KEY TRENDS IN VAT EXEMPTIONS IN NIGERIA
Change is the only constant thing in life. This aged saying is true even within the legal systems of countries, worldwide. The need for change, however, ought to be balanced against the desire to maintain certainty in tax law, particularly as this is one of the key canons of taxation. Whether this is the case within the Nigerian legal system has been the subject of debate one too many times. Most recently, this question has been asked as it relates to the exemption regime under the Value Added Tax Act.
This paper will prefatorily review the scope of exemptions from Value Added Tax (VAT) as contained in the VAT Act. It will then address the changes to those exemptions provided in the Value Added Tax (Modification) Order 2020, as well as the Federal Inland Revenue Service (FIRS) Public Notice on the VAT Modification Order (the Notice). It will also weigh competing arguments on the validity of the Order and the Notice, and take a view on its impact for the Nigerian Tax Law.
Exemptions under the VAT Act
The VAT Act imposes VAT on the supply of all goods and services except those which it specifically exempts or are otherwise zero rated. Per the schedule to the VAT Act, the following are VAT-free:
- all medical and pharmaceutical products
- basic food items
- books and educational materials
- baby products
- fertilizers, locally produced agricultural and veterinary medicine, farming machinery and farming transportation equipment
- all exports
- plant, machinery imported for use in an export processing zone
- plant, machinery and equipment purchased for utilization of gas in downstream petroleum operations; and tractors, ploughs and agricultural equipment and implements purchased for agricultural purposes.
The VAT Act further provides that medical services, services rendered by community banks etc., plays and performances conducted by educational institutions as part of learning, and all exported services are exempt services.
From the above, where any of the foregoing goods or services are to be supplied, there is no charge of 7.5% VAT on them and in the same vein, there is no duty on the supplier to deduct and remit such monies to the FIRS.
Potentially to keep the provisions of the schedule up to date and in line with societal developments, and with the realities of modern society, the VAT Act empowers the Minister to “amend the rate of tax chargeable and amend, vary or modify the list set out in the first schedule to this Act”. In the exercise of these powers, the Minister of Finance published the Order. The Order however appears to include an extended list of exempted items in addition to those originally contained in the Schedule to the VAT Act.
- petroleum products such as aviation spirit, motor spirit, super; motor spirit ordinary; kerosene-type jet fuel, kerosene, natural gas as well as other liquefied petroleum gases and other gaseous hydrocarbons
- essential raw materials for the production of pharmaceutical products
- renewable energy equipment, which includes wind-powered generator, solar-powered generator, solar cells, solar generators of a limited wattage as well as other photosensitive semiconductor devices;
- and raw materials for the production of baby diapers and sanitary towels.
The Order may be regarded as a welcome development particularly since it provided much-needed clarity on the scope of certain exemptions contained under the VAT Act and guidance on how these exemptions may be enjoyed. However, the extended list of exempted items was met with mixed reactions from stakeholders, and it appears that the FIRS is strongly against the Order, hence the Public Notice.
The FIRS Notice
The FIRS via its Public Notice, together with the Order, presents the classical act of the government taking back with its left hand, what it had generously given with its right hand. The FIRS noted that “the following items included in the breakdown are not exempted from VAT as they were not listed in schedule 1 of the VAT Act or a previous Ministerial Order;
- Natural gas;
- essential raw materials for the production of pharmaceutical products;
- renewable energy equipment
- raw materials for the production of baby diapers and sanitary towels.
These items shall continue to be liable to VAT at 7.5% until otherwise provided in an appropriate statutory instrument”. This appears to be an attempt to claw back on the new exemptions granted via the Order.
Teasing the Key Issues
The Public Notice raises a number of salient legal questions, including:
- the nature and scope of the Order;
- whether the Notice has the effect of amending the Order and the propriety or otherwise of this; and
- other corollary questions and implications.
The Legality of the Order
The Order, as noted in its introductory paragraph, was made in furtherance of powers granted under Section 38 of the VAT Act which grants the Minister the power to expand the exemptions outline within the VAT Act. The Order was made by the Minister’s powers as in section 38 of the VAT Act. As a result, it is called a subsidiary legislation, deemed to derive its power and validity from the principal legislation (the VAT Act in this case) and is thus, like the principal legislation, binding and enforceable.
The Court of Appeal made this principle crystal when it held Omatseye v. FRN that “subsidiary legislation or enactment is one that was subsequently made or enacted under and pursuant to the power conferred by the principal legislation or enactment. It derives its force or efficacy from the principal legislation to which it is therefore secondary and complimentary. It is trite that subsidiary legislation generally has the force of law”.
Therefore, the Order by the Minister is without doubt binding and enforceable in Nigeria without a subsequent enactment or order. It also follows and may be validly argued that the Order expands the list of items that are exempted from VAT and any other conclusion will be tantamount to rewriting or amending the law. A careful read of paragraph 2 of the Order will show that the intendment is to extend the preexisting exemptions under the VAT Act, and this is a power which the minister can validly exercise within the realm of the law.
It is trite that in the interpretation of statutes, the starting point is always to give regard to the ordinary meaning of the words used in the statute. The Courts have held as a general rule that ”the provision is clear and plain in its wordings. In this wise, the law insists that courts must deploy the literal rule in its interpretation, id est, the provision must be accorded its ordinary meaning without any embellishment.” It, therefore, follows that the provisions of paragraph 2 of the Order ought to be given its literal meaning without any form of embellishment.
Paragraph 2 of the Order provides that “the extended list of items exempted from Value Added Tax in the First Schedule to the Value Added Tax Act is as specified in the schedule to this Order.” The literal and unmistakable conclusion that may be reached from the foregoing excerpt is that the Order has in its schedule set out an expanded list of exempt items from VAT. It is thus extremely difficult to see how a different conclusion from this may be reached.
Interrogating the FIRS Public Notice
Before addressing the validity or correctness of the assertion by the FIRS, it is a useful starting point to discuss the legal nature of an FIRS public notice. The attitude of the courts has always been to group public notices and information circulars in the same class and they have held that these instruments do not constitute binding law.
As a general rule, circulars, policies or guidelines issued by government authorities cannot be binding on stakeholders, where their provisions are inconsistent with the provisions of the enabling laws. On tax matters, the Court of Appeal in Federal Board of Inland Revenue V. Halliburton (WA) Ltd held definitively that a Circular released by the FIRS Chairman cannot be legally binding as to impute additional liability on taxpayers. The law will not allow the FIRS to impose additional obligations on the tax-payers, utilizing circulars or guidelines, outside the purview of the tax laws.
This clear elucidation of the law on the validity of an FIRS public notice knocks the wind out of the sails as it relates to the implication of the FIRS Notice. Assuming arguendo that the Notice is binding, it is important to address the propriety of the position espoused by the FIRS. It appears that the FIRS gives the provisions of the Order a very different interpretation when it states that natural gas, essential raw materials for the production of pharmaceutical products, renewable energy equipment, raw materials for the production of baby diapers and sanitary towels, are all not exempt from VAT.
It is even more difficult to agree with the position of the FIRS as it appears to flow from a misconception or misinterpretation as to the nature of the Order, given that the FIRS notes that the aforementioned items are still “VATable” until otherwise provided in an appropriate statutory instrument. In what may be described as a shallow approach to the interpretation of paragraph 2 of the Order, the FIRS takes the view that paragraph 2 provides a breakdown (including the Common External Tariff code) of items exempted from VAT under the VAT Act to guide importers, other stakeholders and the Nigerian customs service on the items to which VAT should not be charged at the ports. While this conclusion is not wrong, there appears to be no legal basis for the conclusion that items such as natural gas, et all which are contained in the extended list in the Order are not exempt from VAT.
Implications of the status quo
It may be argued from a legal standpoint that the Order takes precedence over the Notice by the FIRS, and this notionally settles the debate, the fact of the FIRS public notice nonetheless gives rise to several legal and practical implications. These include;
Erosion of Certainty in Tax Law
Adam Smith, in his work, An Inquiry into the Nature and Causes of the Wealth of Nations, put forward what has become a foundational principle of tax law in his four (4) cannons of taxation. These cannons represent the characteristics of a good tax system, one of which is “certainty”. The requirement of certainty in a tax system makes it important that the income or property intended to be taxed, the occasion for tax payment, the rate of tax and the modalities of assessment and general administration are spelt out beforehand.
In the absence of certainty, every person subject to the tax is put more or less at the mercy of the taxman who can unfairly change the charge on a taxpayer. As important as this principle is for any tax system including Nigeria’s, it appears that its continued operation is being undermined by the inexplicable inconsistency in the policies of the executive arm of government which houses the minister of Finance and the FIRS. The approbation and reprobation that is reminiscent of the Order and the Notice are prejudicial to the certainty of Nigerian tax laws and makes it difficult for a taxpayer to effectively determine tax exposure/liability and take steps to arrange its tax affairs in such a way as to comply with the extant provisions of the law.
Apparent display of a lack of cohesion and coherence
It is trite that in the exercise of executive powers or any power at all, there is a need to maintain coherence and coordination in the absence of which compliance is made unnecessarily difficult. In this case, the fact that in the same year, the Minister published an Executive Order and the FIRS subsequently attempted to claw back on the position espoused via the executive Order, is too obvious a display of disorganization that should not occur given the proximity of both entities and the overarching need for a common stance.
Given Nigeria’s commitment to focus on indirect taxes such as VAT as opposed to direct taxation, the skies need to be clear to entrench certainty as to what the law is and also to increase the propensity for compliance by taxpayers. Against this backdrop, Nigerian tax and administrative authorities need to put their house in order and maintain a unanimous front as regards what the position of the law.
As it specifically relates to the exemptions from VAT, the nature of the Order makes it a superior provision which ought to be relied upon to determine the items that are exempt from VAT. The Notice by the FIRS is however not to be completely ignored given that the FIRS is the key enforcer of VAT in Nigeria and taxpayers run the risk of being slapped with a notice of additional assessment by the FIRS given the already expressed notion that the items introduced under the Order are not intended to be exempt.
It is thus imperative that affected taxpayers bring the issues before the court for a final determination to remove all doubt on the alleged exempt items. Until this happens, it is the opinion of the writer that the Order being a higher-ranking instrument takes precedence. In any case, the law should/would be interpreted in favour of the taxpayer given its uncertainty and in line with well-recognized principles in the interpretation of tax law.
Gabriel Aliu is a commercial and tax law currently practising at Olaniwun Ajayi LP.