Daily Independent Online.
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Thursday, July 01, 2004.
Legal issues involved in Lagos sales tax
The irony can’t be ignored. On
the eve of the last gubernatorial election in the state, they threw their weight
firmly behind the incumbent governor. Now they have taken a different turn. Between
the Lagos State Governor, Bola Tinubu, and manufacturers operating in the
state, the battle line has been drawn. The litigious matter? Tinubu’s
insistence on enforcing the controversial Sales Tax Law, which the
manufacturers argue, is unfair and unconstitutional. The issues here are, to
say the least, enthralling: A Lagos High Court had, in November 2003, not only validated
the tax but also held that the said tax and the Value Added Tax (VAT) are the
same. So for the manufacturers, asking them to pay both taxes amounts to double
taxation. And off they went to the Appeal Court. As Daily Independent went to
press, the Federal Government had, not surprisingly, asked to be joined as a
party in the appeal against the lower court’s ruling. About the same
time, MAN was considering seeking an injunction to stop the state government
from carrying out an earlier threat to seal up factories that failed to pay the
Sales Tax. And close watchers say a fascinating drama is about to be played-out
in the state. Development Reporter, Ntai Bagshaw, x-rays the issues involved.
In
all ramifications, this matter is bound to stir the hornet’s nest,
especially when the major actors in the brawl are by no means featherweights.
Try them for size: The Federal Government, Lagos State government and Manufacturers
Association of Nigeria (MAN). The
controversial sales tax is the thorny issue here.
The genesis
The
appropriate place to start is to trace the genesis of the problem. How did it
all begin? Tunji Abayomi, who holds a PhD in law, is perhaps best placed to
explain: “There was a Value Added Tax (VAT) law, which was brought about
in 1992/1993. This law in essence took over taxation of consumer goods. And
because it was enacted during a military government, it basically covered the
states.
“Subsequent
to that, there was what we called Tax Levies decree, which essentially said
that you can only tax in this manner and on this product. Those are all federal
laws. In the meantime there was in existence states’ sales tax but those
sales tax could not be operational because the Federal Government appeared to
have covered the state. You could argue for some inconsistencies but the state
laws could not operate because the then Federal Government was making laws for
the entire federation.
“What
now happened was that, Lagos State was dissatisfied with its receipt of VAT and
went to court. The governor then made an order under the enabling Sales Tax Law
of Lagos State and now created a schedule of items that are to be taxed. The
problem is that under section 3 of that law, it says that manufacturers or
suppliers as agents of the state will be required to collect this money and pay
to Lagos State.”
Abayomi, who is MAN’s counsel,
disclosed that the association, obviously uncomfortable with this arrangement -
since they already pay VAT - then went to court to argue that paying the sales
tax amounts to double taxation. It lost that case.
Highlights of the
judgment
In her judgment at the Lagos High Court
in November last year, Justice O. Falase ruled that the Lagos State government
has the legislative competence to impose the Sales Tax Law. According to her,
only the state government is empowered by the 1999 Constitution to legislate on
intra-state commerce and trade. The provisions of the Sales Tax Law, she said,
are limited to the taxation of goods solely within Lagos State and do not in
any way cover inter-state commerce and trade. Justice Falase stated further
that the provisions of Decree 102 of 1993 to the extent that they seek to
regulate the taxation of goods within Lagos State is null and void, adding that
such exercise is in violation of the provision of the constitution and ultra
vires the powers of the National Assembly. Interestingly, she did rule that the
Sales Tax Law and VAT Decree are the same, both being taxes designed to tax the
sale or purchase of goods and services.
Consequences of the
judgment
Simply
put, Falase ruled that the VAT Decree 102 be restricted to inter-state commerce
and trade only. That is trade outside Lagos State. And that the Sales Tax is
directed at Lagos-based consumers of the category of goods covered by the tax.
A muddled affair
Indeed until a higher court mediates in
the matter, a quagmire of sorts will, as is presently the case, hang over it.
How?
Firstly,
since, according to Falase, VAT does not apply to goods sold in Lagos, the
Federal Government - through the Federal Inland Revenue Service (FIRS)
- will have to define the modality for excluding the input of VAT in the
VAT accounts of companies operating in Lagos State.
Secondly,
since only consumers are by law liable to pay the said tax, the move by the
state government compelling manufacturers to collect the tax on its behalf is
faulty. The provision of the Sales Tax Law is explicit in this regard. Section
2 of the law provides: “Every purchaser or consumer of any of the
chargeable commodities listed in the said schedule shall be liable to pay Sales
Tax at the time of purchase or time of consumption.”
MAN
indeed argues that companies are too remote from consumers to act as collecting
agents for the state government. Besides, not all of the goods produced by
manufacturers in Lagos State are meant for the Lagos market. Some are meant for
other states and others for export. So under the law, what modalities will be
used to determine goods that are meant for Lagos only?
“This
is a consumer tax, it is a tax on the consumer,” Charles Ugwuh,
MAN’s president maintains. “He (the consumer) deals with the
distributors and retailers so when the goods get to the distributors, the state
government should go there and collect their money.”
When
Daily Independent took him up on the matter, Ugwuh was livid: “Lagos
State now wants to forcibly appoint us as agents for the tax - for us to
collect it the same way as we do the Pay-As-You-Earn (PAYE). But we say no. You
cannot forcibly appoint us agents to collect the tax for you.”
But
if the manufacturers collect VAT and PAYE on behalf of the Federal Government,
why can’t they do same for the sales tax?
Ugwuh
explains: “First of all, if I am collecting PAYE, it is because I employ
the man. Because I pay the staff, I can take the (federal) government’s
money and give to them. So, I can be its agent in that regard.
“In the case of VAT, there is a
value added. I add the value. The (Federal) government says you have added all
this value so pay me a certain percentage as value added. So, I say no problem.
I collect the tax, deduct what I have paid and pay the balance to the Federal
Government. That is how VAT works. So, in the case of VAT, we are also agents
of the Federal Government. This is a very important point that you must know.
“But
in the case that we are being forced to become agents, we cannot be agents
because the goods are being sold to a retailer and I have no dealings with the
retailer. I have no dealings with the final consumer, so I cannot collect on
their behalf. That is the quarrel.”
However
reasonable Ugwuh’s position seems, it doesn’t go down with the
state government. And Governor Tinubu has demonstrated his resolve to compel
the manufacturers to pay the sales tax when he, penultimate week, gave them a
two-week ultimatum (which expired Tuesday this week) within which to pay the
tax or risk having their premises sealed up. “The case was contested in
court and we won convincingly, but the ruling has not been complied
with,” a visibly vexed Tinubu lamented. “We shall not condone this
act any longer.”
Nevertheless,
analysts argue that there are still loose ends in the entire mater. “Even
if the manufacturers are liable to collect the tax as the state government
insists, what is the mechanism for collection?” Emeka Anyanwu, a trade
development expert, asks. “There is need for the state government to
embark on public enlightenment programmes to intimate Lagosians on the existence
of the tax.”
Not done, MAN exposes more loopholes in
the law. According to the association, since some categories of products
covered by the law are produced by factories located outside Lagos,
transferring such products for sale in Lagos does not subject them to pay the
sales tax as they are classified goods involved in inter-state trade. The
implication of this, MAN asserts, is that goods produced and sold in Lagos will
be uncompetitive, price-wise (to the extent of the sales tax value) compared to
goods produced outside Lagos or goods imported into the country but sold in
Lagos. The manufacturers argue further that the decision by the state
government to assess the tax on their turnover is defective since their
turnover components include inter-state and export sales.
Yet,
more contentious issues surround Tinubu’s move to seal up
‘defaulting’ factories. Refusing to budge on its decision not to
pay the tax until the Appeal Court decides the matter, MAN maintains that doing
so will be unlawful. “The threat to seal up companies for not paying
sales tax is a nullity since if there has been no collection there is nothing
to remit,” MAN insists. Ugwuh affirms: “The matter is under appeal
and our members should await the outcome of the judgment.”
Also
commenting on the plan to seal up factories in the state, Abayomi said MAN
might seek an injunction to stop the state government from carrying out the
plan. “We are considering applying to court to injunct Lagos State from
carrying out its threat,” he said, stressing that the state government
can only go into such premises by the order of the court. “And I
don’t think that the Sales Tax Law allows him (Tinubu) to just walk into
your premises and seal the place up,” Abayomi stated.
More knotty issues
Meanwhile
as the brickbats linger, the matter is taking fresh turns by the day. The
Federal Government, equally dissatisfied with the Falase judgment, is currently
seeking an order from the Court of Appeal, for “enlargement of
time” within which it would file a Notice of Appeal against the ruling of
the Lagos High Court. The Federal Government, through its counsel, Chief Afe
Babalola, SAN, is also seeking an order suspending the ruling of the lower
court pending the hearing and determination of the appeal, arguing that it
nullifies the provisions of Decrees 102 of 1993 and 21 of 1998.
Even
the Attorney General of the Federation and Minister of Justice, Chief Akin
Olujinmi, SAN, says he is querying the fact that the Federal Government was not
made a party to the suit instituted at the Lagos High Court throughout the
trial and determination of the case. He insists that the Lagos State government
and the High Court are under duty to make it a party to the case in all cases
affecting the validity or otherwise of a federal legislation. The Motion on
Notice, signed by Babalola read further: “The judgment of the court below
prejudicially affects the rights and interests of the applicant (Federal
Government). The order made by the trial court is being relied upon by the
plaintiffs and their allies to avoid payment of taxes due to the Federal
Government and the state government alike.”
Swearing
to an affidavit in support of the motion, Mr Bankole Akomolafe, counsel in
Babalola’s chambers, told the upper court that the decision of the Appeal
Court has the effect of reducing drastically the revenue accruable to the
Federal Government. Akomolafe argued that prior to the decision of the lower
court, the Federal Government had been enforcing the provisions of Decrees 102
and 21 against MAN to collect revenue, which is shared with all the states of
the federation.
Akomolafe’s
position undoubtedly raises pertinent issues. If eventually the Appeal Court
validates the Sales Tax Law, it would swing the Federal Government into dire
straits in terms of accruable revenue. Lagos, by all means, is the largest
contributor to the VAT purse of the government. Akomolafe is therefore pleading
with the Appeal Court to suspend the orders of the lower court. He maintains
that the respondents (Lagos State Attorney General) and their allies could
always claim a tax refund and/or adjustment “in the unlikely event that
the applicant’s (AGF) appeal fails and he is adjudged to have wrongfully
collected any tax from the respondents.”
Expect the
unexpected
The
feuding parties are not optimistic of an amicable settlement of the matter.
“When the court at the highest level resolves the matter,” Ugwuh
says, “the matter will be laid to rest.” Asked if he foresees the
slightest chance of an out-of-court settlement, the MAN chief stated: Anything
is possible. I don’t know what Lagos State will do. It is entirely free
to reach out to the manufacturers. We will wait and see what they will do. I
thought we were partners in progress. I feel sad. We are not enemies of the
state government.”
Ugwuh spoke further. “We believe
we are partners in progress with them. But if they don’t appreciate this,
then it is unfortunate.”
Analysts agree on one thing: That
consumers bear the brunt of price increases in whatever manner. And the ceteris
paribus criterion holds true here.
