VAT Row: FG Eyes Out-of-court Settlement

 

The Federal Government has hinted that it may explore an out-of-court solution to the lingering legal battle between its agency, Federal Inland Revenue Service, and Rivers and Lagos states over the collection of Value Added Tax.

The Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed, noted that efforts were ongoing on the issue but she did not give details as the matter was subjudice.

Speaking in an interview on Channels Television’s Politics Today on Thursday night, Ahmed said she hoped there would be a political solution to the issue rather than a protracted court case.

The Federal High Court sitting in Port Harcourt, the Rivers State capital, had on August 9 ruled that Rivers State and not the FIRS should be the authority collecting VAT and Personal Income Tax in the state.

The FIRS then approached the Court of Appeal in Abuja to challenge the judgement. It also wrote to the Senate to seek the inclusion of VAT collection in the exclusive legislative list.

Following the failure of the FIRS to obtain a stay of execution it sought from the appellate court to prevent the state government from enforcing the verdict, the Rivers State Government enacted a law to empower the state to collect VAT. The governor, Nyesom Wike, signed the bill into law on August 19.

Lagos State, whose request for joinder as a respondent in the suit before the Court of Appeal was also granted by the court, also enacted its own VAT law. The governor, Babajide Sanwo-Olu, signed the bill into law on September 10.

Meanwhile, after approving Lagos State’s request for joinder as a party at the Court of Appeal, ordered all parties to maintain the status quo on the matter, a ruling the Rivers State Government had approached the Supreme Court to set aside.

The Court of Appeal also directed that the matter be moved from Abuja to its Port Harcourt Division for further hearing. The court has yet to decide on the substantive suit as of the time of filing this report.

But the minister said, “I’m not supposed to be talking about issues in court but I do hope that this problem can be solved by sitting on the table; not on the pages of newspaper or disagreements in court because it is possible to solve it on the table, talking of political solution.”

When asked if the Federal Government was reaching out to the governors and if its representatives had met any of the governors over the matter, she said, “There are a lot of efforts going on right now. As I said, I don’t want to discuss it because it’s in court so I have to be careful. But there will be a positive political solution. We are working towards an out-of-court solution.”

Meanwhile, the Finance Minister has clarified that the government’s decision to sell national assets is mainly to transform the assets into performing assets not only to raise revenue.

The minister said in the interview, “There is a privatisation process going on by the National Council on Privatisation, chaired by the Vice President, and an agency that is responsible for privatisation. Yes, some national assets are being sold, but the major reason we are selling national assets is not to raise revenue. It is to be able to transform those investments into performing assets.

“What is the point of having an asset you have invested in that is not performing? If you sell it to a private sector company that is able to run the business better, then the economy is better for it. So, the reason for privatisation is not just to fund the budget; it’s to turn non-performing assets into performing assets.”

When Saturday PUNCH contacted the Rivers State Government, which initiated the VAT court case, if it would withdraw its cases in court and embrace a political solution, the Commissioner for Justice, Prof Zaccheus Adangor, declined to comment on the matter. Rather, he said the Commissioner for Information should be contacted on the issue.

The Commissioner for Information, Mr Paulinus Nzirim, also declined comment on the issue, simply saying, “No comment.”

In his previous comments on the matter, however, the governor did not rule out the option of dialogue, but he hinted that all concerned would have to first agree that states should be the right authority to collect VAT.

He had said, “Some people have said be your brothers’ keeper. I have no problem with that, but let us tell ourselves the simple truth. When you agree that it is the states that should collect VAT, we can sit down to say, now we know it is the states, but look at the problems. That is a different thing.”

But the Lagos State Government, in its response to whether it would embrace a political solution, said it would consider the option provided the conditions were just and fair.

It however said it had yet to be contacted by the Federal Government on the out-of-court settlement option.

The state Commissioner for Information and Strategy, Mr Gbenga Omotosho, told one of our correspondents on Friday, “As far as I know, we haven’t got any representation from the Federal Government. But for us in Lagos, it is not a matter of us vs them. It is a matter of justice, fairness and equity. It is a matter of what is good for Nigeria.

“In Lagos, if we get it right, it will affect every corner of Nigeria. Lagos is like a giant carrying on its shoulders the responsibilities of so many others. So, if you encourage this giant to do more, it will and the effect will percolate through other parts of the country.

“If you fix roads in Lagos, goods coming from the port would get to other parts of the country fast and cost of freight would reduce; wear and tear on vehicles would reduce. An out-of-court settlement is an option so long it is going to promote equity, justice and fairness.”

Prior to the minister’s comment, the VAT row had also assumed ethnic and political colourations, with northern and southern governors taking opposing stances on the issue.

The southern governors on September 16 backed VAT collection by states but the northern governors on September 27 warned that this would cause an increase in prices of goods and services and create barriers in interstate trade, adding that they would wait till the Supreme Court ruled on the substantive suit when the matter eventually comes before it.

Meanwhile, the Minister of Finance who introduced VAT in 1993 during the late Gen Sani Abacha regime, Dr Kalu Idika Kalu, had told Sunday PUNCH in an interview that instead of allowing the issue to fester and degenerate into ethnic and political issues, the government should summon the stakeholders and get experts knowledgeable in the subject to advise on how to manage it.

“That is how a government should operate,” he said. “I also think it is better for the government to recognise that there are loopholes in the current tax structure. As I said, these are issues a small team, maybe comprising lawyers, economists and social development specialists, can quickly deliberate on within two weeks, put all the factors into cognisance and come up with the solution.

“It is better to resolve it rather than make it a legal issue. We should be hesitant to push it in a direction we know would create more cleavage in the system.”

Experts kick against out-of-court settlement

A Professor of Economics at the Olabisi Onabanjo University, Ogun State, Prof Sheriffdeen Tella, advised against the out-of-court settlement option, which he said would give the Federal Government an upper hand that might be to the disadvantage of the states in the future.

He said, “I believe it is better for the Supreme Court to pass a judgement on the matter. With an out-of-court settlement, the Federal Government can through the National Assembly make a law that would make it impossible for the states in future to be able to exercise their rights.

“The out-of-court settlement will not be seen as legal since it was not ordered by the court. It simply means that it would be used for future reference.

“I think what the Federal Government is trying to do is to prevent a legal situation that may not be easy to resolve in the future. Maybe they cannot see a way out for now and realise that in future they will have to pass a law through the National Assembly in a way that the court cannot override. Since there is nothing approved by the National Assembly yet, whatsoever the court says becomes binding.

“The Federal Government, in the short run, is trying to prevent the state governments from having an upper hand. This would likely not lead to multiple taxation as the states may likely end up collecting taxes since it is the Federal Government that is calling for an out-of-court settlement.”

Also speaking on this development, a Professor of Economics and Public Policy at the University of Uyo, Akpan Ekpo, said that an out of court settlement would only be feasible in a win-win situation. He added that if the states found the settlement to be unfavourable, the case would eventually be resolved by the court.

He said, “If both sides want to settle out of court, we have to see the terms of the settlement whether it would be a win-win. If both sides want to do and we see the terms and conditions to be win-win, then it is good.

“But if it is not a win-win situation, then the Supreme Court should decide, and this may lead to one side taking all. You know the VAT used to be the old sales tax, which is a matter for states.

“I don’t know why they want to opt for an out-of-court settlement but if both sides agree to that, let them start the process, and the states would know if they are gaining something. If the out-of-court settlement is not favourable to the states, they can return to the court to settle the case.”

A Tax Expert and Chief Operating Officer and Risk Management Partner, KPMG Nigeria, Victor Onyenkpa, said an out-of-court settlement was desirable but both parties to the suit might find it difficult to agree to a mutually favourable situation.

He expressed the fear that both parties might not reach an agreement out of court if the FIRS didn’t agree to a reflective tax revenue allocation system.

“I would favour a situation where there is a central collection of VAT and perhaps somewhat more conversation on how the proceeds collected are shared.

“The ideal solution would be to collect at the centre because it is efficient and effective but have a new conversation around how the revenue is collected so that you have a much more collective system.

“There is also the issue of the parties not being able to actually reach an agreement and the terms of the agreement. Clearly, I would expect Lagos and Rivers to want more allocations than what they are getting currently, but if the FIRS isn’t willing to meet these demands they will end up in court,” he added.

Why out of court settlement may be difficult – Oyedele

The Fiscal Policy Partner and West Africa Tax Leader at PricewaterhouseCoopers, Mr Taiwo Oyedele, said that while he would advise the parties to settle out of court, he was afraid that the dispute might linger if a political conversation to determine the most appropriate VAT system for Nigeria was not established.

He said, “What I am saying is that whether they settle out of court or they allow the Supreme Court to decide, it will not be the end of the matter. Because there is already a dispute, there are some states who think that states should collect while others think the FIRS should still be in charge.

“So when the Supreme Court makes a judgement it will favour one party. To this end, we still have a problem because tax law is not like an election where you say majority has won and then you move on. When it comes to tax matters and people don’t feel like what they want is what has happened, there is going to be a lot of lobbying to get the national assembly to amend the constitution.

“Because to amend the constitution you only need two-third, they can mobilise that.

“The number of states that will benefit from state administration of VAT are not very many so I sense the possibility that they can mobilise enough states to amend the constitution and put it the way the want it.

“What I am suggesting is that they settle out of court and have a political conversation to decide a proper VAT system that is fit for Nigeria.”

He said that if the parties reached an out-of-court agreement to administer VAT at the sub national level, the states should consider amending the constitution as the current tax laws favoured a central collection system.

On the other hand, if an agreement was reached to continue VAT collection at the federal level, he advised the government to review the current sharing formula.

Oyedele said, “An out-of-court settlement will not provide a permanent solution to the dispute unless it is complemented by a political solution to amend the constitution to reflect the most desirable level of government to administer VAT.

“Without a political solution involving a constitutional amendment, another state may institute an action in future to challenge VAT collection by the Federal Government as other states will not be bound by the terms of an out-of-court settlement between the current parties to the VAT case.”