Greater Transparency Needed From Nigerian Government on Extending VAT

The burden of federal indirect taxes in Nigeria has increased frequently and under many new names and descriptions. In the course of the past two years alone, we now have fresh taxes on consumer products—internet transactions, telephone calls and other telecommunication services, and on carbonated and sweetened beverages pursuant to the provisions of Section 37 of the Finance Act, 2020 and Section 17 of the Finance Act, 2021 respectively.

This article had its genesis in our disquiet about the recent introduction of a number of consumer-burdening taxes into the Nigerian system. Our initial reaction was concern about what appeared to us to be politicians’ lack of transparency about the introduction of these taxes. Later, it became clear to us that larger topical issues of tax policy inextricably arose.

The article has two aims: to expose, analyze and critique the proliferation of consumer-burdening taxes; and to call for a re-think of where Nigeria may be going with value-added tax.

The Changes

The changes have been driven by two main factors. The first is that the Federal Government of Nigeria (FGN) is cash-strapped and employers are hurting. Revenues from oil have been dwindling. More money has to be extracted from other sources.

Second, there is typically less public protest against raising taxes piecemeal and under confusing labels, and appearing to put the burden of collecting them on manufacturers rather than on consumers. Interestingly, following public protest, the minister of communications and digital economy recently announced the suspension of the proposed implementation of the telecommunications tax by the FGN on the basis that the Nigerian telecommunications sector is already overburdened by excessive and multiple taxation.

This, in fact, only solves one problem by creating another because the due process for the suspension was not followed. Also, it is still unclear whether the suspension of the 5% excise duty on these consumer products is permanent or merely a pause to reschedule the implementation to a later date in the future.

Nigeria has had legislation imposing VAT at a rate of 5% since 1993, but it was only in 2020, by Section 34 of the FA 2019 and Section 42 of the FA 2020, 27 years later, that the FGN finally summoned the political will to raise the rate from 5% to only 7.5%.

Attempts to raise VAT or income tax have historically met with far more opposition than any of the new taxes in issue here has been faced with. It is therefore tempting for political actors to be attracted to options that do not look like increasing income tax or VAT. But the effect of the changes in issue is, as a practical matter, to raise the VAT rate. All of the taxes are on consumer products. The burden of the taxes will ultimately be borne by consumers.

VAT has been the fastest-growing source of tax revenues in the past five years. It is difficult to resist the conclusion that the FGN’s true aim is to raise VAT revenues without appearing to do so, by acting in a piecemeal fashion and using many different names.

The Stakes

That the FGN is anxious to increase its tax revenue collection is understandable but does not mean that doing so by complicating the law and misleading observers should be welcome. It is important to maximize simplicity and transparency in our system.

The FGN here does not give the ideals of simplicity and transparency, established by Adam Smith in “The Wealth of Nations” as part of the canons of taxation, the respect that they deserve. This is unfortunate. Interestingly, and ironically, the theme for the 2022 Federal Inland Revenue Service (FIRS) tax year, disclosed in its current calendar and other literature, is “Simplifying Tax Administration in Nigeria.”

To minimize the risk of confusion, there is a need for clarity and precision on the justification for imposing these taxes under the Nigerian tax system. Attempts by the FGN to raise the VAT rate should be presented and defended as exactly what they are, not misleadingly disguised and obfuscated.

The FGN should start a sincere and full public and political debate about why a higher VAT rate is needed across the board in view of how times have changed, and about how VAT collection should be shared and deployed. What the FGN has been doing thus far is avoiding this long-overdue and much-needed debate, which is fundamentally important given the realities of the FGN’s finances today. We all delay having that critical debate at our peril.

To be clear, we do not argue that all of the new taxes in the past two years are less than transparent or complicate the law unnecessarily. For example, the recent increase in the burden of capital gains tax by Section 2 of the FA 2021, by restoring that tax on shares, is certainly neither confusing nor less than transparent. It does basically exactly what it says that it does.

We also do not argue here that the overall burden of tax on the citizen is too high by either historical Nigerian or international standards. There is much evidence to the contrary. Our point is entirely about process.

The States

We certainly do not argue that the states’ governments are more transparent on VAT than the FGN—they are arguably even worse than the FGN on this point. States including Lagos, Kano, Oyo, and Rivers have imposed consumer-burdening taxes such as:

• The hotel occupancy and restaurant consumption tax in Lagos pursuant to the Hotel Occupancy and Restaurant Consumption Tax Law, Cap H8, Laws of Lagos State 2015 (the Lagos Consumption Tax Law);
• The consumption tax in Kano pursuant to the Kano State Revenue Administration (Amendment) Law, 2017; and
• The hotel occupancy and restaurant consumption tax in Oyo pursuant to the Oyo State Hotel Occupancy and Restaurant Consumption Tax Law, 2021.

In Registered Trustees of Hotel Owners and Managers Association (HOMA) of Nigeria v. Attorney General of Lagos State & the FIRS (Suit No: FHC/L/CS/360/2018), the Court of Appeal set aside the judgment of the Federal High Court and confirmed that the FIRS has the power to collect VAT on the supply of goods and services consumed in hotels, restaurants, and event centers in Lagos State under the VAT Act, as the taxable goods and services under the Lagos Consumption Tax Law are duplicated under the VAT Act.

Larger VAT collection states such as Rivers and Lagos now have their own VAT statutes. These statutes are arguably the most honest state statutes on the subject because they call themselves VAT statutes, but they are also the most constitutionally controversial.

The reality is that for nearly 50 years, at least since 1978, the states have been collecting what is conceptually equivalent to VAT on sales of land but calling it “governor’s consent fee” rather than VAT. They are empowered to collect those fees by virtue of Section 5 of the Land Use Act. Consent fees are VAT in concept and in practical effect, but not in name. Like VAT, they are charged on sales as a percentage of the sale value (not just of a net gain) and borne by buyers rather than sellers.

It is perhaps not surprising that heavy agitation by the states to collect sales tax started in earnest in about 1980, as seen in A.G Ogun State v. Aberuagba [1985] 1 NWLR (Pt 3) 395, which is about the same time that the states started to collect consent fees on a large scale.

The fact that consent fees are not called VAT should not blind us to the fact that the states—in reality—started collecting VAT on land sales 15 years before the FGN started charging it on sales of goods. Consent fee is different from the capital gains tax component of the suite of usual land transfer perfection taxes (such as stamp duty and title registration fee), which is in effect a percentage of the gains and not of the sale consideration.

The Constitution

We also do not take any position on who should win the ongoing cases in which the FGN and states are suing over the power to charge VAT under the 1999 Constitution. What is needed is a political/constitutional resolution of the issues, not a judicial one. It is naive to expect that the struggle between the FGN and the states over VAT powers will end with a resolution by the Supreme Court of the issue of interpreting the 1999 Constitution clauses on where the power to charge VAT lies.

The matter is not likely to end there because VAT has become too critical a component of our government revenue mix. The states with huge VAT collections are a minority in headcount terms, and a majority of the other states understandably covet their VAT revenues. The interests of both the states with smaller VAT collections and the FGN are aligned against the states with huge VAT collections. The states with smaller collections and the FGN are therefore arguably likely to win the VAT political war in the long run, given that they greatly outnumber the states with large VAT collections.

Whatever the judicial resolution may be, we will still need a constitutional resolution if we are to get things right and stable. The inquiry should not and must not stop at the level of judicial determination. The quantum of VAT collections today, both in absolute terms and relative to other sources of federal tax revenues, is such that the issues need to be thoroughly revisited at a political-constitutional level, whatever the courts may eventually say.

Conclusion

The sooner the FGN initiates the full and open debate on VAT that we have called for, the better for us all. Our tax system should be as simple and transparent as possible both on VAT matters and in other respects.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Gbolahan Elias is a professor, a Senior Advocate of Nigeria and a partner at G. Elias, a business law firm in Nigeria. Favour Ogini is an associate at G. Elias.

The authors may be contacted at: gbolahan.elias@gelias.com; favour.ogini@gelias.com