In 2020, Lagos generated nearly 420 billion naira in internal revenue, more than three times its closest rival, Rivers State. It is no coincidence that the state systematically tops the list of states in internally generated revenue (IGR). It turned out to have the most efficient and competent tax collection system. Its laws are also designed to take advantage of loopholes in federal tax laws and the country’s constitution. Over time, he complained about restrictive federal laws preventing his revenue-generating agency from reaching its full potential. Now more and more states are starting to see it like this. They don’t want to be limited to collecting only personal income tax, while allowing companies operating in their respective states and taking advantage of the business-friendly environment to pay all taxes to the federal government. The recent dispute over the collection of value added tax (VAT) is only one of the results of the outcry. There will likely be more to come.
The Internal Revenue Service in Lagos collects at least 25 different categories of taxes. Most are aimed at individuals, due to federal laws and the Constitution of the Federal Republic of Nigeria which give most of the tax collection powers to the central government. Unlike the Rivers State government, which outright challenged the right of FIRS to collect VAT by passing its own law, the Lagos State government quietly collected taxes, which could very easily fall into the category a consumption or sales tax.
It is no surprise that the matter of the law passed by the Rivers State government ends up in court. It is even less surprising that other states, particularly Lagos, are joining Rivers in the lawsuit against the federal government and FIRS. Based on Supreme Court precedents, states have the law on their side. A similar case; Attorney General, Ogun State v Ayinke Aberuagba, following the enactment of the Sales Tax Act 1982 by the Ogun State House of Assembly. Even though the court case focused on the distinction between the taxation of the purchaser of goods, which is the consumption tax, and the imposition of the tax on the product itself, which by strict definition is a sales tax, the similarity in the case of Ogun and one of today’s rivers are too glaring to ignore. Again, the case of the State Attorney General of Ogun v Ayinke Aberuagba has been challenged and decided on the basis of the 1979 Constitution of the Federal Republic of Nigeria, which in many ways is no different. of the 1999 Constitution.
In rendering the main judgment in favor of the States, Judge Mohammed Bello declared in 1984: “The power to legislate on trade and commerce is, under article 4 of the Constitution, exclusively vested in the National Assembly. . The omission of item 38 from the exclusive legislative lists of the Constitutions of 1960 and 1963 in the Constitution of 1979 does not suggest that the subject has been moved to the residual list. Article 61 with its ancillary powers is omnipresent and so total that it leaves nothing to the state, except to the extent that it is expressly stipulated in the Constitution.
Regardless of how the current Rivers, and now Lagos, Federal Inland Revenue Service case in the Supreme Court ended, the handwriting is on the wall. The way the country’s resources, especially state tax rights, are managed can no longer be the status quo.
According to data from the International Monetary Fund (IMF), Nigeria has approximately 56,329 active corporate taxpayers (corporate income tax), 14,823 personal / corporate taxpayers (personal income tax) and 77,082 businesses reporting VAT on 3,098,193 incorporated companies, trade names and incorporated trustees. This shows the large pool of individuals and companies who do not pay taxes. But it also shows that there is room for states and federal governments to increase their tax base.
It is the view of this newspaper that states should not be limited to collecting only personal income tax. Federal laws and, where applicable, the constitution should be amended to allow states to collect corporate tax. To prevent states from going too far in the name of increasing revenues, the National Assembly could legislate on what percentage a state can collect in corporate taxes, say five percent. In this vein, there is no reason why the federal government and FIRS should not collect personal income tax as they do in most parts of the world. This, in the long run, would also help low-capacity states to develop and improve their tax collection systems.
With the clamor for restructuring taking center stage, we believe that launching tax reforms will help ease some of the political tension. Outside of the political arena, the alternative to inaction would be an increase in the number of states that collect taxes through the backdoor.