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Value Added Tax (VAT): The Implications of the Judgment of the Federal High Court in AG Rivers State v. FIRS & Anor.



The Value Added Tax (“VAT”) was introduced by the Federal Government of Nigeria in 1993 via the Value Added Tax Decree as a form of consumption tax to replace the previously applicable Sales Tax.[1] The newly introduced VAT applied to the purchase of goods and services produced or imported into the Country by consumers except specifically exempted by the Decree. This applicability of the VAT Decree remained unchanged under the succeeding VAT Act and remained the undisputed applicable authority with respect to the imposition and collection of VAT in Nigeria till 9th August 2021 when this indisputability was challenged in Court by the Rivers State Government. The Rivers State Government in a suit instituted against the Federal Inland Revenue Service, and the Attorney General of Federation before the Federal High Court sitting in Port Harcourt, Rivers State, invited the Court to put to bed the controversy surrounding the collection of VAT by the Federal Inland Revenue System (“FIRS”) on behalf of the Federal Government when it challenged the power of the FIRS to collect Value Added Tax, Withholding Tax, Education Tax, and Technology Levy within the state.

The Parties exchanged processes and delivered their respective arguments in support of their positions. The Court evaluated these arguments and the processes before it, and being persuasively swayed by the arguments of the Attorney General of Rivers State for the Plaintiffs, held that the State, through its appropriate authority is empowered to impose and collect VAT, Withholding Tax, Education Tax, and Technology Levy, and not the Federal Inland Revenue Service. The Court 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 the above taxes to FIRS. The Court further held that the power to legislate on Value Added Tax is not within the legislative competence of the National Assembly as it is not contained within the Exclusive Legislative List under the 1999 Constitution.


Following the decision of the Honourable court, the Rivers State House of Assembly passed a VAT bill which was subsequently signed into law by the State Governor on 19th August 2021.[2] The new law, by Section 7 empowers the Rivers State Board of Internal Revenue to impose, assess, and collect Value Added Tax from all taxable persons and companies in the state. The new law retains the 7.5% threshold applicable under the VAT Act as the rate to be charged as Value Added Tax in the state.  However, contrary to the sharing formula available under the VAT Act, the new VAT Law of Rivers State pegs 70% of the total VAT collected for the State while 30% will go directly to the Local Government. No provision is made for the Federal Government under the Law.[3] The law exempts certain goods and services from the payment of VAT, such as basic food items, medical and pharmaceutical products, books and educational materials, fertilisers, and farming equipment.

In a similar style, the Lagos State Government, following the ‘success’ of the Rivers State Government at the Federal High Court, equally passed its own Value Added Tax Law, 2021. Like its Rivers State counterpart, the Lagos State law vests the power to administer the law, assess, and collect the Value Added Tax, on the Lagos State Internal Revenue Service.[4] Unlike the VAT Act and VAT Law of Rivers State, the Lagos State VAT Law pegs the rate at 6% on the value of goods and services as stated in the Law.[5] The Law also mandates all taxable persons and companies in the State to register with the Lagos State Internal Revenue Service within 6 months of the passage of the Law or of commencement of business, whichever comes first.[6] Failure of any taxable person to register constitutes an offence punishable with a fine of N50,000.00 for the first month of default and N100,000.00 for subsequent months. Where after 3 months, the default persists, an application shall be made to the court to seal up the premises where such a taxable person conducts their businesses.[7]

The implication of the Federal High Court’s decision on the VAT law is that the judgment will not only be valid in Rivers State but any and every state in the country that stands to follow suit. More states, especially those remitting a large chunk of VAT into the Federation Account, may be tempted to enact their respective VAT Laws to principally enable their State Internal Revenue Service to assess and administer the Value Added Tax instead of the Federal Inland Revenue Service. This is to allow the States absolute control over the sums realised as Value Added Tax. In fact, there are already calls for the South-South Governors to enact their VAT Laws.[8] However, the positions of all states might be negatively impacted by lack of capacity to collect VAT taxes, difficulty in auditing compliance, and higher cost of collection especially in states where consultants and other forms of agency structures are used for tax collection.

Also, states that have existing Consumption Tax Laws such as Lagos and others would have to repeal those laws when introducing VAT Laws in their states as to do otherwise would amount to legislative double taxation, a position that has already been laid to rest by the Supreme Court in the case of A.G. Lagos State v Eko Hotels[9].

Furthermore, Local Governments will also be worse off as states prescribe lower rates for sharing VAT revenue with Local Governments with Rivers prescribing 30% and Lagos 25%, as opposed to the Federal Government’s 35% under the VAT Act. The effect of this would be glaring in states that generate considerably low VAT. It is worthy to note that a central system of filing is currently adopted, which means that VAT is currently filed and remitted centrally by companies based on the location of their head office. This is what PWC calls the “Headquarters Effect”.[10] Therefore, the VAT attributed to Lagos State can be said to be artificially inflated to some extent by this effect.[11]


While the Court of Appeal has asked parties to maintain the status quo on the matter so as not to affect the subject matter of the suit, states like Lagos and Rivers have enacted laws backing up their collection of VAT within their states. This will affect the uncertainty of business as businesses would not know which agency has prevailing authority over the collection of VAT and non-remittance will amount to a breach of the law.

However, the judgment of the Federal High Court, if upheld by the Court of Appeal and Supreme Court, coupled with the VAT laws of states that have enacted their VAT laws would have a number of effects on business owners, service providers, and VAT payers in general.

The first implication is that they would remit their VAT to the State Internal Revenue Service where they operate as against the FIRS. By this, the FIRS would cease to collect VAT generated in the states.

Secondly, the 7.5% VAT rate imposed by the Federal Inland Revenue Services would not be applicable to VAT payers in such states, except where the VAT law adopts the existing rate. According to the Rivers State VAT law, it still maintains the 7.5% VAT rate, Lagos State on the other hand opted for 6% in its own law instead of 7.5%.

Under the new Lagos State Value Added Tax Law, small businesses with turnover, not more than N25m are not exempt under this Law and would have to start paying taxes now. The penalties for failure to register are as high as N50,000 for the first month, and N100,000 for each subsequent month, while the fine for failure to keep records to ascertain the correct VAT is up to N250,000. This penalty regime will weigh heavily on businesses, especially SMEs.


The judgment of the Federal High Court has been the subject of debates in many fora, and it is apparent that the current VAT revenue sharing formula among states is not equitable and states want more, however, the ultimate decision to uphold or dismiss it lies with the Court of Appeal and the Supreme Court. If the decision of the Federal High Court is upheld, the judgment would create some level of competition among states in the aspect of revenue generation and overall development. States that consistently depend on the VAT share from the Federal Government as contained in the VAT Act, would be compelled to look inward to cater for their needs. 

Furthermore, states cannot rely on the Federal High Court judgment to collect VAT, however, they can rely on the VAT Laws passed in their states to enforce remittance of VAT to their government at the state level because the law has not been stopped by any court of competent jurisdiction in Nigeria.

Finally, while parties have been asked to maintain status quo antebellum one could argue that the Court of Appeal’s ruling is not binding on the Lagos State government as it was not a party to the appeal as at the time the order was granted.

This article is intended to serve as information to the general public. It should not be taken as legal advice and does not create a client-lawyer relationship between you and our law firm. If you have any inquiries, kindly reach out to us at contactus@tundeadisa.com

Contributions By Ojosu Oluwafemi, Esq, Mustapha Olawoyin, Esq, and Adebolanle Olowolabi, Esq.

[1] “Current Law and Practice of Value Added Tax in Nigeria” by Abiola Sanni. British Journal of Arts and Social Sciences ISSN: 2046-9578, Vol.5 No.2 (2012).

[2] The law is to be known as “Rivers State Value Added Tax Law No 4 of 2021”

[3] Section 35 of the VAT Law of Rivers State.

[4] Section 7 of the VAT Law of Lagos State.

[5] Section 4 of the VAT Law of Lagos State.

[6] Section 8 of the VAT Law of Lagos State.

[7] Section 8(3) of the VAT Law

[8] NAN, ‘VAT: Orbih tells South-South Governors to embrace law, use proceeds for grassroot development’ (Guardian, 11 September 2021) <wwwguardian.ng/news/nigeria/vat-orbih-tells-south-south-governors-to-embrace-law-use-proceeds-for-grassroots-development/> accessed 15th September 2021.

[9] (2017) LPELR-43713(SC)

[10] Taiwo Oyedele, ’How to fix Nigeria’s broken Tax system’ (PwC, 11 September 2021) <www.pwcnigeria.typepad.com/tax_matters_nigeria/> accessed 15th September 2021

[11] Ibid at 10.


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