matters not contained in either of the lists are deemed to be in the residual list. The Federal Government exercises powers on matters on the exclusive legislative list. Some items on the Concurrent Legislative list are reserved for both the Federal and State government to exercise power over (subject to the doctrine of covering the field discussed below) while others clearly define the extent of the powers of the Federal or State government. The legislative lists specifically provides for the extent of the powers of the National Assembly and the state Houses of Assembly (SHA) to make laws on taxation.
Exclusive Legislative List
Items 58 and 59 of the Exclusive Legislative List states the categories of taxes over which the National Assembly has power to make laws to be “Stamp Duties, Incomes, profits, capital gain, except otherwise prescribed by this constitution.” There is no provision for VAT or consumption tax generally. Consumption tax is different from income, profit and capital gains taxes. The tax base of consumption tax is money spent on the purchase of goods or services. On the other hand, the tax bases of income, profit and capital gains taxes are based on income, profit and capital gains respectfully. The Exclusive List justifies the enactment of Stamp Duties Act (SDA), PITA, CITA and CGT; the same cannot be said for the VATA.
Another relevant item on the Exclusive Legislative List is item 62 on regulations of inter- state and international trade and commerce. This may be too remote to vest the National Assembly with the power to make law on consumption tax on all goods and services in Nigeria. This is because there is a specific item on taxation in the legislative list. Assuming the item is stretched to incorporate the power to legislate on consumption tax, the effect will be that VATA is valid in relations to inter- state and international trade and commerce.
Concurrent Legislative List
Items 7, 8, 9 and 10 of the Concurrent List provide thus:
- In the exercise of its powers to impose any tax or duty on –
(a) Capital gains, incomes or profits on persons other than companies; and
(b) Documents or transactions by way of stamp duties.
The National Assembly may, subject to such conditions as it may prescribe, provide that the collection of any such tax or duty or the administration of the law imposing it shall be carried out by the Government of a State or other authority of a State.
- Where an Act of the National Assembly provides for the collection of tax or duty on capital gains, incomes or profit or the administration of any law by an authority of a State in accordance with paragraph 7 hereof, it shall regulate the liability of persons to such tax or duty in such manner as to ensure that such tax or duty is not levied on the same person by more than one State.
- A House of Assembly may, subject to such conditions as it may prescribe, make provisions for the collection of any tax, fee or rate or for the administration of the Law providing for such collection by a local government council.
- Where a Law of a House of Assembly provides for the collection of tax, fee or rate or for the administration of such Law by a local government council in accordance with the provisions hereof it shall regulate the liability of persons to the tax, fee or rate in such manner as to ensure that such tax, fee or rate is not levied on the same person in respect of the same liability by more than one local government council.
These items again confirm the power of the National Assembly to legislate on capital gains, incomes or profits and Stamp Duties. The only difference is that the National Assembly is empowered to make law allowing the states to collect the taxes from individuals. The State Houses of Assembly can only legislate on administration, regulation and collection of taxes, fees and rates by the Local Government.
Interpretation of Constitutional Provisions on Taxation in Relation to the VATA
Various propositions can be made on the interpretation of taxation powers under the above constitutional provisions. In the first place, the argument can be made that the absence of a provision for taxation of consumption spending both in the Exclusive and Concurrent lists means that the matter is reserved exclusively for the states. This is consistent with the general phantom conception of a ‘Residual Legislative List’ which is deemed to contain matters not contained in either the exclusive or concurrent list. The issues with this view however, is that it loses sight of the fact that states can only make law within their geographical definition and cannot legislate on inter-state commerce with incidental consumption spending, international trade/commerce and e-commerce.
A weighty contrary argument is that the Exclusive and Concurrent lists provisions on taxation would appear to demonstrate an unequivocal intention by the Constitution to centralize taxation legislation in Nigeria with the power of the states limited to collection and administration of tax on individuals and legislation for taxation at the local government level. This position is justified by the fact that the Constitution leaves no room for the states to legislate on imposition of any of the tax listed in the legislative lists. Item 7 of the Concurrent List bars states from having anything to do with Taxation of companies and Items 9 and 10 limit the legislative competence of states on taxation to Local Government level. This argument is also supported by the canons of constitutional interpretation which is to the effect that the constitution must be interpreted broadly to give effect to the intention of the makers of the constitution. Where the provisions of the constitution are not clear, the court must ensure that the object and true intent of the Constitution are preserved.
The constraint to the above argument however is that ‘taxation’ as envisaged under the Constitution is not at large. The relevant taxes contemplated by the Constitution are specifically defined and there is no omnibus provision that would appear to extend the power of the National Assembly to any form of tax outside those specifically listed. Though the VATA is made part of the Constitution as an existing law under section 315, the law is trite that an existing law that is incompatible with the constitution is null and void.
It is in this respect that the validity and constitutionality of the Taxes and Levies (Approved List of Collection) Act (TLA) and the regulation made pursuant to section 1(2) of the Act in 2015 by Dr. Ngozi Okonji- Iweala extending the list is in doubt. The Act contains a list of taxes including those not expressly stated in the Constitution like VAT and consumption taxes in hotels and event centres. The Act also seeks to determine the taxes collectible at the local government level- a duty expressly vested on the State Houses of Assembly.
The exclusive power of the National Assembly to impose taxes and determine their collection and administration is circumscribed by the Exclusive and Concurrent Legislative List. The National Assembly does not possess any magical powers outside the Constitution to dictate the taxes that the states can or cannot impose and it is to that extent, incompatible with the Constitution. The Act is a relic of the military era with total disregard to the Constitution and another political document maintaining Nigeria’s skewed federalism.
Perhaps, a more plausible position would be that both the Federal and States governments have power to make law on consumption tax within their area of exclusive competence as defined by other items of the legislative lists. For the federal government, this would mean imports, exports, inter-state supply and electronic supply of goods and services. For states, this means they can legislate on consumption tax with respect to commerce, trade and transactions within their states. This position is also not free from complexities. For example, how would one determine whether a transaction is inter-state? Should the rules of origin or destination apply as between the states? There is also the challenge of e-commerce. How should the determination of the authority with power to impose and collect the tax be made between the states and Federal Government in cases of electronic transactions?
Judicial Consideration of the Constitutionality of VATA
Overtime, the courts have had the opportunity to determine the question of the Constitutionality of VATA in a number of cases. The final analysis of the cases would show that the question is far from being effectively answered.
A major case where VATA was upheld by the Supreme Court (SC) as against Lagos Sales Tax Law was the case of Attorney-General of Lagos v. Eko Hotels Limited & Anor. In that case the issue before the Court was whether VATA has covered the field of Sales Tax and whether the imposition of both VAT and Sales Tax creates double taxation. The court answered these questions in the affirmative and consequently upheld the decisions of the Federal High Court and Court of Appeal setting aside the Sales Tax Law of Lagos State.
On its face, this decision would seem to have resolved the issue but surprisingly, though the Supreme Court relied heavily on the doctrine of covering the field in deciding the case, the court expressly stated that it was not ‘asked to determine on the validity of Value Added Tax Act nor the Sales Tax laws of Lagos State’. While it is true that the issue was not expressly raised, the resolution of the questions submitted before the court could not be effectively determined without the resolution of the question of constitutional validity. This is because the doctrine of covering the field cannot apply except the two legislations in contention derive their powers from the Concurrent Legislative List. The doctrine of covering the field would not arise if the National Assembly has no constitutional authority to enact VATA.
The decision is a mechanical application of section 4(5) without reference to section 4(4) and the Exclusive and Concurrent List of the Constitution. The fact that VATA is an existing law, as held by the court, is not enough to invoke the doctrine of covering the field because the legislation ought to be tested against Constitutional compatibility.
In reaching the decision, the Supreme Court concluded that the older cases of A. G. Ogun state v. Aberuagba and Nigerian Soft Drinks Limited v. Attorney- General of Lagos State were inapplicable. In Aberuagba’s case, the Supreme Court had held the Ogun State Sales Tax Law was unconstitutional in that it sought to regulate inter-state commerce. In the Soft Drinks’ case, the Court of Appeal held that the Lagos State Sales Tax Law was validly made and different from the Ogun State version considered in Aberuagba’s case.
The decision of the court is curious and disappointing given the status of the Supreme Court, not just as a court of law, but as a court of policy. What the decision means in practical terms however, is that the Supreme Court technically left room for revisiting the issue of constitutionality of the Act. The decision is ‘inconclusive’ and cannot be a good authority for the constitutionality of VATA as a whole.
In The Registered Trustees of Hotel Owners and Managers Association of Lagos v. AG Lagos & Anor, the Federal High Court considered the question of whether VATA has covered the field of consumption tax in relation to the Lagos State Hotel Occupancy and Restaurant Consumption Law and fiscalisation regulation made pursuant to the law.
The court held that the provisions of VATA which deals with services consumed in hotels, restaurants and event centres are unconstitutional and void to the extent its inconsistency with the constitution. The court also noted that the TLA tacitly repealed provisions of VATA relating to consumption tax in hotels, restaurants and event centres because the enactment vests the states with the power to collect the tax.
The decision of the court in the latter case has considerable merit to the extent that consumption tax is not contained in the Exclusive or Concurrent List. However, there is an arguable issue on whether taxation generally was not intended to be vested exclusively on the National Assembly at the federal and state government levels as argued above. Secondly, the alternative decision on the effect of the TLA and regulation made pursuant to it is inconsistent with the decision of the Court. If consumption tax is not contained in the Constitution, then the National Assembly has no power to make a law empowering the states to collect the tax, concomitantly, the states cannot rely on it as the source of their authority. In fairness to the court, it had invited parties to address it on the Constitutionality of the law but jettisoned the invitation because it later considered that it was not related to the issues submitted by the parties.
The decision is also in conflict with Nigeria Employers Consultative Association & Anor v AG Federation &Ors where the Federal High Court relied on the Supreme Court decision in Eko Hotels’ case to nullify the Kano State Consumption Tax Law on the premise that it imposes taxes on goods and services already subject to VATA.
Despite many decades of litigation on the Constitutionality or otherwise of Nigeria’s VATA, the fate of the Act still hangs in the balance. What is clear however is that the absence of an express provision on consumption tax in the Constitution poses a real threat to the sustenance of the present centralized VAT arrangement. The Hotel Owners and Managers’ Association’s case is a pointer to this fact. There is a chance that someday, any state of the Federation will invoke the original jurisdiction of the Supreme Court to challenge the Constitutionality of the VATA.
Nigeria need not wait for a revolutionary decision to restructure the tax system. The uncertainty and effect on the revenue of the Federal and State Governments will be unimaginable. There is also the problem of double taxation occasioned by the current impasse-thus the urgent need for reconsideration of the VAT regime. This is most apt, especially with the clamour for diversification to non- oil revenues for survival.
- Efe Etomi is a Partner in Chief Rotimi Williams Chambers.
- Elvis E. Asia is the Managing Partner of Law Future Partners (LFP)
 Cap. C23, LFN 2004.
 Cap. V1, LFN 2004.
 See the Value Added Tax (Amendment) Act No. 12 of 2007. Prior to this amendment, there were other amendments in the Finance (Miscellaneous Taxation Provisions) Decrees.
 See Lagos State Hotel Occupancy and Restaurant Consumption Law (2009) and the Hotel Occupancy and Restaurant Consumption (Fiscalisation) Regulation, 2017 made pursuant to it. Similar laws exist in other states including Ogun and Kano States. The laws were made pursuant to the Taxes and Levies (Approved List of Collection) Act and Taxes and Levies (Approved List of Collection) Act (Amendment) Order, 2015.
 Unreported]Suit No. FHC/L/CS/360/2018. Judgment delivered on October 3, 2019
 See section 4 of VATA as amended by the Finace Act, 2020.
 See section 2, 3 and the First Schedule of VATA.
 Section 42 defines a ‘taxable person’ to include an individual or body of individuals, family, corporations, sole trustee or executor or a person who carries out in a place an economic activity, a person exploiting tangible or intangible property for the purpose of obtaining income there from of trade or business or a person or agency of government acting in that capacity.
‘Humanitarian donor funded project’ includes projects undertaken by Non-Governmental Organizations and Religious and Social Clubs or Societies recognized by law whose activity is not for profit and in the public interest. See section 46.
 See section 6 of the VATA
 Research shows that most federal states allow the federating units to impose and collect VAT or related taxes. This is the case in countries like Canada, Mexico, and India. In India, Value-added tax (VAT) or central sales tax (CST) applies to intrastate or interstate sales of goods, respectively. There is no federal VAT in the US: VAT is imposed as sales and use taxes in the states. In Brazil, there are State, federal and municipal VAT. See [AUTHOR] ‘A Cross Jurisdiction Review of VAT’ [YEAR].Retrieved fromhttps://en.wikipedia.org/wiki/Value-added_tax, accessed on [DD/MM/YYYY]. See also [AUTHOR]‘EY’s 2019 Worldwide VAT, GST and Sales Tax Guide’[YEAR]. Retrieved fromhttps://www.ey.com/gl/en/services/tax/worldwide-vat-gst-sales-tax-guide—country-list. Accessed on…
 See section 7.
 Section 36.
 See the Second Schedule to the 1999 Constitution of the Federal Republic of Nigeria, Cap. 24 LFN, 2004.
See generally the Second Schedule to the 1999 Constitution, Part I and Part II.
 PITA, CGT, CITA and Stamp Duties Act were enacted in accordance with this provision.
 The e-commerce market in Nigeria is growing by the day. If the states are allowed to impose and collect consumption taxes on supply of goods and services within the states, the challenge of determining the state where the supply occurred would arise. This question cannot be left for the states to determine as doing so will create a chaotic situation with increase in the chances of double taxation.
 See Brig. General Mohammed Buba Marwa & Ors v. Admiral Murtala Nyako & Ors  LPELR –SC 141/2011 or (2012) 1 SC (Pt. III) andGlobal Excellence Communications Limited & Ors V. Mr. Donald Duke (2007) LPELR-1323(SC).
Ehioze Egharevba v. Hon Crosby Osadolor Eribo & ors  9 NWLR (Pt.1199) 411 SC and FRN v. Achida & Anor (2018) LPELR-46065(CA).
 See sections 1 (3) and 315 (3) of the Constitution. See also the cases of AG Oyo State v. NLC Oyo State Chapter& Ors(2002) LPELR-7077(CA); Araba v. Ogunsiji (2011) LPELR-3720(CA);Edet v. Chagoon (2008) 2 NWLR (Pt. 1070) 85 at P. 104, paras. D-F and Adesoye & ors v. Governor of Osun State & Ors (2004) LPELR-7344(CA).
 Cap T2 LFN, 2004.
Nigerian Minister of Finance at that time. See Supra note 5.
 In May 2020, in the case of Registered Trustees of Hotel Owners and Managers Association of Lagos (“HOMAL”) v. Attorney-General of the Federation & Anor, the Federal High Court nullified the Taxes and Levies (Approved List for Collection) Act (Amendment) Order, 2015 on the basis that the powers of the Minister of Finance under the Taxes and Levies (Approved List for Collection) Act to amend the Schedule to the Act is a violation of the powers of the National Assembly to make laws and is therefore unconstitutional. It is contended that the entire Act may suffer the same fate if properly challenged. It must be noted that the first draft of this article was written before this decision.
 There are templates in Federal States like India and Brazil in this regard. See note 11.
See A. Sanni, ‘Current Law and Practice of Value Added Tax in Nigeria. Published inBritish Journal of Arts and Social Sciences (Online) Vol.5 No.2.2012. Retrieved fromhttps://abiolasanniandco.com/wp-content/uploads/resources/Current-Law-and-Practice-of-Value-Added-Tax-in-Nigeria.pdf. Sanni reportsconflicting decisions from the Lagos State High Court and the Federal High Court on the issue. The decisions from the Lagos State High Court favoured the Sales Tax Law, while those from the Federal High Court favoured VATA.
 (2017) LPELR-43713(SC).
 The case is also reported at (2017) LPELR-43713. See Justice Kekere- Ekun’s decision at pages 25-33, paras. D-A. see also Justice Okoro at pages 61- 64, Justice Eko at page 69.
 See A.G. Ogun v. A.G.F. (1982) 13 NSCC 1 at 35 and AG Federation v. AG of Lagos State (2013) LPELR-20974(SC).
 See AGF v. AG Lagos (2013) 16 NWLR (pt. 1380) 249 S.C: Where the Supreme Court held that the Federal Government had no power to legislate on regulation and licensing of hotels in Lagos State and accordingly concluded that the doctrine of covering the field cannot apply.
 (1985) 1 NWLR (Pt. 3) 395.
 (1987) 2 NWLR (Pt. 57) 444.
 See Interpretation of Constitutional Provisions on Taxation as it relates to the VATA.