By Olusegun Adeniyi
In September 2018, there was an interesting exchange in Premium Times between Vice President Yemi Osinbajo and his ‘illustrious predecessor’ (as he described him), Alhaji Atiku Abubakar. The issue in contention was restructuring of the country. The latter had taken on the former on his postulation that what Nigeria required was “managing resources properly and providing for the people properly.” To Atiku, Osinbajo failed “to appreciate the connection between Nigeria’s defective structure and its underperformance.” Defending his stance, Osinbajo argued that “good governance involves, inter alia, transparency and prudence in public finance,” before throwing this punchline: “Surprisingly, Alhaji Atiku leaves out the elephant in the room – corruption. And how grand corruption, fueled by a rentier economic structure that benefits those who can use political positions or access to either loot the treasury or get favorable concessions to enrich themselves.”
However, the bit that is relevant to this piece is where Osinbajo explained “the issue of deeper fiscal federalism or restructuring” and “how the then Lagos State Government, led by Asiwaju Bola Ahmed Tinubu, decided to fight for greater autonomy of states.” Osinbajo then listed sundry issues on which he, as Attorney General of the state, took the federal government to court, before concluding: “Years later, we also filed an action at the Supreme Court arguing that the Value Added Tax, being a consumption tax, should exclusively belong to the States.”
From the foregoing, we can draw some quick conclusions. One, there has always been a contention about VAT because it conflicts with the federal nature of our constitution as imperfect as it may seem. It is particularly instructive that General Ibrahim Babangida did not promulgate the VAT Decree No. 102 of 1993 until 24th August 1993, just three days before he ‘stepped aside’. And President Olusegun Obasanjo also did not assent to the VAT Act 2007 until 23rd May 2007—six days before he left office! Two, the VAT controversy has nothing to do with ethnicity; afterall, both Tinubu and Obasanjo that started the battle were Yoruba and from the same Southwest. Three, we can use VAT and the debate around it to begin the process of restructuring our country. Four, whatever may be his position today, Osinbajo was an advocate that VAT “should exclusively belong to the states.”
I have spent considerable time in the past week to investigate the VAT case under reference and my findings are quite revealing. In the statement of claim filed at the Supreme Court, the LASG under Tinubu had stated: “The House of Assembly of Lagos State of Nigeria is the body entitled, to the exclusion of any other legislative body, to enact laws with regard to the imposition and collection of tax on the supply of all goods and services within Lagos State of Nigeria and that Lagos State of Nigeria, or any agency of the State, is the body entitled, to the exclusion of any other body, to assess and collect such tax, and that the revenue of the Lagos State Government has been and continues to be affected by the enforcement of provisions of the Value Added Tax Act.”
Based on this claim, Lagos then urged the Supreme Court to determine “Whether upon the coming into effect of the Constitution of the Federal Republic of Nigeria, 1999, the said Value Added Tax Act is an existing law within the meaning of Section 315 of the said Constitution, being a federal legislation, which is deemed to be an Act of the National Assembly.”
Apparently mindful of the implications of the case against the background of some earlier rulings, the Supreme Court counselled Lagos to seek a political solution on the issue. That was understandable. A few years earlier, when the state challenged the powers of the federal government to grant licenses and permits to erect structures in Lagos without its permission, prior knowledge or consent, the Supreme Court ruled in favour of the state. The apex court held that any item “not expressly mentioned in the Exclusive Legislative List or Concurrent Legislative List is Residual and within the legislative competence of the state government.”
Knowing it had a solid case on VAT, Lagos refused to toe the suggested line of political solution. Eventually, the federal government filed a preliminary objection, asking the supreme court to strike out the case on grounds that there was no dispute between it and the LASG. Without going into the merit of the case, the federal government argued a technical point that the authority the LASG was challenging was that of the Federal Inland Revenue Services (FIRS) so the suit ought to have been filed at the FHC. The federal government averred: “The Plaintiff’s cause of action relates to acts of a federal organ and cannot form the basis of invoking this Honourable Court’s Original Jurisdiction to entertain this suit; and the entire suit constitutes an abuse of court processes.”
In determining the case, the Supreme Court held that based on the affidavits filed, the grouse in question was about “…a dispute pertaining to the operation of an agency of the federal government.” With that, the Supreme Court concluded that it was the FHC “that was imbued with jurisdiction to the exclusion of any other court in civil causes and matters relating to the revenue of the government; connected with or pertaining to taxation of companies and other bodies; the operation and interpretation of the constitution in so far as it affected the federal government or any of its agencies.”
There were arguments at the time that the Supreme Court deliberately chose a clever route since Lagos was challenging the VAT Act enacted by the National Assembly and not FIRS as claimed by the federal government. But Lagos was left with the option to take the matter up at the FHC. Somewhere along the line, the state that had for 16 years been in opposition suddenly found itself in the ruling All Progressives Congress (APC) in 2015 and decided not to pursue the matter any further.
However, apparently taking a cue from Lagos, Rivers State under Governor Nyesom Wike filed a case against the FIRS at the FHC. And in his judgement, Justice Stephen Pam declared that FIRS “has no constitutional authority to enforce and administer taxes not expressly stipulated under Items 58 and 59, Part I, Second Schedule to the 1999 Constitution of the Federal Republic of Nigeria.” Following that decision, the Rivers State House of Assembly quickly enacted VAT Law No. 4 of 2021 to end the authority of the FIRS to administer, collect and enforce the VAT Act, 2007 in Rivers State. Lagos State that had pretended to be sleeping on the issue also jumped in with the accelerated passage of the VAT bill “in line with fiscal federalism that we have been talking about.”
I have always suspected that the VAT law would unravel one day. In a 2016 interview with Ms Modele Sarafa Yusuf, former president of the Institute of Chartered Accountants of Nigeria (ICAN) and respected tax consultant, Mr Emmanuel Ijewere, explained the mandate Babangida gave the committee (which he chaired) that came up with the VAT law in 1993. “What was happening at that time was that there was a sales tax in several states, and there was no particular rule as to what they were charging. It was being used as a source of creating confusion, so the government now said let us standardize it.” Ijewere said his committee was told that “whatever money was collected in a state belongs to that state” while the VAT tax commission would retain 5% for administration. “Somewhere along the line, the federal government took it over, pushed the states aside, and that defeated the whole thing. It now turns out that the states that are generating a lot more VAT are not getting the commensurate amount of money from their economic activities and that was the unfair part of it.”
While the intention behind the 1993 VAT decree may have been altruistic, it has created more problems than it attempted to solve. But we cannot blame Babangida for that. Although he enacted the VAT decree before leaving office, implementation started on 1st December 1993 by which time General Sani Abacha was in power. Now, what is the issue? VAT, in a nutshell, is a consumption tax imposed on the supply of all goods and services, except those specifically exempted in a Schedule to the Act. The main challenge is that there is a near unanimity of opinion that the unjust sharing formula in VAT Act creates an impression of ‘robbing Peter to pay Paul’. That has always been the problem.
It is difficult to fault Wike’s argument that it makes no sense that Rivers State generated N15bn VAT revenue in June this year but got N4.7bn (about 30%) in return, while Kano generated N2.8bn in the same month and got the same N2.8bn back (100%). Meanwhile, Lagos State that generated N46.4bn in the same month was allocated N9.3bn (about 20%). “Sometimes, you don’t want to believe these things exist,” Wike said. But while the Rivers Governor may have championed the recent fight, Tinubu was in the forefront before APC came to the centre. At that time, aside Osinbajo who was constantly in court, the intellectual wing of the party and government composed of legal scholars and experts in taxation like Abiola O. Sanni and Ade Ipaye, SAN. They were the people writing opinions and making analysis in support of the argument that VAT proceeds belong to the states. Ipaye, by the way, is currently the Chief of Staff to Osinbajo (proper designation: deputy chief of staff to the president). A former professor of Law, specializing in Taxation at the University of Lagos, he was appointed by Tinubu as SA on Taxation before Babatunde Raji Fashola, SAN, (as Governor) elevated him (Ipaye) to the position of Attorney General and Commissioner for Justice in the state. All these principal actors are now in the federal government.
Meanwhile, the FHC judgement in favour of the Rivers State Government has thrown up issues about the nature of our system. If we were running a proper federation, the federal government would have jumped at it; being the biggest beneficiary if we disaggregate the VAT components. But many of the states would suffer and that is where the interest of the federal government comes in. With Wike talking tough against the background of the mismanagement of our diversity by the current administration, the VAT issue has provoked another North-South brouhaha. I want to deal with a few of them before I conclude.
Since everybody is talking about alcohol, including those who don’t drink, let us start from the VAT derived from it. In addressing the unholy wedlock between religious pulpit and political podium in Nigeria in my September 2019 column, I referenced the issue, following the destruction by the Kano State Hisbah Board of 196,400 bottles of beer in its effort to ensure a “sane, peaceful and sharia-compliant society.” I wrote: “this is the sort of hypocritical decisions that makes many to question the viability of our federal structure. The issue of VAT proceeds is one of the strongest points being canvassed by proponents of restructuring the country and it is difficult to fault. It is also one of the arguments made by former Vice President and presidential candidate of the main opposition Peoples Democratic Party (PDP), Alhaji Atiku Abubakar before the last general election. ‘If a state is opposed to cattle tax or bicycle tax or alcohol tax, or pollution tax, for instance, it should not expect to share in the tax proceeds from those items,’ Atiku said in 2017.”
So, I align myself with those who say states that ban alcohol cannot benefit from VAT derived therefrom. But the notion of a ‘Parasitic North’ and ‘Productive South’ that forms the basis of most narratives when discussing the contradictions of Nigeria is not supported by any empirical evidence. While we cannot discount the argument of the Niger Delta whose people have for decades borne the brunt of oil exploration without much to show for the resource, the oil money for which some people deride others is rent rather than “any rigorous productive activity,” as Alhaji Bashir Ibrahim Yusuf reminded some of us in a chat group during the week. “The most hardworking Nigerians are the farmers who feed the nation with iron age tools without a fair reward for their labour.” And you find this class of Nigerians everywhere in the country.
As I have consistently argued on this page, the saber-rattling about North and South is a distraction from the real issue which is that Nigeria is not working for majority of its citizens. Now that the system is creaking beneath all of us, we must begin to fix it by bringing to the table the productive capacities of every citizen which means we need to wean ourselves of this distributive mentality that oil has foisted on our collective psyche. When the federal government argues for the retention of the status quo on VAT, it is to protect at least 30 of the 36 states which are both in the north and south. But it is also now clear that the market is over for these states that must begin to generate their own economic activities. The days of taking begging bowls to Abuja that is neck deep in foreign debts is gradually but surely coming to an end.
This VAT crisis therefore comes with a huge opportunity to address fundamental issues in an economy that is already in dire straits and perfect our skewed federal structure. As I argued in my ‘Platform Nigeria’ presentation with the theme, ‘Is Devolution of Powers the solution to Nigeria’s Problem?’ in May this year, the fiscal imbalance in which the federal government controls disproportionate power and wealth has become a huge problem. The current regime of ‘sharing the national cake’ is also unsustainable. “We should actually be thinking in terms of getting the people to directly fund their government, not the gathering to share oil money, and the laziness, lack of accountability and tension associated with it. We should be moving from an extract and share economy to one funded by taxpayers.”
Last Friday, the Appeal Court sitting in Abuja ordered all parties to maintain the status quo and refrain from taking action that would give effect to the VAT judgement. It is interesting that the Rivers State Government has approached the Supreme Court to challenge that stay. From my reading of the whole situation and given the experience of Lagos on this issue, a political solution appears the surest bet to the VAT imbroglio. For that to happen, President Muhammadu Buhari must show leadership on the issue. He can delegate Osinbajo to use the instrumentality of the National Economic Council which he chairs to negotiate with the states.
In practical terms, there is value in a centrally collected tax and the current VAT regime has its own merit. We may need to change the name, increase derivation component, reduce cost of collection by FIRS and allow states to retain 100% taxes on certain items (like alcohol) that some may have issues with. We may also need to tweak the sharing formula such that only a certain percentage will go to the central pool for sharing. But asking each state to keep all the VAT it generates will be difficult to implement under the current circumstance.
If, for instance, the court upholds the current ruling, each state will have to create its own VAT law to plug the hole that the centrally collected and distributed VAT will create in their already troubled finances. Different rates in different states will make it difficult to do business across the country. Things exempted from VAT could also be brought under such law (like food and agricultural products, for states that don’t have other things they can immediately tax.) The implication will be higher prices and inflation. Besides, since most states don’t have the capacity that FIRS has, they may deploy commissioned consultants and motor park touts to do the job of tax collection. We all know that will be an open invitation to anarchy.
At the end of the day, we have two major problems. One, we have a revenue problem across the board. Without necessarily raising rates or creating new taxes, we need to bring more people into the tax net and be more efficient in collection. Two, we need to spend the accrued revenues more prudently. No point taking taxes from the people and expending such proceeds on frivolities or having some mummy and son fight over millions of Naira after daddy had ‘disappeared’ the dollar component into his Babariga!
• You can follow me on my Twitter handle, @Olusegunverdict and on www.olusegunadeniyi.com
