Bloomberg Tax
Sept. 10, 2021, 7:00 AM

Nigerian Federal High Court Landmark VAT Decision

Folajimi O. Akinla
Folajimi O. Akinla

Nigeria is a federation: however, it is run like a unitary state with power highly concentrated at the center. To appreciate this, look at the 68 paragraphs (items) of the Exclusive Legislative List in the 1999 Constitution which vest the federal government [FG] with exclusive preserve to legislate over at least 97 items.

Furthermore, items 67 and 68 give broad powers to the FG to make laws on “any other matter… which the National Assembly has power to make laws in accordance with… this Constitution” and “any matter incidental or supplementary to any matter… in this list” respectively.

In sharp contrast, states, under the Concurrent Legislative List, have powers to make laws over roughly 19 items. Of the 30 paragraphs on this list, 11 ascribe additional items over which the FG can legislate.

Burdened by a high concentration of power, the FG is unwieldy and slow to respond, as indicated by how long it takes to pass new legislation. Likewise, states, due to their limited legislative competence, are unreasonably dependent on the FG for their survival, thus adding to the FG’s woes.

The current system also stifles healthy competition among states. It is little wonder that many states rely on monthly handouts from the FG to meet their daily needs.

Federalism is characterized by decentralization of power to states, while the center retains limited power to protect, defend and maintain the federation (e.g., powers to regulate citizenship, currency, the financial system, arms and ammunition, inter-state/international trade, international relations, national boundaries).

The recent decision of the Federal High Court (FHC) in AG Rivers v. FIRS & AG Federation (FHC/PH/CS/149/2020, delivered Aug.) is therefore a laudable step by the judiciary to recognize the Nigerian federation and interpret the Constitution purposively.

The Decision

In AG Rivers v. FIRS & AG Federation, Rivers State challenged the FG’s power to legislate over value-added tax (VAT).

Rivers State challenged:

  • the FG’s competence to legislate over VAT, withholding tax (WHT), technology tax and education tax. The State argued that the FG’s powers to tax are qualified by items 58 and 59 of the Exclusive Legislative List which give the FG power to legislate over “Stamp duties, Taxation of incomes, profits and capital gains, except as otherwise prescribed by this Constitution.” Rivers State argued that by legislating and imposing these taxes, the FG acted outside its constitutional powers;
  • the FG’s appointment of the Federal Inland Revenue Service (FIRS), Nigeria’s federal tax authority, to administer VAT. According to Rivers State, by paragraph 7 of the Concurrent Legislative List, the power to administer VAT must be delegated to a state agency; and
  • the Taxes and Levies Act, which it argued, to the extent that the Act gives power to the FG to impose tax outside the scope of the FG’s powers, is unconstitutional.

The FHC resolved all questions in favor of Rivers State. The implication is therefore that the FG can no longer impose, collect or administer VAT, and in addition, must delegate powers to administer VAT to state agencies.

The FIRS has appealed and filed an application for injunction pending appeal.


The FG may lose an ever-increasing source of revenue in VAT. According to the National Bureau of Statistics, Nigeria generated around 1.5 trillion naira ($3.6 billion) in VAT in 2020, representing a 29% increase in VAT collection from the previous year. By Q2 2021, the FG has generated over 1 trillion naira, representing a 56% increase when compared with the same period in 2020.

The decision did not come as a surprise, given the history of VAT. Before its introduction in 1993, an FG committee set up to review the tax expressed concerns over the constitutionality, stating that:

"[M]ost countries that have introduced VAT have unitary constitutions. In federal and confederal states, power sharing creates several tax jurisdiction and systems for revenue sharing between federation and the states and among the states that constitute the federation. Under the present system in Nigeria, sales tax is collected and retained by the states. If VAT is intended to replace it as in the existing constitutional arrangements, it would become a state revenue. But it is not so clear whether the Federal Government which now seeks to introduce VAT as a new source of revenue to lessen its dependence on oil revenue intends that VAT should be a state tax. This was the type of problem which faced the United States when it sought to introduce sales tax as a revenue source to supplement federal revenue and also when it debated the introduction of VAT as a new revenue source. In both cases, the move was vehemently opposed by the states.”

(Original source: Report of the Study Group on Indirect Taxation in Nigeria p. 17. See E. Ijewere, Towards Efficient VAT Operation in Nigeria (lecture organized by the MVAT Committee at Obafemi Awolowo University Ile-Ife, May 20, 1993), at 5-6. (Progress Report). (Reference: The Complexities of a Value Added Tax in Nigeria, are There any Solutions?)

The courts have also at different times pronounced on the legislative competence of the FG and the states over VAT and similar taxes (AG Ogun State v. Aberuagba & Others, AG Lagos v. AGF, AG Lagos v. Eko Hotels, UKALA SAN v. FIRS, etc.)

FIRS’ Appeal

At the time of writing, the FHC had dismissed the FIRS’ motion for an injunction pending appeal. This clears the way for Rivers State to commence collection and administration of its recently introduced VAT law, barring any contrary decision of the Court of Appeal.

Case law suggests that the courts are more likely to grant a stay where the affairs of government would be affected. In Zamfara State Government & Others v. Ecobank Nig Ltd & Others ([2016] NGCA 40) the Court of Appeal held that:

“Also, the likelihood of bringing the affairs of government to the ground or grinding it to a halt if the judgment is enforced in its entirety tilts the balance of convenience in favor of the appellant for interim reprieve from the enforcement of the judgment pending appeal. Public good should in the interim prevail in granting the application which I hereby grant in part… “

With Rivers State’s new VAT law requiring resident taxpayers to pay VAT to the State, taxpayers are now caught between a rock and a hard place. To resolve this impasse, the courts may allow the FG to continue collecting VAT but order the FG to provide security for costs.

Essentially, the security is to indemnify a party (in this case Rivers State) if the appeal is unsuccessful. By doing this, the FG’s revenue is protected, taxpayers are not penalized under Rivers State’s VAT law, and Rivers State is indemnified in the event the FG loses the appeal.

It is also interesting to note that other states are following suit—Lagos State’s VAT bill has, at the time of writing, just passed a second reading in the House of Assembly. The state is also hosting public hearings for the draft law.

Merits of an Appeal

The constitutional point on the limits of the FG’s powers to legislate on VAT is likely to be upheld. However, other parts of the decision relating to the FG’s power to legislate over WHT may be overruled, given that WHT is a tax on profits. Technology tax (NITD Levy) and tertiary education tax are also imposed on the profits of companies, therefore there is some argument that they fall under item 59 of the Constitution. Moreover, item 67 allows the FG to legislate over matters that “the National Assembly has power to make laws in accordance with the…Constitution.”

On delegation, the word “may” in paragraph 7 of the Concurrent Legislative List suggests that the FG has a discretion in whom to delegate. Furthermore, paragraph 8 provides that where a state agency is appointed, the FG has a duty to prevent incidences of double tax. So, there is a chance of success on appeal.


There will be winners and losers. In the long run, everyone wins if states legislate over a consumption-type tax. This encourages trade and spurs commerce at the state level.

The FG’s current VAT sharing formula is often challenged for being inequitable. The 15% retained by the FG as cost of collection (while sharing 50% and 35% to states and local government respectively) appears rather high when compared with the average cost of other VAT collecting countries.

The sharing formula for states, whereby VAT is shared based on equality (50%), population (30%) and derivation (20%), also remains a contentious issue, with the adoption of Sharia law by states in Northern Nigeria. For example, while alcohol is forbidden in these states, they benefit from VAT generated from sale of alcoholic beverages.

A solution could be to revisit the Supreme Court decision in AG Ogun v. Aberuagba where the court recognized the shared competence of states in relation to sales tax. Can VAT be replaced with states’ sales tax laws, where states collect taxes on goods consumed within their territories while the FG collects and enforces VAT on imports? States could harmonize their sales tax laws, like the EU, bar a refund system. This is more akin to a federal system.

This column does not necessarily reflect the opinion of The Bureau of National Affairs Inc. or its owners.

Folajimi O. Akinla is a tax lawyer, specializing in dispute resolution and tax policy and advocacy. He frequently represents taxpayers at the Tax Appeal Tribunal.

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