A Federal High Court in Port Harcourt has restrained the Federal Government from collecting some taxes in Rivers State. The court on August 10 declared that the state government, not the Federal Inland Revenue Services (FIRS), should collect the Valued Added Tax (VAT) and Personal Income Tax (PIT) in the State.
Justice Stephen Dalyop Pam, gave an order of perpetual injunction restraining the Federal Inland Revenue Service and the Attorney-General of the Federation, both first and second defendants in the suit, from “collecting, demanding, threatening and intimidating residents of Rivers State to pay to FIRS personnel income tax and VAT. He made the declaration while delivering judgement in suit No. FHC/PH/CS/149/2020, filed by the Attorney-General for Rivers State (plaintiff).
Pam, who granted all 11 reliefs sought by the Rivers State government said that there was no constitutional basis for the FIRS to demand for and collect VAT, Withholding Tax, Education Tax and Technology Levy in Rivers State or any other States of the Federation. He said the constitutional powers and competence of the Federal Government were limited to taxation of incomes, profits and capital gains, which did not include VAT or any other sales tax or levy than those specifically mentioned in Items 58 and 59 of the Exclusive Legislative List of the Constitution.
The judge dismissed the preliminary objection filed by the defendants that the court lacked the jurisdiction to hear the suit and that the case should be transferred to the Court of Appeal for interpretation. Justice Pam, who also dismissed another objection raised by the defendants that the National Assembly ought to have been made a party in the suit, declared that the issues of taxes raised by the state government were matters of law that the court was constitutionally empowered to entertain.
On the face of the court decision, the 36 states have been given a window of opportunity to increase internally generated revenue (IGR) which, for many of the states, dismally low. But a deeper look will suggest their legal victory may be pyrrhic after all. Firstly, the FIRS will appeal the ruling of the federal high court in Port Harcourt. Who knows, it may win. In which case, the matter go all the way to the Supreme Court.
Secondly, even if the states do win again at the Supreme Court, still the win won’t translate to more money in their pockets. May be for one or two states, but surely not so for most of them. Because they simply do not have the resources and reach the FIRS has to collect VAT. Thirdly, they will lose their shares of other taxes that the federal government collects. The federal government may be, ultimately, the winner, not loser. This is because the Federal Capital Territory (FCT) generates the second-highest VAT (after Lagos) in addition to import and non-import foreign VAT.
What more, Section 40 of the VAT Act, gives 15 per cent of the VAT pool to the federal government; 50 per cent to states; and 35 per cent to local governments (net of four per cent cost of collection by the FIRS), while 20 per cent of the pool is shared based on derivation. In 2020, for instance, total VAT collection was about N1.53tn, with import VAT being N348bn (or 22.7 per cent) while foreign non-import VAT was N420bn (or 27.4 per cent) and local VAT amounted to N763bn (or 49.8per cent). In effect, what this means is that the federal government is likely to retain more than the 15 per cent it currently receives, while states and local governments will have less to share. This is why Rivers and the other states it believes will benefit from its legal ‘victory’ may have shot themselves in the foot.