In the month of August 2021, a Federal High Court sitting in Port Harcourt, Rivers State of Nigeria entered judgement that it is the Rivers State Government (RSG) and not the Federal Inland Revenue Services (FIRS) that is constitutionally entitled to impose taxes enforceable or collectable in its territory of the nature of consumption or sales tax, VAT, education and other taxes or levies, other than the taxes and duties specifically reserved for the Federal Government by items 58 and 59 of Part 1 of the Second Schedule of the 1999 Constitution as amended.
The court, presided over by Justice Stephen Dalyop Pam, therefore issued an order of perpetual injunction restraining FIRS 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.
The RSG quickly enacted and signed into law a bill empowering the state board of inland revenue to begin levying and collecting VAT in the state. But the FIRS filed an application before the same court seeking a stay-of-execution to stop the RSG from collecting VAT in line with the earlier judgement in favour of the state. The application was dismissed by Justice Pam as according to him granting the application would negate the principle of equity and amount to committing murder. The Judge furthered averred that in as much as the law enacted with respect to VAT by the RSG remained valid, the courts were bound to obey such law until it had been set aside by a court of competent jurisdiction.
The FIRS would later approach the Court of Appeal sitting in Abuja praying the appellate court to not only set aside the Federal High Court judgement, but to also stay the execution of the judgement pending the conclusion of the appeal. The Appeal Court granted the reliefs sought by the FIRS and ordered both Rivers and Lagos (which had applied to join the suit as a co-Respondent alongside Rivers State) States to maintain status quo on the collection of VAT, pending the determination of an appeal that was lodged before it by the FIRS. Specifically, the Appeal Court ordered all the parties that have subjected themselves before it to “refrain from taking any action to give effect to the judgement of the Federal High Court”, which gave RSG the right to collect VAT, instead of the FIRS. The Appeal Court then fixed the next hearing in the suit for September 16, 2021. No doubt, this looks pretty much like a case that will end up at the Supreme Court of Nigeria, the highest court in the land.
As the legal brickbats continue, there is no shadow of doubt that this is a monumental judgement that is set to redefine the practice of federalism in Nigeria. I am not a lawyer therefore lack competence and capacity to comment on the legalities of the judgement and appeal processes, however I will analyse the socio-political and economic implications of the judgement if it is allowed to stand.
Nigeria’s Unique Federalism
Nigeria’s official title is the Federal Republic of Nigeria but there is little federalism in the system of governance in the country. A true federalist government according to Britannica has political authority divided between two autonomous sets of governments, one national and the other subnational, both of which operate directly upon the people. Furthermore, of the eight largest countries in the world by area, seven—Russia, Canada, the United States, Brazil, Australia, India, and Argentina—are organised on a federal basis. (China, the third largest, is a unitary state.) It listed Federal countries to also include Austria, Belgium, Ethiopia, Germany, Malaysia, Mexico, Nigeria, Pakistan, Switzerland, the United Arab Emirates, and Venezuela, among others.
One key ingredient of federal systems is that the subnational governments are the ones that fund the national government. I live in the UK and every year my Council (local government equivalent in Nigeria, the UK has no states) sends me a detailed financial statement showing income and expenditure of the Council and the share of the income that was remitted to the national government. Similar systems exist in the US and elsewhere. Nigeria is however operating in the reverse order with the national government superintending over 68 out of 98 items in the exclusive list of the constitution. Even the 30 items left are in the concurrent list where the national government and the subnational governments run them together with the national government taking precedence over the subnational governments. So, in effect the national government has powers over all the 98 items in the constitution which basically covers almost all economic activities in the country!
Nigeria’s federalism therefore has a powerful federal government gathering revenue from almost all economic activities into a pot called the federation account from where it distributes to the subnational governments (states and local governments). This is contrary to the practice of federalism all over the world. It is in this regards that the VAT judgement which hands the states the power to collect local taxes is a welcome development because Nigeria by this judgement has began the journey to true federalism!
The drawbacks of Nigeria’s brand of federalism
1. It makes the subnational governments to be lazy – Governors and local government Chairmen in Nigeria are no interested in unlocking economic value in their jurisdictions because they are assured of billions of Naira from the federal government every month. Every state and local government in Nigeria is endowed with huge resources – fertile land, mineral resources, tourism potential, services etc – which if adequately tapped will assure economic prosperity by the residents.
2.National government is bulky and distracted – a national government focuses on big ticket items such as defence, foreign policy, currency issuance, trade treaties, fiscal/monetary policies etc. When the national government reduces itself to minute roles such as the collection of consumption taxes all over the country, it becomes too big and unmanageable. Imagine a consumer paying for alcohol in a remote village in Rivers State and the federal government is there to collect the VAT!
3.Creates unjust situations – there are states in Nigeria that have banned certain economic activities such as sale of alcohol but share from the proceeds of VAT collected from sale of alcohol from the federal pool.
1.Nigeria has tried the federation account allocation system since 1966 when the regional governments were abolished and has made little progress in economic development. It is time to turn to true federalism for a change because it is said that doing the same thing repeatedly and expecting different results is insanity! The VAT judgement therefore must be allowed to stay to bring a breath of fresh air into the governance process in Nigeria.
2. It is noted the quickness the Rivers and Lagos states governments enacted the VAT laws. This swiftness in legislation should equally apply to other important matters of healthcare, education, agriculture, infrastructure, electoral process etc that governments at national and state levels are wont to drag their feet about.
3. It is sad to note that Lagos state fixed the allocation of VAT revenues at 75% to the state and 25% to the local governments. This is the same injustice that the state is taking issues with the federal government that it is keeping a lion share of revenues at the centre. The Lagos state government will abide with true federalism by reversing the VAT revenue sharing formula by granting 75% to the local governments (which are governments closest to the people) and retaining 25% at the centre at the state level. Other states are to also take this formula if we are to deliver dividends of democracy directly to the people.
The states may not have the legal and operational capacity to collect VAT, but this can be quickly implemented which will inevitably create more jobs and enhance the revenue collection as more hands will be recruited for the administration and enforcement of the VAT laws at the state level.
The VAT judgement is a watershed in Nigeria’s political and economic management systems which is hoped will be for the better. It must be allowed to stand!