Examining the Powers of the FIRS in The Administration of Value Added Tax

In this article, we discuss the provisions of the tax laws as they pertain to the administrative powers of the FIRS and the compliance requirements of taxpayers registered as a Business name with the Corporate Affairs Commission (CAC).

As long as tax is involved, the conflict between taxpayers and the tax authorities may remain unending; no one is too sure if either of these parties fleece the other of their monies. Courts have been kept to their toes in ensuring that the interpretation of these tax laws harmonize the understanding of these laws.

The question on the powers of the Federal Inland Revenue Service (FIRS) to administer taxes not expressly covered by the exclusive legislative list has become an issue for debate too often, with several judicial pronouncements stating its position. Most recently, the case of Emmanuel Chukwuka Ukala SAN (ECU) v. Federal Inland Revenue Service (FIRS), substantively sought to clarify this prevailing issue. Pointedly, this concern bothers not just on the jurisprudence of our tax laws but on the constitutional delineation of legislative powers. Who has which powers?

Background

On 2nd March 2020, ECU brought an action against FIRS. The core of ECU’s argument was simply that FIRS lacked the constitutional competence to administer taxes other than that expressly provided by Item 59, Part 1 of the Second Schedule to the Nigerian Constitution and by a stretch, that the National Assembly could not validly delegate such powers to the FIRS.

The FIRS in its defence, argued that its power to administer taxes such as Value Added Tax (VAT) is sourced from Item 67 and 68, Part 1 of the Second Schedule to the Nigerian Constitution. FIRS argued that the juristic personality of ECU subjects it to VAT.

The Court held all substantive issues as raised in favour of ECU and stated that the FIRS is not empowered to administer such taxes nor could such powers be delegated to it. Also, the Court similarly held that ECU not being a company as defined by Section105 of the Companies Income Tax Act (CITA) could not be within the jurisdiction of the FIRS thus not liable to Company Income Tax (CIT), Tertiary Education Tax (TET) and Value Added Tax (VAT).

Issues Arising

The case as discussed above raises certain pertinent questions such as the powers of the FIRS to administer the VAT Act and to whom it may administer it to. These questions have become more frequent as there is now a line of decided cases all of which have aired their judicial thought on this core. These issues will be discussed in convenient headings.

Taxable Status of a Business Name

ECU argued that by virtue of being a business name it is not covered under the CITA and beyond the jurisdiction of FIRS in respect of taxes such as CIT, EDT, VAT, and such other taxes administered by the FIRS. Surprisingly, the Court agreed to this provision.  It should be noted that the application of CIT and its incidental taxes are distinct from other taxes such as Capital gains, consumption taxes and even Withholding taxes. The underlying provisions of these taxes are different from one another.

While CIT is applicable to any company or corporation (other than a corporation sole) established by or under any law in force in Nigeria or elsewhere1, VAT on the other hand applies to an individual or body of individuals, family, corporation sole, trustees or executor or a person who carries out an economic activity, a person exploiting tangible or intangible property for the purpose of obtaining income therefrom by way of trade or business or a person or agency of Government acting in that capacity2.

Therefore, the FIRS as the relevant agency empowered to administer VAT in Nigeria can validly enforce compliance against any taxable person that supplies or provide taxable goods or services. This includes ECU. It will not be out of place if the FIRS issues a notification to ECU of its intention to carry out a VAT audit or VAT monitoring exercise. The non-application of CIT to ECU does not extend to VAT.

Validity of the VAT Act

Another issue which arose from this case is whether the National Assembly could make laws for the purpose of taxation beyond that which is expressly listed in Item 59, Part 1 of the Second Schedule to the Nigerian Constitution, Item 59 relates to the “taxation of income, profit and capital gains or as may otherwise be prescribed by the constitution”. The sum of ECU’s argument was that the express exclusion of consumption tax from the list was a converse limitation to the powers of the National Assembly to enact the VAT Act. Clearly questioning the validity of the Act.

Pointedly, while the decision of the Court is clear that Item 59 limits the powers of the National Assembly, the Court may have been hasty in its decision. This is because the concluding sentence of Item 59 gives an open window from the listed items. Thus, empowering any such addition to the foregoing list which may be traced to the Constitution. A combined reading of Item 59, 67 and 68 of same schedule may be interpreted to widen the powers of the National Assembly to legislate on matters incidental and supplementary to items on the exclusive legislative list. It should be noted that the VAT Act was enacted pursuant to Item 68, Part 1 of the Second Schedule of the Nigerian Constitution.

Delegation of Legislative Powers

ECU not only argued that the National Assembly could not impose VAT but also that it could not delegate such powers to the FIRS. Citing the omission of consumption or sales tax such as VAT from Item 7 – 10 of the Concurrent legislative list as the basis of its argument. This view is true to the extent that the constitution generally does not expressly include VAT and other consumption taxes. VAT was established pursuant to Item 67 & 68 of the exclusive legislative list which enable the National Assembly to make laws incidental and supplementary to their law-making powers. 

Furthermore, the Taxes and Levies Act which was enacted to harmonize the collection of taxes within Nigeria’s tax system clearly sets out who should collect which tax. Part I to the Schedule of the Taxes and Levies Act, expressly states the various taxes to be collected by the Federal, State and Local Government. Specifically, the Act states that VAT is one of such taxes to be collected by the Federal Government.

This further strengthens the argument of VAT being a tax covered under the exclusive legislative list. Suffice to say that the Taxes and Levies Act does not seek to oppose the provision of the Constitution but gives more clarity to it. The argument against the legislative powers of the National Assembly to make laws with respect to VAT is simply a bold attempt at ignoring the incidental and supplementary powers of the National Assembly. To further rely on Item 7 – 10 of the concurrent legislative list is to give an unsustainable interpretation of legislative powers.

Conclusion

The decision of the Court in the above case is questionable on more grounds than one. Perhaps, a neat line of argument from the FIRS would have aided the Court in some of these areas which this decision blurs the line. i.e. Status of business name with respect to VAT and the validity of the FIRS to administer the VAT Act. The rationale behind the Court’s decision is likely to increase the tension between taxpayers and the tax authority. Be that as it may, the laws are clear on the issues raised above and it is hoped that the Court will give more clarity in a latter case. Conclusively, it will be interesting to see the National Assembly joined as a party in matters such as this in the future.

1. Companies Income Tax Act, Section 105

2. Value Added Tax Act, Section 46

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Examining the Powers of the FIRS in The Administration of Value Added Tax
Examining the Powers of the FIRS in The Administration of Value Added Tax