Division of Taxing Powers in Nigeria

Division of Taxing Powers in Nigeria
– a Paradigm Shift
BY
SANNI, ABIOLA OLAITAN

LL.B., (HONS) (O.A.U.) LL.M (O.A.U.), B.L.
MATRIC NO: 999006216
1
DECEMBER, 2010.
DIVISION OF TAXING POWERS IN NIGERIA
– A PARADIGM SHIFT
BY
LL.B., (HONS) (O.A.U.) LL.M (O.A.U.), B.L.
MATRIC NO: 999006216
A THESIS SUBMITTED TO THE DEPARTMENT OF COMMERCIAL AND
INDUSTRIAL LAW, UNIVERSITY OF LAGOS IN FULFILLMENT OF THE
REQUIREMENTS FOR THE AWARD OF THE DEGREE OF DOCTOR OF
PHILOSOPHY (Ph.D) IN COMMERCIAL LAW.
DECEMBER, 2010
2
SCHOOL OF POST GRADUATE STUDIES
UNIVERSITY OF LAGOS
CERTIFICATION
This is to certify that the thesis:
“DIVISION OF TAXING POWERS IN NIGERIA – A PARADIGM SHIFT”
Submitted to the School of Post graduate studies, University of Lagos
For the award of the degree of
DOCTOR OF PHILOSOPHY (Ph.D)
is a record of original research carried out by
In the
Department of Commercial and Industrial Law.
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REPRESENTATIV E
3
DEDICATION
This thesis is dedicated to the memory of my father Pa Samuel Eluwole Sanni, my
aged mother Mrs Comfort Opa Sanni and my darling wife, Sola for her steadfastness,
prayer and everything.
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TABLE OF CONTENTS
Page
CHAPTER 1
1.0. INTRODUCTION…………………………………………………………………………..1
1.0. Background to the Study ………………………………………………………………….....4
1.2. Statement of the problem ………………………………………………………………….... 7
1.3. Operational Definitions ………………………………………………………………………9
1.3.1. Paradigm …………………………………………………………………..................9
1.3.2. Tax …………………………………………………………………………...............9
1.3.3. Taxing powers ………………………………………………………………………10
1.3.4. Federalism …………………………………………………………………………..10
1.3.5. Fiscal federalism…………………………………………………………………….10
1.4. Scope and limitation of Study………………………………………………………………11
1.5. Research questions ………………………………………………………………………….12
1.6. Theoretical Framework……………………………………………………………...............13
1.6.1. Federalism…………………………………………………………………………14
1.6.2. Fiscal Federalism………………………………………………………...............16
1.6.3. Theories of Division of Taxing Powers…………………………………………...20
1.6.3.1. Conventional Model …………………………………………………………....20
1.6.3.1. Public Choice Theory …………………………………………………………..22
2.0. RESEARCH METHODOLOGY ………………………………………………………….26
CHAPTER 2
2.0. LITERATURE REVIEW ………………………………………………………………..27
2.0. Introduction ……………………………………………………………………...................27
2. 1. Federalism ………………………………………………………………………….28
2. 2. Nature of Tax vis-a-vis Related Terms……………………………………………..33
2.3. Nature of Taxing Powers
…………………………………………………………...34
5
2.4. Division of Taxing Powers
…………………………………………………………….36
2.5. International Perspectives………………………………..…………………………………

45
2.6. DISCUSSION ………………………………………………………………………………50
CHAPTER 3
CONCEPTUAL BASIS OF TAX & DIVISION OF TAXING POWERS
3.0. Introduction …………………………………………………………………………………56
3.1. Functions of Taxation …………………………………………………………...………….59
3.1.1 Provision of public goods ………………………………………………................59
3.1.2. Distributive functions ……………………………………………………………..62
3.1.3. Economic Stabilization …………………………………………………...............63
3.2. Tax and Right to Property …………………………………………………………………..65
3.3. Nature of Taxing Powers …………………………………………………………………..69
3.3.1. What is a tax? ………………………………………………………………......70
3.3.2. Levy ……………………………………………………………………………....73
3.3.3. Duty ……………………………………………………………………………….74
3.3.4. Fee/Charge ……………………………………………………………………......75
3.3.5. Rates ………………………………………………………………………………78
3.3.6. Fines ………………………………………………………………………………79
3.3.7. Taxing Power …………………………………………………….……………….81
3.3.8. Regulatory Powers ………………………………………………………………. 84
3.4. Distinguishing Between Taxing Powers and Legislative Powers …………………………..88
3.5. Limits of Taxing Powers …………………………………………………………………. ..90
3.5.1 Constitutional limitations ………………………………………………………….91
3.5.2. Policy considerations ……………………………………………………………..93
3.5.3. Legislative hurdle …………………………………………………………………95
3.5.4. Administrative Constraints …………………………………………………….....97
3.5.5. Territorial jurisdiction ………………………………………………………….....98
3.6. Problems Associated with Division of Taxing Power …………………………………… ..99
6
3.6.1. Spillovers or Externalities ……………………………………………………….100
3.6.2. Impact of Tax Policy on Mobility and Distribution of Factors of Production…………...101
3.6.3. Imbalance of revenue and development between States ………………………………...102
3.6.4. Imbalance of revenue in favour of the federal government ……………………..103
3.6.5. Compensating States for revenue loss ………………………………………..104
3.7. Approaches to Allocating Taxing Powers ……………………………………………..104
3.7.1. Should Tax Base be utilised exclusively or concurrently? ……………...........106
3.7.1.1. Exclusive Base Utilization ……………………………………………,……106
3.7.1.2. Concurrent Utilization of Tax Base………………………………………….108
3.7.2. Mechanism for Federal-State Fiscal Coordination ……………………………110
3.7.2.1. Tax credit system ……………………………………………………………111
3.7.2.2. Tax deduction ……………………………………………………………….113
3.7.2.3. Tax Supplement ………………………………………………………………..114
3.7.2.4. Piggybacking …………………………………………………………………...115
3.7.2.5 Grants ……………………………………………………………………………116
CHAPTER 4
LEGAL FRAMEWORK & PRACTICE OF DIVISION OF TAXING POWERS –
INTERNATIONAL PERSPECTIVE
4.0. Introduction ………………………………………………………………………………117
4.1. United States of America …………………………………………………………………118
4.1.1. Federal taxing power ………………………………………………………………..122
4.1.2. State taxing powers ……………………………………………………………...126
4.2. Canada …………………………………………………………………………… ……….130
4.2.1. Taxing power of the Dominion…………………………………………………………132
4.2.2. Taxing Power of the Province ………………………………………………………….132
4.3. Australia …………………………………………………………………………...............143
4.4. India ……………………………………………………………………………………….149
4.5.Brazil………………………………………………………………………………………..155
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CHAPTER 5
EVOLUTION OF DIVISION OF TAXING POWERS IN NIGERIA FROM 1954 TO 1999
CONSTITUTION
5.0. Introduction ………………………………………………………………….. ……..……161
5.1. Fiscal Arrangement in the Pre-Colonial era ………………………………………..……..162
5.2. Evolution of a modern Tax System – From community Tax to
Personal Income Tax ……………………………………………….…………………..………163
5.2.1. Harmonisation of Community Taxes (Direct Taxation)…….. ………..………...164
5.2.2. Emergence of Personal Income Tax ………………………………….…………166
5.2.3. Introduction of Regionalism ………………………………………….…………171
5.2.4. Reconsideration of a “dual system”……………………………………… …….174
5.2.5. Chicks Commission, 1953 ……………………………………….……………...178
5.2.6. 1954 Lyttleton Constitution………………………………………….………….181
5.3. Independence to Military Rule (1960-1966) ……………………………………………...188
5.4. Military Rule and Division of Taxing Powers ………………………………………........192
5.3.1. Dina‟s Committee ………………………………………………………………194
5.4.2. Mohammed/Obasanjo Military Government ……………………………………201
5.5. The provisions of the 1979 constitution …………………………………………………..208
5.6. The Military Rule from 1983 -1999 ……………………………………………………… 211
5.6.1. The Emergence of the Sales Tax Act …………………………………...............212
5.6.2. Era of Study Group…………………………………………………………........213
CHAPTER 6
FRAMEWORK FOR DIVISION OF TAXING POWERS UNDER THE 1999
CONSTITUTION
6.0. Introduction ………………………………………………………………..………………217
8
6.1. Constitutional Framework…………...……………………………………….…................218
6.2. Federal Taxing Powers …………………………………………………………………....223
6.2.1. Implied grant…………………………………………………………………….225
6.2.1. Limitations of the Federal Taxing Powers ………………………………………230
6.3.3. Scope of and Contentious Issues arising from Federal Taxes …………………………..231
6.3.3.1. Customs Duties ………………………………………………………………..231
6.3.3.2. Excise Duties ………………………………………………………………….236
6.3.3.2. Income/Profits Tax ……………………………………………………………238
6.3.3.3. Personal Income Tax …………………………………………………………240
6.3.3.4. Companies Income Tax ……………………………………………………….244
6.3.3.5. Petroleum Profits Tax………………………………………………………….249
6.3.3.6. Education Tax …………………………………………………………………254
6.3.3.7. Technology Tax ……………………………………………………………….256
6.3.3.8. Capital Gains Tax ……………………………………………………………..256
6.3.3.9. Stamp Duty ……………………………………………………………………258
6.3.3.10. Value Added Tax ……………………………………………………………261
6.4. States Taxing Powers …………………………………………………………………….267
6.4.1. Express State Taxing Powers ……………………………………………………267
6.4.2. Implied Taxing Powers of the States ……………………………………………268
6.4.2.1. The subject matter must not be on the Exclusive List ………………...............269
6.4.2.2. Whether the subject matter is on the Concurrent Legislative List …………….270
6.4.2.3. Any other specific provision in the Constitution?.......................……………..……….275
6.4.3. Residual Taxing power of the State …………………………………………………...275
6.4.3.1. Betting Duty Law …………………………………………………………………….278
6.4.3.2. Pool Betting Tax ………………………………………………………………………279
6.4.3.3. Education Development Levy Law ………………………………………………….279
6.4.3.4. Entertainment Tax …………………………………………………………….280
6.4.3.5. Special Development Levy ……………………………………………… ………281
6.4.3.6. Trade Cattle Control and Tax …………………………………………………………283
6.4.3.7. Tenement Rates ……………………………………………………………………….284
6.4.3.8. Personal Income Tax Law ……………………………………………………………284
9
6.4.3.9. Stamp Duties Law……………………………………………………………. ………286
6.4.3.10. Capital Gains Tax Act ………………………………………………………..287
6.4.3.11. Produce Sales Tax …………………………………………………………..288
6.4.3.12. Sales Tax Law. …………………………………………………………….......289
6.4.4. Delegation of States taxes to the Local Government Councils........................................295
6.5. Local Government Taxing Powers ……………………………………………………….296
6.6. Division of Taxing Powers and Principles of Federalism ……………………………......304
6.6.1. Separateness and independence of each government ……………………….....304
6.6.1.1. Financial Independence ……………………………………………………….305
6.6.1.2. Taxation and Territoriality ……………………………………………………309
6.6.1.3. Autonomous tax institution …………………………………………. ……….311
6.6.1.3. Autonomous tax policy ……………………………………………………. ...322.
6.6.2. Mutual non-interference or inter-governmental immunities …………………….326
6.6.3. Equality between State Governments ………………………………………...…329
6.6.4. Division of Powers ……………………………………………………………....330
CHAPTER 7
SUMMARY, FINDINGS AND CONCLUSION
7.0. Summary ………………………………………………………………………………….339
7.1. Findings …………………………………………………………………………...............353
7.2. Contributions to Knowledge ………………………………………………………………355
7.3. Conclusion & Recommendations …………………………………………………………356
10
AKNOWLEDGEMENTS
My gratitude goes to the Almighty God for His grace over me throughout my academic sojourn
this far. I am indebted to my supervisors Prof P.K. Fogam and Prof T.A.I. Osipitan for their
sacrifice and commitment to my career development without which this work would not have
met the deadline for submission. I sincerely appreciate the encouragement of Prof. C.K Agomo
at all times. I thank Prof. Oluwole Akanle and Mr Ade Ipaye for sparing time for regular
intellectual discourse. Without Professor Oyelowo Oyewo and Prof Fogams‟s foresight in
graciously approving a one year study leave for me this thesis could have still been a work in
progress. I thank God for their exemplary leadership. Words cannot express my profound
appreciation to Prof. I.O Smith, Dr Yemi Oke and all the members of the Academic Programme
Committee (APC) for their encouragement and guidance. Profs Ogundipe, Okanlawan,
Akinboye, Ilori, Dr Obasoro John and Dr. Okunniga deserve special mention.
I am indebted to Mrs Kathy Mandlebaum, the former Director of the International Tax
Programme, Temple University, Philadelphia, United States of America where I was a Fulbright
Scholar between July 2002 to May 2003. I also thank Christiana-Panayi, HJA for her supervision
of my work while I was a Visiting Research Scholar to the Centre for Commercial Law Studies,
Queen Mary College, University of London. My sincere gratitude goes to the University of
Lagos for granting leaves which enabled me to take advantage of opportunities to travel abroad
for research purposes. I sincerely thank Mr Olu Sodimu and Prof Toyin Ogundipe for facilitating
11
a Ph.D Financial Assistance Grant by the University of Lagos. I thank Professor Owasanoye for
facilitating my leave at the Nigerian Institute of Advanced Legal Studies during which this work
was finally concluded.
My special gratitude goes to my seniors Prof. A.A. Adeyemi, Prof. Akin Oyebode, Prof. E.N.U
Uzodike, Prof. K. Mowoe, Chief Akin Ibidapo-Obe and Prof. A. Atsenuwa for their
encouragement. Special thanks also go to Mrs Joke Oyewunmi, Dr. Joe Abugu, Dr. Wale
Olawoyin, Dr. Dayo Amokaye, Dr Bolodeoku, Mr.Olaniyan, Mrs Asikia Ige, Mr Akeem Bello,
Mr.Tunde Otubu, Dr. K.A. Amusa, Mrs Kemi Adekile, Mr Gbenga Akingbehin, Dr. Dayo
Ayoade, Mrs Iyabo Ogunniran, Mrs Kemi Omotubora, Mr Yomi Olukolu, Mr. Tunde Oni, Yinka
Owoeye, Wahab Shittu and Dr. Simon Igbinedon for their comments and encouragement at
different stages of the work.
My immediate family bore the brunt of my being an absentee father during my trips abroad and
obsession with this research. I am also grateful to my siblings Rotimi, Lekan, Babatunde, Toyin,
Tunde, Joke and their spouses. I also appreciate my in-laws the Ibraheems for their prayer and
support. I sincerely thank Messrs Lekan Bada, Akin Akintayo, Ade Adegoroye, Folarin Philip,
Emmanuel Oke and my bosom friend Engr Bayo Owojori for helping to proof read this work. I
thank Mrs Ikwenobe, Pastors Amuse, other staff of Departments of Commercial and Industrial
and Public Law, my teeming students, friends too numerous to mention for their constant prayer
and encouragement. May the Almighty God reward you all for being such a blessing in my life.
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ABSTRACT
The prolonged military rule in Nigeria has bequeathed an over centralized structure under the
Constitution of the Federal Republic of Nigeria, 1999 whereby the Federal Government
generates about 90 percent of the country‟s tax revenue. While the need for decentralization and
diversification of Nigerian revenue base from oil is self evident, the critical roles of division of
taxing powers in achieving these laudable objectives are yet to be articulated and mainstreamed
in public discourse. This thesis examines the framework for division of taxing powers in Nigeria
and the gap between theory and practice based on the country‟s historical experiences and that of
other federations. It is argued that the current structure of division of taxing powers is antithetical
to the basic principles of federalism. The thesis recommends a concurrent use of a few broad
based taxes under a cooperative federalism framework as a panacea for reform. .
This thesis is divided into seven chapters. Chapter One is on general introduction and research
framework while Chapter Two focuses on Literature review. The jurisprudential basis of tax and
other related terms form the basis of Chapter Three. Chapter Four examines the international
perspectives of division of taxing powers in some federal countries such as United States of
America, Canada, Australia, India and Brazil. Chapter Five examines the evolution of division
of taxing powers in Nigeria while Chapter six discusses the scheme of division of taxing powers
under the 1999 Constitution and the extent to which it either converges or diverges from the
13
principles of federalism. The work is concluded in Chapter Seven with summary, findings and
recommendations.
TABLE OF CASES
Aderawos Timbers Trading Company Ltd v. FBIR (1961)1 All NLR 247……………………...231
Angus v. Minister of National Revenue (1957) Ex CB 342……………………………………………139
Attorney General of Bendel v Attorney General of
Federation (1982) 3NCLR 1…………………………………………………………………………………………..50
Attorney General, Federation v. Attorney General,
Abia State & 35 Ors. (No 2) [2002] 6 NWLR (Pt.76)………………………………….50, 233, 257,
276, 333
A-G (NSW) v. Homebrush Flour Mills(1937)56CLR390......................................................72
Attorney General, Lagos State v. Attorney General,
Federation & 35 Ors. Suit No. SC/20/2008 ……………50, 89, 225, 230, 233, 241, 266, 293, 307
Attorney General, Lagos State v. Eko Hotels & Suite &FIRS 1 TLRN, 25……….265, 266, 291,350
Attorney General of Ondo State v. Attorney General of the Federation (2002)9
NWLR223……………………………………………………………………………………………………………..93, 337
Attorney-General of Ogun State v Attorney-General
of the Federation (1982) 2 NCLR 166…………………………………………………………………….50, 325
Attorney-General of Ogun State v. Alhaja
Ayinke Aberuagba (1984) S.C. 20…………………………………………………35, 51, 55, 89, 92, 94,
116, 225, 226, 229, 230, 232, 236, 239, 292, 294, 334, 349.
14
A-G (NSW) v. Homebrush Flour Mills Ltd(1937)56 CLR 390…………………………………………73
Australian Tape Manufacturers Association v. Commonwealth
(1993)176 CLR480………………………………………………………………………………………………………71
Bamidele & Ors v. Commissioner for Local Government
(1994)2NWLR(Pt.28)568............................................................................................................................303
Bank of Tornto v. Lambe(1887)12 AC. 575...........................................................................................134
Baxter v. Commissioner for Taxation (NSW)(1807)..........................................................................326
Bolten v. Madsen (1963)110 CLR 497.....................................................................................................145
Boucher v. Lawson (1973)Cas. Temp. Hard 85.(1738) Cunning p.144...........................97, 308
Burnette v. Coronado Oil 285 US 396 (1932)................................................................................... .....326
Cape Brandy Syndicate v. IRC [1921] K.B. 64.................................................................................70, 231
California v. Central Pacific. 127 US 1(1888)................................................................................ ......328
Caron v. King (1924) A.C. 999...................................................................................................................134
Collector v. Day US 113 (1870)................................................................................................................326
Coltness Iron Company v. Black (1881) 6 A.C.315.ilac Circuit Court..........................................95
City of Essendon Corp v. Criterion Theatres (1974) 74 CLR1..................................................327
D’Emeden v. Pedder (1904)1CLR 91..................................................................................................326
Daymond v. South West Water Authority (1976) AC 609...........................................................77
Davis v. Mills (1904)194 US 451............................................................................................................65
Deakins v.Webb (1904)1 CLR 585.......................................................................................................326
Dennis Hotels Pty v. Victoria (1959-1960)104 C.L.R.529.........................................................144
Dickinson’s Arcade Pty v. The State of Tasmania(1974)130 C.L.R.1....................................144
DFC of T v. Brown (1958) 100 CLR.32.................................................................................................68
15
Dobbins v. Commissioner of Erie County 16 Pet 435(1842)...................................................326
Emelogu v. The State (1988)2NWLR(Pt.78)528...........................................................................293
Entick v. Carrighton (1765)19 State Tr.1029..................................................................................65
Eti-Osa Local Government v. Jegede(2007)10 NWLR(Pt.1043)537....................................335
Fairfax v. Commissioner of Taxation (1965) 114 C.L.R. 1 ………………………………………76
Fawehinmi v. Babangida (2003)3NWLR(Pt.808)604..............................................................293
First Bank Plc v. A.G. Anambra (2000)1.N.R.L.R.129..................................................................68
Helvering v. Powers 293 US 214 (1943).......................................................................................327
INEC v Musa [2003] 10 W.R.N.1...........................................................................................................34
Indian v. Taylor(1955) A.C 491........................................................................................98, 308, 309
Indian Motorcycle Ltd.v. United States 283 US 570 (1931)....................................................326
Johnson v. Maryland 254 US 51 (1920)..........................................................................................326
Knight, Frank and Rutley v. A-G Kano State(1998)7NWLR(Pt.556)1...................................303
Lakanmi v A.G. for Western State (1971) 1 U.I.L.R., 201..........................................................194, 196
Lond v. Rockwood 227 US 142 (1928)........................................................................................... ...326
Mama Cass Restaurants Ltd v. Federal Board of Inland Revenue
Suit No. FHC.L/CS/826/04...................................................................................................................263, 264
Manufacturers’ Association of Nigeria v. A-G Lagos State Suit No.ID/105M/2001...............265
Mapleview Estate, Inc v City of Brown City No. 236366 San ………………………………………….78
Matthews v Chicory Marketing Board (Vict), (1938) 60 C.L.R. 263 ......................................70, 145
McCray v. United States 195 U.S. 27 (1904) at p.59.
McCulloh v. Maryland 4 Wheat.316 (1819).....................................................................................3247
Mobil Producing (Nig) Ltd v. Tai Local Government Council(2004)10 CLRN99.............336
16
New York v. United States 326 US 587...............................................................................................327
Nichols v Ames (173 U.S. 509 (1929), p.505.................................................................................82, 339
Nigerian Soft Drinks Ltd v. A-G Lagos State (1987)2NWLR9Pt.57)444................................292
Ohio v. Helvering 293 US 360 (1943)...................................................................................................327
Ohio v. Thomas 173 US 276(1899).............................................................................................................328
Panhandle Oil Company v. Mississipi 277 US 21(1928)....................................................................326
Peterswald v. Batley(1904)1 CLR 497......................................................................................................145
Parton v. Milk Board 80 C.L.R., 229............................................................................................................144
Pirrie v. McFarlane (1925)36 CLR 170......................................................................................................327
Polaroid Corp v. Offerman, 507 S.E. 2.d 284, 349 N.C. 290 (1998)................................................248
Pryce v. Monmouthshire Canal and Rly Companies
(1897)4 App Cas 197..........................................................................................................................................75
Registered Association of Telecommunications Operators of Nigeria & Ors v.
Lagos State & Ors. (Unreported) Suit No.FHC/L/CS/517/06...........................................................86
S.A. Authority v. Regional Tax Board (1967) N.C.L.R. 452..................................................................234
Saginaw Co. v. John Sexton Corp of Michighan
232 Mich. App 202................................................................................................................................................75
S.D.V. Nigeria Limited v. Apapa Local Government Council
(Unreported Suit) The Guardian 13 th May, 2000, p.31 ......................................................................302
Shell Petroleum Development Company of Nigeria Limited v.
Burutu Local Government Council (2002)1.NLRLR 1......................................................................79,
299
Societe Centrale D’Hypothesques v. Cite de Quebec (1961) QLR 661............................................77
17
South Australia v. Silver Bros Ltd [1932] A.C. 514.
South Carolina v. United States 199 US 437 (1905)............................................................................ .327
Springer v. United States 102 U.S.586(1880).........................................................................................124
Tennant v. Smith (1892) A.C. 154...................................................................................................................95
United States v. Shoe Corp 532 U.S. 360(1998)........................................................................................77
Vestey v. Inland Revenue Commission (1980)AC 1148....................................................................68
Western Australian v. Chamberlain Industries property Ltd 121 C.L.R...................................144
18
TABLE OF STATUTES
Betting Duty Law No. 26 Cap.B1 Laws of Lagos State, 2003...................................................278, 279
Capital Gains Tax Act, Cap. C1 Laws of the Federation of Nigeria, 2004.........................228, 259,
315, 337
Capital Gains Tax Act, No.44 Cap. C1 Laws of the Lagos States 2003.................................280,288
Constitution of the Federation of Nigeria, 1960........................................................................190, 230

1963 Constitution of the Federation of Nigeria, Act No. 20 of 1963
Section 2.................................................................................................................................................................188
Section 76(1).......................................................................................................................................................188
Section 138(1)....................................................................................................................................................188
Section 140..........................................................................................................................................................188
Section 166...............................................................................................................................................................5
1979 Constitution of the Federal Republic of Nigeria........................................................................209,
210, 229, 230, 261, 273
1999 Constitution of the Federal Republic of Nigeria, Cap. C3 Laws of the Federation of
Nigeria, 2004
Section 2(1)....................................................................................................................................................4, 104
Section 2(2)................................................................................................................................................................4
Section 3(1)..............................................................................................................................................................54
Section 3(2)...............................................................................................................................................................54
Section 4(2)...................................................................................................................................................88, 313,
258
Section 4(3)....................................................................................................................................................2, 358,
19
Section 4(5)....................................................................................................................................................2, 358
Section 4(7).............................................................................................................................270, 277, 316, 358
Section 7(5).......................................................................................................................................91, 270, 298
Section 14(2)(b)...................................................................................................................................................50
Section 16(1)..................................................................................................................................................50
Section 16(4)..............................................................................................................................................63
Section 24(f)...............................................................................................................................................59
Section 44(1).......................................................................................................................................67, 95
Section 44(2)...............................................................................................................................................67
Section 45(1)...............................................................................................................................................67
Section 58..............................................................................................................................................94, 95
Section 59..................................................................................................................................95, 316, 317
Section 120...................................................................................................................................................76
Section 122...............................................................................................................................................144
Section 162..........................................................................................................76, 235, 245, 251, 305
Section 163........................................................................................................................................259, 318
Section 165...................................................................................................................................................322
Section 315.....................................................................................................................................8, 294, 357
Section 318.....................................................................................................................................................306
Item 2 Exclusive Legislative List...........................................................................................................270
Item 5 Exclusive Legislative List.................................................................................................233, 271
Item 6 Exclusive Legislative List............................................................................................................271
Item 14 Exclusive Legislative List.........................................................................................................233
Item 16 Exclusive Legislative List............................................................................................2, 240, 335
20
Item 24 Exclusive Legislative List..........................................................................................................233
Item 47 Exclusive Legislative List........................................................................................................233
Item 50 Exclusive Legislative List........................................................................................................233
Item 25 Exclusive Legislative List..............................................................................................................2
Item 58 Exclusive Legislative List...................................................................................................2, 335
Item 59 Exclusive Legislative List................................................................................2, 104, 257, 335
Item 62(a) Exclusive Legislative List......................................................................................................89
Item D7 Concurrent Legislative List.................................................................................272, 273, 313
Item D8 Concurrent Legislative List................................................................241, 272, 273, 313, 314
Items D9-10 Concurrent Legislative List..........................................................................244, 273, 295
Chapter 2...............................................................................................................................................................56
Companies Income Tax Act, Cap C21 Laws of the Federation of Nigeria, 2004...............228, 247
Customs and Excise Management Act, Cap C4
Laws of the Federation of Nigeria, 2004...................................................................................... ..........228
Companies Income Tax Ordinance No.14 of 1939

Section 2......................................................................................................................................................................171
Section 4......................................................................................................................................................................171
Section17A..................................................................................................................................................................172
Education Tax Act Cap. E4 Laws of the Federation of Nigeria, 2004
Section 5.................................................................................................................... ....................................................76
Section 3(1)................................................................................................................................................................257
Section 1(3).................................................................................................................................................................257
Education Development Levy Law No.66 Cap. E4 Laws of Lagos
21
State, 2003..................................................................................................................................................279, 281
Entertainment Tax Law Cap. E2 Laws of Lagos State, 2003.................................................279, 280
Federal Inland Revenue Services (Establishment) Act No.13, 2007.................................273, 311,

312, 313, 315, 316, 317, 320
Foreign Exchange (Monitoring and Miscellaneous Provisions) Act, Cap F34, Laws of the
Federation of Nigeria, 2004
Income Tax Management Act (ITMA), Cap 173 Laws of
Federation of Nigeria, 1990 ...................................................................................................191, 342
Income Tax (Colony) Ordinance, 1927
Section 1..........................................................................................................................................................169
Section 3(a)...................................................................................................................................................169
Land Use Charge Law Cap L61 Laws of Lagos State, 2003.............................................296, 302
Lagos State Wharf Landing Fee Law, 2009......................................................................................237
Lagos State Infrastructure Maintenance and Regulatory Agency Law,2004
Section 3...........................................................................................................................................................86
Section 16........................................................................................................................................................86
Lytltleton Constitution of 1954
Section 51(1)................................................................................................................................................183
National Information Technology Development Agency Act, 2007........................................256, 355
Nigerian Investment Promotion Commission Act, Cap N.117 Laws of the Federation of Nigeria,
2004
Non-Native Income Tax (Protectorate) Ordinance No.21 of 1931
Section 1.......................................................................................... ......................................................................170
Section 3.................................................................................................................... ............................................170
Off-Shore Oil Revenue Decree No.9 of 1971...........................................................................................199
Public Enterprises (Privatization and Commercialization) Act, Cap P.38, Laws of the
Federation of Nigeria, 2004
Personal Income Tax Act, No. 104,1993 Cap.P8 Laws of the Federation of the Nigeria, 2004
Section 86(1)................................................................................................................ .............................................98
22
Section 2(2)...............................................................................................................................................................274,
275
Personal Income Tax Law No.16 Cap.P4 Laws of Lagos State, 2003..........................................278,
285, 286, 311, 314, 328, 337
Petroleum Profits Tax Act, Cap.P13, Laws of the Federation of Nigeria, 2004......................228,
249, 252
Pool Betting Tax Law No.7 Cap. P10 Laws of Lagos State, 2003................................. ..........279, 280
Produce Sales Tax Law No.19 Cap.19 Laws of Lagos State, 2003.........................................278, 289
Revenue Mobilization Allocation and Fiscal Commission Act No. 49

of 1989, Cap R4 Laws of the Federation of Nigeria, 2004...............................................................219
Stamp Duties Act, Cap S8 Laws of the Federation of Nigeria, 2004.............................................228,
260, 274, 315, 316
Stamp Duties Law No.16 Cap.S10 Laws of Lagos State, 2003.............................................278, 287
Sales Tax Law No.9 Cap.S3 Laws of Lagos State 2003.......................................................................264,

278, 289
Special Development Levy Law No.4 Cap.S8 Laws of Lagos State, 2003...................................278,
282
The Constitution (Distributable Pool Account) Decree No.13 of 1970.......................................198

The Income Tax Management (Uniform Taxation) Decree No.7 of 1975...................................201
Taxes and Levies (Approved List for Collection) Act No. 21 of 1998,
Cap T1 Laws of the Federation of Nigeria, 2004.....................................................................................274,
321, 331, 332, 352, 358
The Unification Decree No. 24 of 1966.........................................................................................................193
Tenement Rates Law No.10 Cap.T2 Laws of Lagos State, 2003........................................278, 284
Trade Cattle Control and Tax Law No.4 Cap.T4 Laws of Lagos State 2003..............................278,
284
Value Added Tax Decree No.102 of 1993, Cap V1 Laws of the Federation of Nigeria, 2004
Section 40............................................................................................................................................215, 235, 263
Section 2,3,5,6&7....................................................................................................................................................292
23
ABBREVIATIONS
AC Appeal Court
AG Attorney General
ASLJ Arizona State Law Journal
BNA British North America Act
BTR British Tax Review
Cap Chapter
CGT Capital Gains Tax
CGTA Capital Gains Tax Act
CIT Company Income Tax
CITN Chartered institute of Taxation of Nigeria
CJN Chief Justice of Nigeria
CFRN Constitution of the Federal Republic of Nigeria
CLL Concurrent Legislative List
CLR Commonwealth Law Report
CLS Current Law Series
CE Custom and Excise
CGT Capital Gain Tax
DPA Distributable Pool Account
Ed Editor
Edn Edition
ELL Exclusive Legislative List
ET Education Tax
ETA Education Tax Act
Et al And Others
FA Federation Account
FBIR Federal Board of Inland Revenue
FEC Federal Executive Council
FIRS Federal Inland Revenue Service
FIRSEA Federal Inland Revenue Service Establishment Act
FPFAA Federal-Provincial Fiscal Arrangement Act
FHC Federal High Court
FIRS Federal Inland Revenue Service
GST General Sales Tax
HMF Habour Maintenance Fund
HST Harmonised Sales Tax
IMF International Monetary Fund
ITMA Income Tax Management Act
24
JTB Joint Tax Board
JMAS Journal of Modern African Studies
JPE Journal of Political Economy,
J JUSTICE
LFN Laws of Federation of Nigeria
LICJN Legal Issues For Contemporary Justice in Nigeria
LUCL Land Use Charge Law
MAN Manufacturer Association of Nigeria (MAN)
MPJFIL Modern Practice Journal of Finance & Investment Law
NCS Nigerian Customs Services
NDCC Niger Delta Development Commission
NECA Nigerian Employer Consultative Assembly
NIALS Nigerian Institute of Legal Advance Studies
NNPC Nigerian National Petroleum Corporation
NIIS National Institute of International Affairs
NITDA National Information Technology Development Agency
NJL Nigerian Journal of Legislation
NLJ Nigerian Law Journal
NWLR Nigeria Weekly Law Report
Ors Others
PAYE Pay As You Earn
Ph.D Doctor of Philosophy Degree
PITL Personal Income Tax Law
PPIB Productivity Price & Income Board
PPT Petroleum Profits Tax
PPTA Petroleum Profits Tax Act
QJE Quarterly Journal of Economics.
QST Quebec Sales Tax
RST Retail Sales Tax
PIT Personal Income Tax
PITA Personal Income Tax Act
SC Supreme Court
SD Stamp Duties
SDA Stamp Duties Act
TCA Tax Collection Agreement
TRA Tax Rental Agreement
UILR University of Ife Law Report
UK United Kingdom
UDIPTA Uniform Division of Income for Tax Purpose Act
USA United States of America
VAT Value Added Tax
VATA Value Added Tax Act
Vol Volume
WRN Weekly Report of Nigeria
WT Withholding Tax
25
CHAPTER ONE
1.0. INTRODUCTION
Federalism is premised on the division of powers and functions between the federal and
state governments. By implication there is plurality of government. If conflicts are
therefore to be avoided between the levels of government, there must be an agreement
which clearly spells out the power relation between the federal and state governments. The
desire to maintain unity, while equally preserving the diverse interests within the
federation, necessarily gives rise to an arrangement where matters of common interests are
reserved for the federal government, while matters of a purely local nature, are within the
competence of the state governments. The devise of most federating countries is to embody
the agreement in the Constitution.1 The Constitution is therefore the basis of the division of
taxing powers in every country.
However, the technical division of powers might differ from country to country or from
constitution to constitution.2 Generally, the technique for the division of powers is that of
enumerated powers and residual powers. The enumeration may be made under one list of
matters exclusive to either the federal or state governments, or there may be two or even
three lists, one for the federal government exclusively, one to the state governments
exclusively and another concurrent to both. 3 The idea of having two legislative lists has
long been a feature of the Nigerian Constitution.4 The enumerated matters under the
1
See also, Nwabueze, B.O, Federalism in Nigeria under the Presidential Constitution (London: Sweet &
Maxwell, 1983) p.20. Osipitan, T., “Federalism under the New Military Administration in Nigeria – Myth or
Reality?”, Vol. 5, Journal of Private and Property Law (JPPL), April 1986,p.45 at p.49.
2
Emiko, G.I. “An Analysis of Federal/State Taxing Powers” in Tax Law and Tax Administration in
Nigeria, (Lagos: Nigerian Institute of Advanced Legal Studies, 1991), ed., Ajomo, M.A., p.12.
3
Osipitan, T, supra note 1, p. 21..
4
Akande, J.O., Akande: Introduction to the Nigerian Constitution (London: Sweet & Maxwell, 1982), p. 8.
26
Constitution of the Federal Republic of Nigeria, 1999 5 are grouped under two lists – one
exclusive to the Federal Government and the other concurrent to it and the State
Governments, namely, the Exclusive and Concurrent Legislative Lists, respectively.6 As
the name suggests, matters on the Exclusive Legislative List belong to the Federal
Government to the exclusion of the State Governments in so far as the Constitution does
not provide otherwise.7 The Exclusive Legislative List consists of 68 items while the
Concurrent Legislative List has 12 items. Where there is a list of matters concurrent to
both the Federal and State Governments, the Federal Government almost invariably
prevails in the event of conflict or inconsistency between the laws of the two
governments.8
The adoption of the above general scheme of division of powers has far-reaching
consequences for the allocation of taxing powers. While certain taxes are expressly
reserved for the Federal Government, none is so reserved for the States. Under the current
arrangement, the most significant taxes in terms of revenue generation and potentials such
as the Petroleum Profits Tax, Companies Income Tax, Customs and Excise Duties are
exclusively within the competence of the federal government.9 Beyond this, the important
taxes administered by the states such as Personal Income Tax, Capital Gains Tax, Stamp
Duties are established by federal statutes which also determine their rates and
administrative framework and regulations. The Value Added Tax, which is now a
5
Cap C 23 Laws of Federation of Nigeria, 2004 (Hereinafter referred to as the “1999 Constitution”)
6
Nwabueze, B.O., supra note 1, p. 39.
7
See section 4(3) of the 1999 Cons titution.
8
Section 4(5) of the 1999 Constitution provides that “If any Law enacted by the House of Assembly of a
State is inconsistent with any law validly made by the National Assembly, the law made by the National
Assembly shall prevail, and that other Law shall, to the extent of the inconsistency, be void.”
9
See items 16, 25, 58 and 59 of the Exclusive Legislative Lists of the 1999 Constitution.
27
significant source of revenue to the States, is imposed and administered by the federal
government under a revenue sharing arrangement which is exclusively determined by the
federal government.10
The federalised scheme of division of taxing powers under the extant Constitution has
somewhat beclouded the extent of the scope of the taxing powers of the States. A
distinguished tax administrator recently opined that the state governments in Nigeria lack
power to impose taxes under the 1999 Constitution and can only administer taxes imposed
under federal statute. According to her:
“Strictly speaking and sentiments aside, the Constitution would appear to

recognize in most instances that fiscal authorities for taxes lie with the
Federal and Local Government tiers of Government only. State
involvement would appear to be restricted to the administration of Federal
Taxes as defined in the Constitution as may be delegated through the
National Assembly. Clearly, this is one area that will elicit debate which I
would encourage not just now but in our various States. It is also an area
for public discourse as most of the taxes and charges that the taxpayer are
bearing at the State and Local government levels, are strictly speaking
unconstitutional if not backed by proper laws. The debate on this topic
would enhance our understanding of our current Constitution but also
assist us as we seek to improve on the Constitution”.11
The federalised nature of taxing powers has not only made the States to be dependent on
federal allocation but also provided a springboard for friction between the federal and
States over any tax (item) that seems to have potentials for revenue generation.
10
The VAT proceeds are divided in the ratio of 15%:50%:35% to the Federal Government; the State
Governments and the Local Governments respectively. See section 36 of the Value Added Tax Act No 102,
1993 as amended by the Value Added Tax (Amendment) Act No 12 of 2007.
11
Ms Ifueko Omoigui, Executive Chairman, Federal Inland revenue Services, in a paper titled “ Building a
Viable State: Deepening/Widening Internally Generated revenue for Effective Capital Financing”, delivered
at the Governor‟s Forum, Abuja 26th October, 2007
28
While it is indubitable that Nigeria is a federal country in form, 12 the long period of
military rule seems to have bequeathed a system that leans more in favour of a unitary
system in its substance.
1.1. Background to the Study
Every era is characterized by vogue words or phrases that suddenly become ubiquitous.13
Since the commencement of civilian rule14 under the Constitution of the Federal Republic
of Nigeria, 1999,15 the vogue phrases in Nigeria have, perhaps, been “fiscal federalism”
and “resource control”16 which are often used interchangeably. These words mean different
things to different people. They have generally re-awakened the consciousness on the need
to rethink or reform the basis of inter-governmental fiscal relationships in Nigeria.17 The
12
Section 2 of the 1999 Constitution provides (2)(1) “Nigeria is one indivisible and indissoluble sovereign
state to be known by the name of the Federal Republic of Nigeria. (2) Nigeria shall be a Federation
consisting of States and a Federal Capital Territory”.
13
Pinto, D., “Governance in a Globalised world: Is this the end of the National State?” in Rajiv, B., ed,
International Tax Competition – Globalised and Fiscal Sovereignty, (London: Commonwealth Secretariat,
2002), p. 66.
14
Nigeria was ruled by successive Military Government which emerged from coups and counter coups for a
period of twenty eight years out of the country‟s forty nine years of political independence from Britain in
1960.
15
Cap C23, Laws of Federation of Nigeria (LFN), 2004 (Hereafter referred to as the “1999 Constitution”)
16
However the history of the agitation for jus t allocation of resources dates back to the resistance by Adaka
Boro a Police Officer from Niger Delta Area of the former Easter Nigeria whose group demanded for the
Sagbama Kingdom. See generally, “The Adaka Boro Centre – Documenting the Niger Delta Struggle”
available online at http://www.adakaboro.org/home. Site visited on 14th July 2009.
17
The term "resource control" is now subject to various interpretations, by politicians, politic al scholars,
military-politicians, government and non-governmental organizations, corporate executives, contractors,
diplomats and several interest groups. These diverse interpretations seek not to clarify but confuse the issue
so that the communities and the peoples‟ position on the matter are further compounded so as to delay an
agreement or a resolution on the matter. Let us examine these variegated views on resource control vis a viz
the position of the communities. The mining industry as a whole and to some extent the logging companies
believe that resource control or its agitation by the people of the Niger Delta and beyond are merely a
clamour for a return of parts of oil and logging revenue into the regions (states). They advertised the belief
that once the states have been settled, there will be peace. Government lea ders believe that an agitation for
control of resources is nothing but "separatist tendencies" that must not be tolerated, but crushed.
Government does not favour dialogue on this matter even though its agents preach peace. The federal
government sees the setting up of Niger Delta Development Commission (NDDC) by the government as a
way out of the problems in the Niger Delta. Control of oil and gas resources by the States of the Niger Delta
as opposed to the federal government seem to be the driving force that defines the understanding of resource
29
current restiveness in the Niger Delta area 18 resulting from the activities of the militants
and the concomitant threat to national security have made an in-depth study of
fundamental issues underlining these demands more compelling. In the words of Isawa
Elaigwu, “it is a political imperative to critically assess the process of fiscal federalism in
Nigeria in order to respond to emerging exigencies of the times”.19
The clamour for fiscal federalism in Nigeria is accentuated by the facts that the economic
fortunes of teeming majority of Nigerians have worsened compared to the standards during
the pre-independence and post independence eras20 under the Constitution of the
Federation of Nigeria, 1960 (1960 Constitution) and Constitution of the Federal Republic
of Nigeria,1963 (1963 Constitutions).21 This is in spite of the huge amount of revenue
accruing to Nigeria as the fourth largest exporter of crude oil in the world. 22 The poor
control here. The governors of the South-South States are the prime movers of this view and the advertised
objective is to utilize the resources for the building of social infrastructure for the states. The position
assumes that the issue of the federating units is settled and the States and the local governments are the other
units of governance in the Nigerian federation and no more. Building a refinery or a power plant by some
states is thus seen by some of them as resource control. See Oronto, D, (ERA) “A Community Guide to
Understanding the Resource Control”. Available online at
http://www.waado.org/nigerdelta/Essays/ResourceControl/Guide_Douglas.html. Site visited on 4th July
2009.
18
The Niger Delta, the delta of the Niger River in Nigeria, is a densely populated region sometimes called
the Oil Rivers because it was once a major producer of palm oil. The area was the British Oil Rivers
Protectorate from 1885 until 1893, when it was expanded and became the Niger Coast Protectorate. The
Niger Delta, as now defined officially by the Nigerian Government, extends over about 70,000 km² and
makes up 7.5% of Nigeria‟s land mass. Historically and cartographically, it consists of present day, Bayelsa,
Delta, Rivers State, Akwa Ibom and Cross River State. In the year 2000, however, General Olusegun
Obansanjo's regime expanded its definition to include Abia, Edo, Imo and Ondo States. See “Niger Delta”
available online at http://en.wikipedia.org/wiki/Niger_ Delta. Site visited on 7th July 2009.
19
See the Introduction to Fiscal Federalism in Nigeria – Facing the Challenges of the Future (Jos: Institute
of Governance and Social Research, 2007) (ed) Isawa Elaigwu, J, p.7.
20
See “Nigeria” Available online at http://en.wikipedia.org/wiki/Nigeria where it was stated tha t “Due to
inflation per capital GDP today remains lower than in 1960 when Nigeria became independent. See also “An
Overview of the Nigerian Economic Growth and Development”, Available online at
http://www.onlinenigeria.com/economics/. Sites visited on 20th January 2010.
21
See section 166 of the 1963 Constitution for the Short title of the Constitution.
22
In 2006, Nigeria produced a total million barrel of oil per day out of which 2.15 million barrel was
exported. See “Top World Oil Producers, Exporters, Consumers, and Importers, 2006,” Available online at
http://www.infoplease.com/ipa/A0922041.html. Site visited on 2nd February 2009
30
showing of Nigeria in terms of economic development and the growing corruption in
virtually all facets of its national life at all levels of government lends credence to the
research finding that countries that rely on revenue from natural resource exports or
external aid have little need to negotiate with, or to be accountable to citizens, or to build
capacity to raise and administer tax. However, states that rely on broad taxation have much
23
greater incentives to practice better governance.
This thesis examines the constitutional framework for division of taxing powers in Nigeria
and the gap between theory and practice based on the country's historical experiences and
that of other federations. It is argued that the current structure of division of taxing powers
is antithetical to the basic principles of federalism and counter-productive. What is more, it
has resulted in the unfortunate situation whereby neither the Federal Government nor the
States generate appreciable tax revenue and are largely dependent on revenue from oil.
Against this background, the thesis recommends a paradigm shift from the current system
of exclusive use of tax base by levels of government to one whereby a few broad based
taxes such as Income Tax and Sales tax/VAT can be jointly utilized by the Federal and
State Governments under a well-coordinated inter governmental fiscal arrangement.
This thesis is divided into seven chapters. Chapter One is on general introduction, the
research and theoretical framework for conducting the research while Chapter Two is
devoted to Literature Review. The jurisprudential basis of tax and other related terms form
the basis of Chapter Three. Chapter Four examines the strategies and dynamics of division
23
See “How Does Taxation Affect the Quality of Governance?” IDS Po licy Briefing Issue 34, March 2007,
p.2.
31
of taxing powers and practices in some federal countries such as United States of America,
Canada, Australia, India and Brazil. Chapter Five examines the evolution of division of
taxing powers in Nigeria while Chapter Six discusses the framework for division of taxing
powers under the Constitution of the Federal Republic of Nigeria, 1999 and the emerging
challenges arising there from. The thesis concludes with Chapter Seven which contains
recommendations.
1.2. Statement of the problem
The recent tax reforms24 have focused mainly on review or re-design of the existing
taxes without addressing the challenges of revenue diversification from a constitutional
perspective. As a matter of fact, the outcome of certain aspects of the reforms have thrown
up serious constitutional challenges and heightened tension in inter governmental fiscal
relationship. For example, the modification of State administered Sales Tax to a federally
administered Value Added Tax (VAT) in 1993 under the Military rule has given rise to a
controversy on the competence of the Federal Government to continue to administer VAT
under the 1999 Constitution. Also, the constitutionality or otherwise of some of the statutes
enacted during the Military rule which impinge the taxing powers of states have been
called to question in the attempt by States to improve their tax revenue. Such statutes
24
There was a reform of the Tax System in Nigeria in 1993 and 2003 respectively. The 2003 Study Group
recommended, inter alia: (i) various amendment to major tax statutes; (ii) compilation of registers of
individual and corporate taxpayers; (iii) issuance of smart taxpayer National Identification Number; (iv)
adoption of a National Tax Policy; (v) streamlining of tax incentives; (vi) establishment of autonomous tax
authorities; (vii) replacement of all existing taxes with only two taxes: (i)income tax and (ii) expenditure tax.
See generally, “Nigerian Tax Reform in 2003 and Beyond” Main Report of the Study Group on the Nigerian
Tax System, July 2003.
32
include, Value Added Tax Act,25 the Education Tax Act 26 and the National Industrial
Technology Act 27 and Taxes and Levies (Approved List for Collection) Act.28
It is remarkable that the ongoing debate on the review of the 1999 Constitution29 has paid
little or no attention on the framework for the division of taxing powers.30 The thesis
identifies lack of conceptual clarification between taxing power and related terms such as
legislative power and regulatory power as one of the key factor(s) responsible for the rave
of double taxation in Nigeria and recommends a constitutional framework that will
preserve this distinction. It is hoped that this will provide a constitutional springboard and
reinforce other efforts aimed at curbing the festering problems of illegal taxes by all levels
of government.
The work advocates for a critical review of constitutional framework for division of taxing
power under the 1999 Constitution towards the attainment of the twin objectives of
defederalisation of power and diversification of the economic base. The strength and
weaknesses of the extant framework are examined while recommendations are made in the
light of normative principles for division of taxing powers, Nigerian historical experience
and practice in other federations. The Study investigates the evolution of taxing powers in
25
Cap V1, LFN, 2004.
26
Cap E4, LFN, 2004
27
Of 2007. No number is assigned to the Act.
28
Cap T2 LFN 2004.
29
Within its first year of operation, the Constitution had become a very controversial document with
trenchant calls for its review. A lot of criticisms had in fact trailed the Constitution since its promulgation.
See the Preface to I.A. Ayua, (ed,) Nigeria, Issues in the 1999 Constitution, (Lagos: Nigerian Institute of
Advanced Legal Studies: 2000), p.vii.
30
Out of the proposed 109 amendments to the 1999 Constitution by the National Assembly, it is remarkable
that none of them touched on division of taxing powers. See “Nigeria Rejects Proposed Constitutional
Amendment”, available online at http://www.voanews.com/english/archive/2006-05/2006-05-17-
voa25.cfm?CFID=94733738&CFTOKEN=40203322. Site visited on 17 th August 2006
33
Nigeria since 1954 and finds that the prevailing philosophy in the allocation of taxing
powers has been to allocate the most significant taxes in terms of revenue potentials to the
Federal Government while the States are left with taxes that are relatively difficult to
administer with little revenue potentials.
Since the taxing powers of the Federal Government bludgeoned during the successive
military rules, the thesis also examines the constitutionality or otherwise of some of the tax
statutes made during the military era as existing laws under section 315 of the 1999
Constitution. The objective, here, is to determine which of the existing Federal taxing
statutes could operate, as State Laws, with necessary modification, pending the amendment
of the 1999 Constitution.
1.3. Operational Definitions
The following important terms in the title of the thesis bear the following meaning in the
context of this work:
1.3.1. Paradigm - A paradigm shift refers to a great and important change in the
way something is done or thought about or „out of the box thinking‟.31
1.3.2. Tax - The word “tax” is a compulsory payment imposed by government for
the purpose of financing the public sector in a statute enacted specifically for that purpose32
31
Id.
32
such as the Personal Income Tax Act Cap P8 LFN 2004, Companies Income Tax Act Cap C21, LFN 2004
or Value Added Tax Act Cap V1, LFN, 2004
34
for which no direct benefit is conferred on taxpayers by government in exchange for the
payment.
1.3.3. Taxing powers – “Taxing powers” refers to the power of a government to
impose tax and determine the base and rate of the tax. The power to merely collect or
administer taxes imposed by another level of government does not approximate to taxing
power.
1.3.4. Federalism – Federalism is a system whereby both the Federal and State
Governments will be able to concurrently exercise independent power to impose and
determine the rate of a few broad based taxes within their respective jurisdictions under an
arrangement which guarantees the autonomy of each level but promotes cooperation on a
voluntary basis.33
1.3.5. Fiscal federalism - The concept of fiscal federalism aims at devolving power to
the lower level in a federation in order to improve efficiency and promote accountability of
a federal system in terms of service delivery to the people. Fiscal Federalism is achieved
through an efficient (i) division of functions, (ii) division of taxing and other revenue
raising powers and (iii) inter governmental transfer(s). Division of functions emphasises
33
The discussion of contemporary federalism seems to have started with K.C. Wheare who defined it as a
“method of dividing powers such that general and regional governments are each, within a sphere, co -
ordinate and independent.” Wheare‟s prognosis that the two levels must be “co -ordinate” and “independent”
within their respective spheres have proved to be too legalistic, and therefore, unworkable in any federation
anywhere in the world. The search for a more dynamic federalism has given rise to different “types” of
federalism, all of which involve the use of a preceding adjective, for example, “ co-ordinate”, “cooperative”
and “organic“ federalism and lately fiscal federalism. See Agbonika, J.A.M, “Federalism and Military Rule
in Nigeria,” (Thesis: (Ph. D) University of London 1991), p.21, Osipitan, T.A.I., Supra note 1, p.45.
35
the need to allocate particular functions to a level of government that is best able to
perform them in the most efficient manner.
1.4. Scope and limitation of Study
A tax system has three critical elements – the policy, the law and the administration.
Policies are the fundamental principles which guide the orderly development of the tax
laws and administration and, therefore, forms the foundation of the entire tax system.34 Tax
law is “a rule or body of rules governing the imposition and administration of taxes in a
given society.35 Tax administration can be briefly defined as the implementation of the tax
laws in order to achieve set objectives. If there are good tax laws which are badly
administered, the objectives of taxation may be far from being achieved. For there to be a
good tax system the tripod of taxation must be roundly developed. In point of fact, any
dysfunctionality in the tax system can be traced to defects in one or more of the tripod. For
instance, if the tax policies are inconsistent or weak, it is certain that the entire tax system
will be dysfunctional. Hence, since Adam Smith‟s Wealth of Nations in 1776,36 different
nations have tried to align their tax systems, as much as possible, with the principles of
equity, certainty, convenience and administrative efficiency propounded by Smith in his
epic work.
34
Policy is the general principles by which a government is guided in its management of public affairs. See
Black‟s Law Dictionary, Bryan A.G., (ed), (St. Paul, Minnn: West Group, 8th ed, 2004) (Hereinafter referred
to as Black‟s Law Dictionary) p.1196.
35
For instance, a layman may think that all the laws of a State are contained in the Constitution. This is
incorrect. The sources of tax laws includes the Constitution, Statutes, delegated legislations,
36
See Joyce, J., A., Complete Analysis or Abridgment of Dr. Adam Smith’s In quiry into the Nature and
Causes of the Wealth of Nations, (Cambridge: Deighton and J. Nicholson, 1797).
36
This thesis focuses on the constitutional framework for division of taxing powers in
Nigeria as a response to the current scheme under the 1999 Constitution which seems
overtly skewed in favour of the Federal Government to the detriment of the States and
local governments. The main concern is the determination of which taxes should be
imposed by each level of government. The work is not concerned about a review or reform
of any particular tax or taxes. This work, therefore, does not include matters relating to the
institutional framework for tax administration and the task of designing the appropriate
structure and general administrative framework for each tax under each statute such as
Customs and Excise Act, Petroleum Profits Tax Act, Companies Income Tax Act, Personal
Income Tax Act, Value Added Tax Act, Capital Gains Tax Act, Stamp Duties, Sales Tax
Law, etc which are post-allocation matters.37 For example, the work does not delve into
policy issues relating to the appropriate rate and structure of each tax such as whether an
income tax should adopt a comprehensive base or scheduler system, or whether a value
added tax system should adopt a destination or origin principle. 38
1.5. Research questions
The main research questions which this thesis seeks to answer are as follows:
1. What is the jurisprudential nature of taxing powers and in what way(s) are they
distinguishable from legislative powers for the purpose of clarifying and reforming the
37
. These have been the focus of the various 1993 and 2003 Tax Study Groups which made fundamental
changes to the statutory framework of different taxes .
38
The task of designing the appropriate structure of each is so complex that two volumes of book have been
devoted to the subject. See Thuronyi, V, (ed) Tax Law Design & Drafting, Vols 1 & 2., (Washington: IMF,
1998).
37
basis of division of taxing powers under the Constitution of the Federal Republic of
Nigeria, 1999?
2. What is the evolutionary path and overriding principle of the framework for division of
taxing powers from the colonial period up till the Constitution of the Federal Republic of
Nigeria, 1999, and to what extent are they responsible for the current tension in inter-
governmental fiscal relations in Nigeria?
3. To what extent is the framework for division of taxing powers under the 1999
Constitution adheres to or diverges from the principle of fiscal federalism?
4.What policy of division of taxing powers and constitutional framework may help to
achieve the objectives of defederalization and diversification of the revenue base of
Nigeria?
1.6. Theoretical Framework
A discussion of division of taxing powers essentially straddles issues relating to law,
politics and economics. Okorodudu captures the multidisciplinary nature of taxing powers
when she opined that:
“Analysis of Federal and State Taxing Powers presents to the lawyers, the
accountants, the tax expert, the economist, the students of constitutional
law and indeed, millions of Nigerian a continuing intricate, but rewarding
insight into the growth of the fundamental grund norm which binds the
component parts of our country together as a federation. 39
39
Okorodudu, M.T., “Analysis of Federal and State Taxing Powers”, in Ajomo, MA, p.47 Supra note 6.
38
A meaningful study of problems of the allocation of taxing powers will thus have to be
undertaken from an interdisciplinary perspective.
1.6.1. Federalism
K.C. Wheare had defined federalism as a “method of dividing powers such that federal
and state governments are each, within a sphere, co-ordinate and independent.”40 The
writer believes that each level of government should have adequate resources to perform
its functions without appealing to the other levels of government for financial assistance.
He was emphatic about financial independence without which federalism is a farce.
According to him:
“If state authorities, for example, find that the services allotted to them are
too expensive for them to perform, and if they call upon the federal
authority for grants and subsidies to assist them, they are no longer
coordinate with the federal government, but subordinate to it. Financial
subordination makes an end to federalism in fact no matter how carefully
the legal forms may be preserved. It follows therefore that both state and
federal authorities in a federation must be given the power in the
constitution for each to have access to and control, its own sufficient
financial resources. Each must have a power to tax and to borrow for the
financing of its own resources.”41
40
See Wheare, K.C., Federal Government, 4th edn., (London: OUP, 1953), pp 2, 10, 35. The distinguished
writer recognises that a federation has different characteristics but choose to focus on a particular one which
in his view, makes a federal system unique. According to him “I have put forward uncompromisingly a
criterion of federal government. To the extent to which any system of government does not conform to this
criterion, it has no claim to call itself federal”
41
Id.
39
Wheare‟s definition has been criticised mainly on the ground that it is too legalistic and
inflexible.42 According to Jinadu, the definition had relied excessively on what Wheare
assumes to be the essential features of federalism in the United States in formulating his
federal principles.43 To that extent, Wheare‟s definition is static on the basis that no
federal system, in modern time, including that of the United States can satisfy the rigid
criterion of the federal and the component units being independent and coordinate. 44
Given that the definition of federalism has acquired a functional and dynamic dimension in
different societies in the light of the socio-political, economic and cultural forces, it is
generally agreed that any federal system should have certain irreducible features. There is
consensus among writers that “the vitality of the federal system lies in the fact that there is
no sacrosanct federal system but that there are many federal systems as there are federal
states in the world. Each federal system is a product of its environment. In order to make
their system work better, several federal states are either engaged in, or about to begin, the
process of reviewing their federal system. Therefore, the need to review each federal
system should not be regarded as a sign of weakness or as something to apologise for.”45
Nwabueze has identified certain principles which serve as useful guides in the
understanding and analysis of the workings of a federal system. 46 These are:
42
See Birch, A.H., “Approaches to the Study of Federalism” Political Studies, 14, 1 (1966), p.15, Riker,
W.H., Federalism; Origin, Operation, Significance, (Boston: Little, Brown Inc) 1964, pp. 98-99.
43
Jinadu, L.A., “A Note on the Theory of Federalism”, in Akinyemi, B., et al., (eds) Readings on Federalism
(Lagos: Nigerian Institute of International Affairs, 1979), p.16.
44
Birch, A.H., Federalism, Finance and Social Legislation in Canada, Australia and the United States ,
(Oxford: Clarendon Press, 1955), p.15, Vile, M.J.C., The Structure of American Federalism, (London:
Oxford University Press, 1968), p. 198
45
See the Preface to Akinyemi, B., et al., (eds) op.cit., See Note 71.
46
Nwabueze, B.O., Supra, pp 1-17 note 17.
40
(i) Each government must exist, not as an appendage of another government, but as
an autonomous entity in the sense of being able to exercise its own will in the
conduct of its affairs, free from direction by another government;47
(ii) Division of powers between different levels of government,
(iii) Principle of non-interference;
(iv) Equality between the Regional Governments;
(v) A supreme constitution
These principles will be used to analyse the extent to which the arrangement under extant
Constitution either adhere to or diverges from these principles.
1.6.2. Fiscal Federalism
The past half-century has seen a significant pressure towards defederalization or
movement towards federalism.48 Generally, reactions to excessive federalization have led
to demand for greater responsibilities or resources for regional or local governments. The
defederalization process has, therefore, rendered the study of what has been variously
called “multi level finance”, “fiscal federalism” and “fiscal defederalization”49 more
relevant.50
47
Id.p.1.
48
Ahmad, A & Brosio, G., “Introduction: Fiscal Federalism – A Review of Developments in the Literature
and Policy” in Ahmad, A & Brosio, G., (eds) Handbook on Fiscal Federalism (Cheltenham, UK,
Northampton, MA, USA: Edward Elgar, 2006) p.4.
49
K. Mensere, “Evaluating the Taxing Powers of Sub-Central Governments” 2000 IBFD Bulletin, p 133.
50
Ahmad, A & G. Brosio, Loc cit., p.4.
41
Agiobenebo, Tamunopriye has highlighted the principles that have been evolved to guide
intergovernmental fiscal relations in practice as follows:51
a. The Principle of Diversity. One of the arguments for the federal system is its
ability to accommodate a large variety of diversities. So, the fiscal system must
provide scope for variety and differences to adequately accommodate the supply of
national, regional (state) and local public goods.
b. The Principle of Equivalence. The geographical incidence of the various public
goods differs. Therefore, allocative efficiency requires the equalization of locational
advantages arising from interjurisdictional differences with a combination of taxes,
public goods and services.
c. The Principle of Federalized Stabilization. This principle requires the use of fiscal
instruments for achieving macro policy objectives (stabilization, growth, etc) at the
national level.
d. Correction of Spillover Effects. Efficiency of fiscal federalism requires that
interjurisdictional externalities be corrected by the system. Spillover effects or
interjurisdictional externalities refer to externalities (both benefits enjoyed and harm
suffered) by residents of different geo-political units because benefit regions for many
public goods and services are open entities. 52
51
Agiobenebo, T., “Asignmnet, Criteria and the Fiscal Constitution: An Excursion into a Theory of Rational
Fiscal Federalism in Nigeria”, in Fiscal Federalism and Nigeria;s Economic Development , Selected Papers
Presented at the 1999 Annual Conference of the Nigerian Economic Society, pp 41-3.
52
This requirement is intended to control for what in the fiscal decentraliza tion literature is referred to as the
“central city exploitation thesis” exploitation of economies of scale and the rationale for intergovernmental
grants. For example, effluent discharges into a tidal river joining a number of local government areas or
states will impact negatively on the welfare of the residents of all the states or local government areas and not
just the residents of the state emitting the discharge. Efficiency and equity require that the emitting entity
should internalize the cost of the external diseconomy. In the alternative, if this external diseconomy is across
42
e. Minimum Provision of Essential Public Goods and Services. This principle
requires that fiscal federalism should assure all citizens that, irrespective of where
they reside, they will be provided with a minimum level of certain essential public
goods and services.
f. Fiscal Equalization Principle. The existence of sharp regional differences in
resource endowment and concomitant differences in fiscal capacity of State and local
governments would indicate that some degree of fiscal equalization among the
various levels and units of governments is required in order to ensure minimum level
of public goods and services.
g. The Efficiency Principle. This principle has two dimensions in a two-step
hierarchy. At the first level, it requires that, collectively, the set of criteria directing
fiscal federalism should ensure efficiency in the allocation of resources in the Paretian
sense.53 The efficiency criterion, in practice, is implemented partially and loosely
through the criterion of absorptive capacity, which is not adequate. At the second
level, it requires that the collective principles of intergovernmental fiscal relations
should ensure that each level of government maximizes its internal revenue earnings
at minimum tax efforts with optimal distortion.
states, then the national government should intervene; and if it is confined to a state but across local
government areas, then the state government should intervene. See Agio benebo, T.J., Id. p. 42.
53
Pareto efficiency, or Pareto optimality, is an important concept in economics with broad applications in
game theory, engineering and the social sciences. The term is named after Vilfredo Pareto, an Italian
economist who used the concept in his studies of economic efficiency and income distribution. Informally,
Pareto efficient situations are those in which any (additional) change to make any person better off is
impossible without making someone else worse off given a set of alternative allocations of, say, goods or
income for a set of individuals, a change from one allocation to another that can make at least one individual
better off without making any other individual worse off is called a Pareto improvement. An allocation is
defined as Pareto efficient or Pareto optimal when no further Pareto improvements can be made. Such an
allocation is often called a strong Pareto optimum (SPO) by way of setting it apart from mere "weak Pareto
optima" as defined below. See “Pareto Efficiency” available online at
http://en.wikipedia.org/wiki/Pareto_efficiency accessed on 21 October 2009. See also, G. Cabresi,
“Transactional Costs, Resource Allocation & Liability Rules – A comment, 11 j. Law & Economics 67
(1968)
43
h. The Principle of Derivation. The derivation principle requires that the component
units of a federation be able to control some of their preferences in their own way
with their own resources.
i. The Principle of Locational Neutrality. Interregional fiscal differences tend to
influence locational choices both of individuals and firms. Given the natural
differences in resources endowments, differences in tax capacity and effort, some
degree of locational interference appears to be an inevitable cost of fiscal federalism.
The focus of policy therefore is to minimize the distortions arising from such
interference. Consequently, it is recommended that differential taxes which create
locational distortions should be avoided as much as practicable.
j. The Principle of Federalized Redistribution. The redistribution function of fiscal
policy through progressive taxation and expenditure programmes should be
federalized at the federal level. This principle is mutually consistent with that of the
principle of locational neutrality. In other words, if the redistribution function is
defederalized, it can lead to distortions in locational decisions.
These principles are not mutually consistent. Consequently, they are difficult to adhere to
simultaneously. Some of them conflict, thus calling for trade-offs. For example, the
principle of diversity may conflict with that of locational neutrality with attendant socio-
economic costs. Also, the principle of equalization of fiscal position in an attempt to
achieve horizontal equity, may conflict with the efficiency criterion because of the
disincentive effects of the former on labour mobility and productivity.
44
1.6.3. Theories of Division of Taxing Powers.
There are two main theories of division of taxing powers viz: (i) The
Conventional Model and (ii) The Public Choice Approach.
1.6.3.1. Conventional Model
Musgrave54 attempted to provide answers to this question by dividing, the functions
of government into three branches viz: (i) macroeconomic stabilization, (ii) income
redistribution, and (iii) resource allocation. He then proceeded to allocate taxes based on
their nature to help government in achieving these purposes. He thought that the
responsibility of income redistribution and macroeconomic stabilization should be
assigned to federal government because of the existence of spillover effects, whereas
resource allocation may be performed by all levels of government. It follows that
progressive personal income taxes and corporate income taxes should be assigned to the
federal government being best instruments for both income redistribution and
macroeconomic stabilization.55 According to him, all the levels of government should be
responsible for resource allocation through the use of benefit taxes.
Musgrave sees fiscal federalism as a system whose purpose “is to permit different groups
living in various States to express different preferences for public services which inevitably
leads to differences in the level of taxation and public services”.56 Against this background,
he provides some guidelines for the setting of local taxes. First, local governments should
54
Musgrave, R.A., “Who should Tax, Where and What”, in McLure, C.E., (ed), Tax Assignment in Federal
Countries, (Canberra: The Australian National University:1983), p.2
55
Ambrosanio, M.F. & Bordignon, M., “Normative versus Positive Theories of Reve nue Assignments in
Federations” in Ahmad, E & Brosio, G, eds. Handbook of Fiscal Federalism, (Cheltenham, UK,
Northampton, MA, USA:Edward Elgar, 2006), p.312.
56
Musgrave, R.A., loc.cit., p.179., Ahmad, E & Brosio, G, “Introduction: Fiscal Federalism – A Review of
Developments in the literature and Policy,” in Ahmad, E & Brosio, G, eds Supra note 75 ), p.4.,
45
levy taxes on relatively immobile bases or assets in order to prevent tax competition and
revenue losses. Second, they should levy taxes on bases that are evenly distributed among
jurisdictions, in order to prevent the generation of horizontal fiscal imbalances. Third, they
should levy taxes whose yields are relatively stable in real terms, to ensure expenditure
planning.57
The Conventional model is not free of criticisms. First, it rests on the assumption that
governments are benevolent and would always use tax revenue to maximise the social-
welfare of the people, which is not the case in practice. 58 Second, it does not take into
account the exercise of political power and bargaining in designing allocation of taxing
powers.59 In practice, the division of taxing powers is usually more of a product of
historical and political factors than economic factors. Third, it ignores the reality in the real
world that the states and local governments may also be involved in the functions of
economic stabilization and resource distribution. Fourthly, the most important and elastic
tax bases to the federal government will necessarily be assigned exclusively to the federal
government and inevitably put the federal in a stronger fiscal position vis-à-vis the states.60
57
Id, p.312.
58
See generally, Brennnan, G & Buchanan, J., “Normative Tax Theory for a Federal Polity: Some Public
Choice Preliminaries” in McLure, C.E., ed,, “Who should Tax, Where and What”, p.32., Supra note 81.
59
Id.
60
See Bird, M.R., Bird, R,.M., “Rethinking Tax Assignment: The Need for Better Sub National Taxes” IMF
Working Paper 1999, WP/99/175. Available online at
www.adb.org/Documents/Events/2002/Citizen_participation/FDP_LAC.pdf where the writer stated: “The
conventional model of tax assignment in a multi-tiers government structure basically assigns all productive
revenue sources to the central government. Since this prescription accords with the needs and wishes of most
central governments, it is not surprising that this is indeed the pattern found in most countries”.
46
1.6.3.1. Public Choice Theory
The public choice theory is attributed to the duo of Brennan and Buchanan. 61 The
theory is predicated on the assumption that politicians are like leviathans, and therefore,
cannot be trusted to use tax revenues to maximize the welfare of the citizenry in the
absence of appropriate checks and balances. Accordingly, the public choice theory
underscores the positive effect of tax competition among local governments as one of the
forces restraining tax design and budget size. Local taxes on mobile bases should,
therefore, be allowed to trigger competition in order to limit the power of governments to
set their tax rates too high. This is facilitated through the freedom of taxpayers to „vote
with their feet.‟62
The Public Choice approach rejects certain underlying notions of the Conventional Model
that: (i) the functions of economic stabilization is exclusive to the federal government; (ii)
the principal criterion of tax design is to minimize distortion in the economy; and (iii)
policy choices and preferences of the Federal Government are superior to those of the
lower levels of government. According to the Public Choice Approach, in countries where
States perform a measure of stabilization functions, there is no reason why they cannot co-
occupy the jurisdiction to impose taxes such as companies income and excise taxes.
Furthermore, as much as it is desirable to minimize distortion in a tax system, this may be
overridden by a higher political objective such as the observance of the basic tenets of
federalism. In a federal system, the Federal Government and each State have power to
61
See Brennan, G. & Buchannan, J., “normative Tax Theory For a Federal Polity: Some Public Choice
Preliminaries, in McLure, C., Jr. Tax Assignment in Federal Countries, (Canberra: Centre For Research on
Federal Finacial Relatiosn, The Australian National University, Canaberra, 1983), p. 52. .
62
See “Tiebout Model”, Available online at http://en.wikipedia.org/wiki/Tiebout_model. Site visited on 20
April, 2005.
47
pursue their respective policies within the limits of their powers. Where, there are
divergence in the approaches of the Federal and State, it does not and should not
necessarily follow that the policy choice of one is superior to the other. The Public Choice
Theory, for these reasons, rejected the terminologies of “higher” and “lower” in describing
the different levels of government and adopts instead “federal” and “subnational
governments”.63
Against this background, the Public Choice Approach recognizes that allocation of taxing
powers that actually prevails in any country inevitably reflects more on the outcome of
historical situations and political bargaining than the consistent application of any
Conventional principles.64 The approach emphasizes the need to establish an appropriate
legal framework which will ensure that each level of government has access to sufficient
revenue to match their fiscal responsibilities. In essence, each level of government should
not only have access to sufficient revenue but they should also be able to determine how
much to generate to meet their responsibilities as may be required from time to time.
The true test, therefore, is whether the arrangement adopted truly gives each level of
government the power to adjust its tax rate to meet its expanding expenditure profile, as
the need may arise from time to time. Applying the public choice approach to the
subnational governments, Richard Bird has this to say:
63
See generally Bird, R,.M., pp 6-7. Supra note 87
64
“In these circumstances, perhaps the most useful contribution economist can make to the debate is to
prescribe less what should be done than to suggest how the institutional structure within such prescriptions
are determined might be adjusted in order to produce the best p ossible results. This seems to be the best we
can do as well.” See Bird, R,.M., p.7, Id.
48
“It is critical to be clear that meaningful tax assignment refers to the
assignment of the ability (and responsibility) to determine own revenues in
some meaningful ways. Subnational governments may be fully financed
from what they (and others) may consider their “own” taxes. But if, as is
often the case in developing countries, they cannot decide which taxes
they levy, what tax base are, what tax rates are imposed, or how intensely
taxes are enforced, they actually have no control at all over revenues and
hence have really been “assigned” no revenue power at the margin-
though perhaps much revenue. The single most critical variable from this
perspective is control over the effective tax rate, preferably.”65
Within the foregoing parameters, the Public Choice Model Approach prescribes as
follows:
(i) the federal and state government may share taxes and or revenues;
(ii) the state and local governments should rely more on consumption taxes
such as general sales taxes, excises, etc;
(iii) the state and local governments may impose tax on income of
individuals, as a general rule, at a proportional rate.
(iv) the state and local governments may, subject to rigid controls, levy
taxes on corporate income but they should not rely heavily on such
taxes except other suitable alternatives are not available.
(v) Imbalance in the fiscal system should be addressed through the
following measures, inter alia: (i) constitutional grant of an independent power to States to
raise and administer taxes by their own legislation, (ii) grants, (iii) tax sharing, (iv)
surcharges.
The requisite intervention for coordinating the fiscal arrangement to address the trade offs
between federalization and defederalization of the tax system will have to come from the
65
Id.
49
federal government because much as the states and local government may try, they are not
likely to be able to overcome the challenge.
Notwithstanding the divergence in their analytical approaches, the Conventional Model
and Public Choice Approaches do appear to converge in their conclusions which could
serve as the basis for assessing the system of division of taxing powers in Nigeria being a
consensus between the two extreme positions. The convergence is summarised below.
First, taxes on highly mobile factors are best reserved for use by federal government,
whereas those on totally immobile factors often make ideal source of revenue for state
governments. This is likely to be true for both administrative and economic reasons.
Second, residence-based taxes, such as personal income taxes and retail sales and other
indirect taxes, are more likely to be appropriate for states and local governments than
source based taxes such as origin-based value added taxes66 and corporation income taxes.
Third, the fiscal capacity of the state and local governments may be sufficiently unequal
such that horizontal equalization67 is deemed to be appropriate. Finally, revenues assigned
to various governments may not conveniently match expenditure needs. In particular,
federal government may be better able to raise enough revenues than subnational
governments. If this is true, vertical grants may also be required. 68
66
Id
67
Id.
68
C.E. McLure, Jr. p.17.
50
1.7. RESEARCH METHODOLOGY
Black defines “legal research” as the finding and assembling of authorities that bear on a
question of law.69 Legal research has also been defined as a systematic study of the
applicable principles and rules on a subject matter. 70 It generally involves tasks such as
finding primary sources of law or primary authorities, searching secondary authorities for
background information on the subject71 and searching non-legal sources for investigative
or supporting information.72
This work has adopted mainly a library-based/doctrinal research method by considering all
the relevant provisions of the Constitution relevant to division of taxing power and the
judicial interpretations of same. In order to situate the current arrangement in the correct
perspective, we have undertaken a study of the evolution of taxing power in Nigeria by
considering the relevant constitutional framework of previous Constitutions since the
colonial era73 up till date. Information from relevant non-legal sources have also been
consulted and analysed for investigative and supporting information of the legal analyses
and findings. These sources include Reports of the various Study Group on Tax Reform in
Nigeria, Report of the various Commissions on Revenue Allocation in Nigeria and
magazine publications and newspapers reports, and so forth.
69
Black’s Law Dictionary, Bryan A. G., ed., (West Group, St. Paul, Minn., 8th ed., 200-?) p.915.
70
“Legal Research”, available online at http://en.wikipedia.org/wiki/Legal_research. Site visited on 4th
January 2008.
71
The primary sources of Law in Nigeria are the received English law, the Constitution and other Nige rian
legislations, Judicial decisions of superior courts, Nigerian customary law and international law while the
secondary sources include law texts, books, treatise, periodicals, journals and legal digest. See Olowu, D &
Lasebikan, F., “Sources of Law in Nigeria” in Introduction to Nigerian Legal Method, 2nd Sanni A.O., (ed,),
(Ile-Ife: Obafemi Awolowo University Press Ltd., 2006), pp.245-262.
72
See “Legal Research”, available online at http://en.wikipedia.org/wiki/Legal_research. Visited on 24th
September 2007.
73
Such as Littleton Constitution of 1954, 1960 Independence Constitution, 1963 Republic Constitution ,
1979 Constitution and 1999 Constitution.
51
CHAPTER TWO
2.0. LITERATURE REVIEW
2.0. Introduction
Fiscal decentralisation is at the heart of the relationship between the federal government and the
component units in a federal system.74 This is rooted in the fact that States that make up a
federation are not always equally endowed. Some may be fiscally strong while others may be
weak; some may have vast landmass and small population while others may have huge
population and small landmass, some may have mineral resources while other may be rich in
agricultural resources. In some ways, each state may have certain comparative advantages over
the other75 making interdependence an inescapable fact of life. What then should be the means of
resource mobilisation to finance the government at different levels? For instance, how much of
its fiscal power should a state give up as a price for the common good of the federal system?
Should taxes be collected centrally? How do we ensure that each level of government has access
to adequate revenue to discharge its functions? How do we ensure that States that are relatively
“poor and economically backward” have enough resources to provide the standard which the
nation has set as a minimum for its citizens and residents irrespective of their state or country of
origin? How do we ensure fairness and equity in the resolution of these questions and other
related issues? These may be easy theoretically, but they do generate varying degrees of inter
governmental fiscal frictions in virtually all federal systems. Thus, different federal systems have
74
Adamolekun, L., „Decentralization, Subnational Governments and Intergovernmental Relations” in Adamolekun,
L., (ed), Public Administration in Africa, (Ibadan: Spectrum, 2002) p.50.
75
The advantages may often have cost component in terms of disadvantages. For instance, State s with natural
resources such as the states in the Niger Delta may be faced with unique ecological and environmental challenges.
Also, a state with high population density such as Lagos may have huge budget for security, waste management,
traffic control, education and health among others.
52
developed different approaches to addressing these problems within the context of their socio
political and historical experiences.
The literature review shall be undertaken in four parts. The first would be devoted to federalism,
the second on tax, taxing powers and related matters, while the third will be on division of taxing
powers. The fourth part will focus on international perspectives of division of taxing power.
2. 1. Federalism
Ribstein & Kobayashi, in “The Economics of federalism”76 articulated several benefits of
federal systems. The first is called the “exit rights and voice” which underscores the right of a
voter to vote on what taxes to pay and choose among jurisdictions which provide the services in
the most efficient and effective manners. “By letting a voter supplement his “voice” with an
option to “exit” the jurisdiction, the right under federalism can powerfully check state
governments‟ powers to tax and regulate. Second, federal systems can increase economic growth
and development. For instance, the jurisdictions would interact through a common market, which
fosters growth and development. Third, the state jurisdictions can be laboratories to experiment
with various mixes of laws, taxes and services. Because decentralized governments are
presumably closer to their constituents, they are much more likely to possess superior knowledge
of local preferences and cost conditions. Fourth, even if the federal government could more
efficiently carry out some activities, considerations of “political efficiency” may justify assigning
such functions to the states.
76
Ribstein, L.E. & Kobayashi, B., “The Economics of federalism”, Illinois Law and Economics Working Papers
Series, Working Paper No. LE06-001, January, 2006. Available online at http://ssrn.com/abstract=875626. Site
visited 4th January 2008.
53
Olowoloni, G.D.,77 discusses the tension between the political and economic views of
federalism. The writer notes the conventional macro-economics theory that concentration of
functions and powers in the hands of the federal government is best suited to accelerate
economic development. This is based on the notion that classical federalism prevents economies
of scale in government and increases cost of administration. Centralisation of fiscal powers is
also advocated on the basis that it enables the economy to combat depression and inflation.
According to this school of thought, autonomous taxing, borrowing and spending activities of the
state and local government have typically run counter to an economically sound fiscal policy of
the central government and therefore intensified the violence of economic fluctuation.
However, not every economist believes that the centralisation of fiscal powers is what is required
to accelerate the rate of economic development. Some have argued that a short-run misallocation
of scarce resources is not dysfunctional for a federal political system.78 Olowononi argues in
favour of concentration of taxing powers in the hands of the Federal Government. According to
him, the arrangement is not only very economical but permits the efficient use of tax as a
regulator of the economy. It also enables the federal government to facilitate the process of even
development throughout the country through allocation system.
Osuntokun79 traces the history of Nigerian federalism from around 1898 to 1954 and the main
reasons for the amalgamation of the North and South of Nigeria in 1914 as follows: Colonialist‟s
desire to sustain the economically dry North with revenues from the economically buoyant
77
Olowoloni, G.D., “Revenue Allocation and Economics of Federalism” In Amuwo, K., et al., (eds) Federalism and
Political Restructuring in Nigeria, (Ibadan: Spectrum Books Limited, 1998), p.247.
78
Ibid.
79
See Osuntokun J, in “Historical Background of Nigerian Federalism” In Akinyemi, B., et al.,(eds) Supra Note ,
p.72.
54
South, and the practical impossibility of maintaining artificial barrier between the South and the
North. According to the writer, as far back as 1953 demand for revenue allocation on the basis of
derivation was considered a separatist tendency by the powers that be and a section of the
political class.
Another Commentator80 identifies three reasons usually given for allocation (transfers) of
resources from the federal government to the coordinate units. First is the nature of the functions
and revenue resources of the three levels of government. Second is the variation in the revenue-
raising capacities of the lower levels of government. Third is to encourage the coordinate units to
provide certain services which they otherwise may not be willing to provide on a sustainable
basis. The author also identifies the principles upon which inter-governmental transfers are based
such as principles of derivation; need; and national interest or even development. This work
identifies and categorises the historical development of federal finance in Nigeria up till 1974
into six different epochs namely (i) 1946-1952, (ii) 1952-1954, (iii) 1954-1959, (iv) 1959-1964,
(v) 1964-1969 and (vi) 1969-1974. It is remarkable that each of these epochs coincided with the
constitutional changes that took place in Nigeria during these periods.
The first and the second periods were characterized by revenue transfers based on the principle
of derivation. The second period witnessed, for the first time, what the author referred to as the
principle of Independent Revenue whereby the regions were empowered to impose specific taxes
and appropriate the proceeds for their use with the aim of promoting true federalism. The third
epoch witnessed the intensification of the fiscal autonomy and decentralization. The fourth
period, however, witnessed a reversal of the fiscal autonomy hitherto enjoyed by the regions by
enthroning revenue sharing formula based on need rather than derivation because of the disparity
80
Ibid, p.109.
55
in the level of development of the regions. This development was blamed on military rule and
perceived disadvantages of derivation as a principle of revenue transfers. The fifth period
continued revenue sharing based on the principle of need. The last fiscal period, between 1969
and 1974, was characterized by an admixture of derivation and need. The author concludes by
recommending that revenue transfers to lower levels of governments should be based on need to
promote even development in the country.
Elaigwu I81 focuses on the structure of federalism under successive military rule in Nigeria. The
writer notes that the Federal Government became more financially powerful by 1973 than it was
in 1967 due to higher revenue from crude oil export. Consequently, the federal government
assumed more responsibilities as a result of more revenue accruing to the centre and creation of
twelve States out of the regions.
In “Resource Control” Case: Towards Political/Legal Solution”, 82 Sagay equates “resource
control” with “fiscal federalism” which according to him has two major components viz: (i) the
power and the right of a community to raise funds by way of taxation on persons, matters,
services and materials within its territory, for example the right to raise and control Value Added
Tax (VAT); and (ii) the exclusive right to the ownership and control of resources, both natural
and created within its territory. According to the writer, the long term solution to the problems of
resource control and revenue allocation is to give every state “full control over its resources,
81
Elaigwu, I., “The Military and State Building: Federal-State Relations in Nigeria‟s “Military Federalism” 1966-
76”Ibid, p.155.
82
.Sagay, I.E, “The Resource Control” Case: Towards Political/Legal Solution, Nigerian Journal of Legislation,
January-March 2006, Vol 2, No. 1, p. 63.
56
while paying an appropriate tax (based on its income) to the federal government, while the other
part goes into the common pool for sharing among the other tiers of government.
Sagay admonishes Edo State, Delta State, Bayelsa State, Rivers State, Akwa-Ibom State and
Cross Rivers State (the Niger Delta or South-South States) to establish some common political,
economic and social structures as a vehicle for planning the political future of their area within
Nigeria, or if necessary, without Nigeria. The condition for the continued willing participation in
the ongoing Nigerian project must be the total ownership and control by the people of the South-
South of their God-given natural resources, or at the very least, a resort to the provisions of the
1960 Constitution on the revenue allocation, particularly the proceeds of mineral resources,
coupled with the right to have a decisive say in the control and management of the resources.
Osipitan83 rightly, in our view, underscores the need for cooperation between the different ties of
government as no government in a federation can be self-sufficient in its everyday requirements
of governance. According to the learned writer:
“Government, whether Federal, State or Local or even Military , (just like limited
liability companies) must operate through the instrumentalities of human agencies in
its day to day acts of governance. No level of government in a Federation can be self-
sufficient in its everyday requirements of governance. It therefore becomes
imperative for governments within the Federation to interact with one another. It is
these activities and interactions between the various levels of government through
their respective agencies that give rise to inter governmental relations”. 84
2. 2. Nature of Tax vis-a-vis Related Terms
83
“Inter-Governmental Relations and the 1989 Constitution: Problems and Prospects”, 1990, JUSTICE, Vol. 1, No.
2, pp. 27-39.
84
Id., at 28. .
57
Notwithstanding the general agreement85 that a tax has three major characteristics viz: (i)
it is imposed by government, (ii) it is intended for public purposes and (iii) it is a compulsory
payment, there seems to be confusion in the usage of the word “taxes”, “levies”, “charges”,
“fees” and “rates” in Nigeria. For example, the Taxes and Levies (Approved List for Collection)
Act,86 employs some of these terms indiscriminately as if they mean the same thing. 87 Sanni in
“Taxation in the Guise of Administrative Charges – Imperative of Curbing Abuses of Regulatory
Power for Revenue Purposes in Nigeria”88 draws attention to a growing trend in Nigeria whereby
Government‟s Ministries, Agencies and Parastatals charge administrative fees that are
disproportionate to the level of services being rendered and posited that such charges are taxes in
disguise.
The writer bemoans the imposition of a sum of N217, 000.00 as examination re-assessment fee
by the Nigerian Law School as an abuse of regulatory powers for revenue purposes. He
expressed the concern that if the frequent practice of hiking administrative fee is not curtailed, it
may defeat broader objective of regulation and service delivery as many citizens may be denied
access to certain services for which no alternative may exist. Although, there is yet no reported
case in Nigeria where a taxpayer has successfully challenged an administrative fee on the basis
85
Graetz, M. J. & Schenk, D.H., Federal Income Taxation, Principles and Policies, 4th ed., (2001) Femdof Press,
N.Y., p.1, Akanle, O., pp 4-5., Supra note 3, Naiyeju, K. The Value Added Tax- The facts of a Positive Tax in
Nigeria (Nigeria: Kupag Public Affairs, Nigeria, 1996), p. 9., Matthews v. Chicory Marketing Board (Vict), (1938)
60 C.L.R. 263 at 276.
86
No. 21 of 1998, Cap T1 LFN 2004.
87
For instance taxes are subject to certain rules which are not applicable to other terms. Such principles include
“there is no taxation without representation” and “taxing statutes are interpreted literally. Nothing is to be read in;
and nothing is to be read out.” See note 49.
88
Faculty of Law, UNILAG, Current Law Series, 2006, Vol 1, pp.1-41.
58
that it is unreasonably high compared to the level of services being provided, 89 he enjoins the
Nigerian courts to employ the concept of disguise taxes to void such charges should such a
matter come before them.
A consideration of contemporary literature on the problems of inter-governmental fiscal
relations has shown that it may be artificial to define taxing power from only the perspectives of
imposition and administration. Rather, the determination of the power must also take cognisance
of the allocation of all the other critical elements of a tax especially the determination of the rate.
The bottom line is the ability of a government to determine the extent of “its own revenue.”
Okorodudu posited that an “example of own revenue” was exemplified under the 1963
Constitution whereby the regions were given unfettered right to prescribe rates of tax and
personal allowances, and to decide upon their own method of assessment and administration
under their own laws within the general framework provided by Income Tax Management Act
(ITMA).90 The idea of the states being free to determine the rate of taxes within their
jurisdictions is also in sync with the prescription of the Conventional Model and Public Choice
Approach.
89
In Independent National Electoral Commission (INEC) v. Musa [2003] 10 W.R.N.1 it was held that a sum of
N100, 000.00 prescribed by INEC as a registration fee for political parties was not too high, the Federal Government
of Nigeria not being a Father Christmas.
90
Okorodudu, M.T., p. 34. Supra note 6 .
59
Akanle91 gave the nature and scope of taxing power a more extensive treatment. He posited that
taxing power had its origin in the implied common law powers of government. He submitted that
the power to tax is inherent in sovereignty just as the power to maintain law and order. Thus, a
sovereign state has an inherent power to determine persons and things to be subjected to taxation
and those to be exempted. Other literatures on taxing powers have been carried on within this
theoretical framework which has received judicial endorsement by the Supreme Court in the case
of Alhaja Ayinke Aberuagba & Ors v Attorney General of Ogun State.92 In the case, the Supreme
Court held that sales taxing power is implicit in the power of the Federal Government to regulate
trade and commerce under item 61(a) of the 1979 Constitution.
Erik Jensen93 notes that the specific limitations on taxing powers were not intended to be trivial.
The paper brings to the fore the difficulty that is often faced in practice in determining the ambit
of a particular type of tax vested on a level of government. The writer argues that the judicial
definition of “taxes on incomes” should be informed by the time honoured distinction between
income taxes and consumption taxes. The article challenges the US Courts to begin to take into
account constitutional issues that have been ignored in the past.
2.4. Division of Taxing Powers
91
Akanle, O. The Power to Tax and Federalism in Nigeria - Legal and Constitutional Perspectives on the Sources
of Government Revenue, (Lagos: Centre for Business and Investment Studies) 1988, p. 1.
92
1984 S.C. 20, (1997) NRLR Pt.1., p 51. The Supreme Court held that both the federal and state governments have
power to impose sales tax within the scope of their (legislative) powers under the Constitution notwithstanding tha t
the word “sales tax” was mentioned in the Constitution.
93
Arizona State Law Journal Vol 33, Number 4 Winter 2001,
60
In the first published Nigerian literature relating to division of taxing power Adebayo
Adedeji94 discusses the historical, political, constitutional, fiscal and economic background to the
evolution and problems of Federal Finance in Nigeria. The author was also critical of the
derivation principle which he regarded as the main cause of inter-regional rivalry and conflict.
According to him, the change which took place in the relative economic and financial position of
the Regions between 1946 and 1966 had shown that it is myopic for anyone to assume that one
region or area is certain to be the richer and another poorer in perpetuity. According to the
renowned writer, the financial arrangements under the 1960 and 1963 Constitutions were
inimical to effective and development-oriented fiscal policy because important fiscal powers (e.g
income tax, and produce price policy) essential to the formulation of a dynamic national fiscal
policies were given to the Regions. This structure, according to the distinguished writer ignores
the demands of efficiency in tax administration. Adedeji recommended as follows:
(i) the States should be persuaded to give up their income tax jurisdiction in favour of the
federal on the basis that the potentiality of income taxation as a tool of national fiscal
and economic control is too great to be left to the states. Alternatively, he advocated
that both levels of government could be given concurrent powers over personal
income tax. In this regard, the writer made a distinction between progressive personal
income tax and personal (poll) tax. Jurisdiction over the latter should remain with the
state governments, who should retain the revenues from it or share such revenues
with the local authorities;
(ii) he went further to advocate cooperation between the federal and states in the
administration of the taxes. The Federal Government could like the Canadian federal
94
Adedeji, A., Nigerian Federal Finance, Its Development, Problems and Prospects, (London: Hutchinson, 1969)
p.18.
61
government95 enter into specific agreements with individuals State governments.
Under such agreements, the participating State governments could, in return for
compensation, refrain from levying Personal Income Tax. Whatever arrangement is
eventually agreed to, the writer expressed the hope that the Federal Government
would be vested with the power administer the Personal Income Tax for its
independent use;
(iii) that jurisdiction over general sales tax should become concurrent. According to the
eminent writer, “at present it is now exclusively federal because of the rather buoyant
revenue position of the federal government in the past, no use had been made of this
tax. Had jurisdiction over it been concurrent, there is no doubt that some of the
regions, particularly those whose revenue positions have deteriorated during the years,
might have imposed a general sales tax to obtain additional revenue.”96 He concluded
his assessment of the fiscal system on the note that the country‟s leaders who mapped
out the constitution and its fiscal system draw up a charter for regional obscurantism
rather than a fiscal system designed for economy, efficiency, and equity.
Cotter, W.R97 written shortly after the commencement of the 1963 Constitution assesses the
evolution of taxing power in Nigeria from 1958 up till 1964 and the likely problems of
interpretation of the provisions of the Income Tax Management Tax Act (ITMA). He also
examines the problems created by the exclusive regional power on income of individuals which
led to the enactment of ITMA. First, there was a danger that a regional tax law might conflict
with double taxation agreements with foreign governments which the Federal Government had
95
Ibid, p.267
96
Ibid, p.267.
97
See Cotter, W.R, “Taxation and Federalism in Nigeria”, British Tax Review, March -April, 1964, pp.97-116.
62
made or might make in the future. Second, there was the danger of internal double taxation. For
instance, while the Eastern Region imposed tax on the income of its residents, the Western
Region on its part imposed tax not only on its residents but also on any income derived from the
Western Region regardless of the residence of the recipient. Consequently, a resident of Eastern
Nigeria working in Western Nigeria would have to pay income tax on his wages to both
governments.98 The writer noted that although some other countries, such as the United States,
have been able to cope with not only double but triple taxation of the same income, the Hick-
Phillipson‟s Commission thought it imperative to avoid such multiple taxation.
Adedotun Phillips99 views the allocation of taxing power as a matter for federal financial experts
rather than constitution makers. He is of the view that allocation of tax jurisdiction and the
sharing of revenue between the governments must be guided by some basic principles. The first
is the principle of fiscal independence which requires each unit of government to be given fiscal
powers (to raise and to spend funds) sufficient to perform its duties and functions while
simultaneously preserving its autonomy. Second, is the principle that exercise of taxing powers
should not jeopardise the economic circumstances and interests of the whole federation. Third is
the principle of efficiency which demands that a tax be assigned to the level of government that
will administer it efficiently at minimum cost. The fourth requirement is the adequacy and
stability of resources available to all the governments. The writer admitted that the principles are
by no means consistent and non-conflicting.
98
Ibid, p.99.
99
Phillips A., “Nigeria‟s Federal Financial Experience”, The Journal of Modern African Studies, Vol. 9, No. 3
9Oct.1971), p 389 where he stated: “Whatever the origin of a federation, whether aggregation or devolution, its
establishment at once raises rather three problems: how to allocate functions rationally; how to allocate taxing
powers; and how to share revenue between the governments of that federation. .
63
Phillips opines that it is ideal that the federal government should be the guarantor of the financial
stability of the whole federation and should be in a position to assist any regional governments in
financial difficulties. The writer noted that the allocation of taxing power in Nigeria in 1971 was
in consonance with the principles of the distribution of taxing power except with regards to the
allocation of jurisdiction over personal income tax to the regions. According to him „any
proposals for tax reform must clearly include a review of the role of personal income taxing
powers in Nigeria.
As far back as 1965, Ogruike100 has also voted for a federal personal income tax for the
independent use of the Federal Government in Nigeria. According to him, personal income tax in
other climes had proved to be a constant bulwark of fiscal strength in our age of world wars,
international tensions and the welfare state.. A uniform system of progressive income taxation
under federal control is about the most substantial foundation of a sound federal fiscal system.”
In the same vein, Sir Louis Chick had also advocated for a federal personal income in his
Commission‟s Report in 1953.101
Akanle102 approached the consideration of taxing power under the 1979 Constitution by
examining the scope of division of legislative power in section 4 of the Constitution.103 He
posited that a discussion of federal/state taxing power cannot be “effectively discussed without
100
Ogruike, C., in “The Aims of Nigerian Federalism”, The Nigerian Law Journal, 1965, Vol 1, p.200.
101
“Experience in other Federations has shown that where the field of income tax was left to regional governments,
the Federal government has later been compelled to enter it” See Cmd 9026 para 48. This trend was strongest in
Australia and Canada during, and immediately after the two world wars. In spite of the constitutional wide powers
of the Commonwealth and Dominion governments over taxation, both felt the need to have taxing priority over the
state and provincial governments. The acts of both governments were upheld by their judiciary in South Australia v.
Silver Bros Ltd [1932] A.C. 514.
102
Akanle, O, The Power to Tax and the Federalism, Legal and Constitutional Perspectives on the Sources of
Government’s Revenue,, Supra note 53.
103
Ibid., p.24.
64
first discussing briefly the division of Legislative Powers under it.”104 He concluded that the
Federal Government is in firm control of all the major taxes and therefore in a position to
generate surplus revenue while the states are left with far less insignificant taxes.
Okorodudu on her part traces the evolution of taxing power in Nigeria up the Military Rule in
1984 and examines the impact of the change in the structure of the constitutional framework
from Civilian to Military on the constitutionality of the existing State Income Tax Laws and
concluded that state income tax laws were null and void. She advocates the enactment of a new
complete and consolidating Decree to impose a tax upon personal income and for purposes
connected therewith. The intellectual ferment in her paper, perhaps, served as the springboard for
the enactment of Personal Income Tax Act (PITA) to bring income tax law and administration
into conformity with the provision of the 1979 Constitution which.
Okorodudu was poignant in her criticism of the structure as “strongly pro-Federal Government
and anti-competition”. The distinguished writer gave a helpful insight as to the possible policy
underpinning for this arrangement thus:
“Consequently, as if teleguided by past considerations tax matters which are

considered of overriding importance from national strategic and economic
perspectives and over which a uniform central regulation is desirable, most likely
with a view to avoiding competing and conflicting tax jurisdictions, were
appropriated to the Federal Government.” 105
104
Emiko,G.I. “An Analysis of Federal/State Taxing Powers” In Ajomo, M.A., (ed.)
Tax Law and Tax Administration in Nigeria (Lagos: NIALS, 1991), p.12 .12.
105
Okorodudu, M.T., Supra Note p.62 note 6.
65
Reacting to the overarching powers of the Federal Government, Emiko, advocated that a
restrictive interpretation should be given to the federal taxes in order to give accommodation for
the States. Following this approach, The writer posits that there is still scope for States would be
able to operate in many taxes expressly assigned to the Federal Government such as excise and
stamp duties and challenged the states to be creative in exerting their taxing power as far as it
could go. The writer advocated the introduction of Occupation or Privilege Taxes which
according to him are different from a tax on incomes, profits or capital gains.106
Sanni A.O.,107 posited that while a state has power to impose or reintroduce Sales Tax, it cannot
do so simultaneously with the administration of VAT without amounting to double taxation. His
argument is anchored on the fact that VAT on intra state supply of goods and services is now
deemed to be a State Law pursuant to section 315 of the 1999 Constitution subject to necessary
modification. Sanni goes beyond legalism and submits that the ambivalent position of Lagos
State Presents a political, moral and social dilemma and likes the development to “grabbing with
both hands. According to him, Lagos State should not be allowed to “to run with the hare and
hunt with the hounds!” While he encourages taxpayers to ventilate their grievances in court, he
expressed the hope that ongoing or future exercise on the review of the Constitution will “resolve
the nagging and thorny legal issues on the scope and extent of VAT/Sales taxing power in
Nigeria.
106
An occupation tax is one imposed upon “persons” for the privilege of conducting their established trade,
occupation or businesses. It is otherwise referred to as privilege tax. Althou gh it may be measured by the gross
receipts of the occupation taxed, it is not an income tax. The payment of an occupational tax is invariably made a
condition precedent to the exercise of the privilege involved. The power to impose it is inherent in every state and it
exists even under a constitution where enumerated powers of that state do not include it. It may be imposed as a
revenue measure or a regulatory measure or both.”, See Emiko, G.I., Supra, p.35. Note 127.
107
Sanni, A.O.,“Lagos State Sales Tax: Matters Arising”, in Popoola A,, (ed.) Essays in
Honours of Prof. D.A. Ijalaye, (Ile-Ife: Equity Chambers, 2006), p.188.
66
Ayua, I.A.,108 discusses the general problems of fiscal federalism in Nigeria and identifies the
sharing of revenue resources as between the Federal Government and the States and the States
inter se as a fundamental issue in Nigeria‟s federalism. According to him, at least 16 principles
of allocation have been used. These principles include: derivation, need, even development,
national interest, independent revenue continuity, minimum responsibility of government,
financial comparability, population, equality of states, national maximum standards, equality of
access to development, absorptive capacity, tax effort, fiscal responsibility and landmass. The
new criteria raise the main problem of the appropriate weight to be attached to each of them
which is closely associated with competition and conflicting demands of rich or developed states
vis-à-vis those of the poor or underdeveloped ones. The writer concludes that taking care of the
unevenness among the States in Nigeria will remain an important policy matter in the sharing of
national revenue resources.
109
Brosio,G. discusses the various instruments for extraction and sharing rent among different
levels of government. He reviews the arguments against and in favour of sharing the rent with
state governments. Non-petroleum provinces (in Canada) have traditionally adhered to the
principle that Canada is a single nation and a single community. If so, natural resources belong to
the federal government and should be shared among all provinces, and/or used for country-
building purposes. On the other hand, Petroleum producing provinces hold the opposite view,
108
Ayua I.A., “Nigerian Constitutional Scheme on the Sharing of Revenue Resources and Its Implementation: An
Assessment” in Nigeria: Issues in the 1999 Constitution, Ayua I.A., et al., (eds) (Lagos: NIALS, 2000), pp.125-
158.
109
Ahmad, E & Brosio, G., “The Assignment of Revenue from Natural Resources” in Ahmad, E &Brosio, G.,(eds,),
p.431. Supra note 75,
67
stressing the primacy of provincial/communities‟ right and that the national majorities are not
entitled to take natural resources away from where they are produced.
According to Brossio, ownership of natural resources, such as petroleum is not given the same
treatment across the world as ownership may be vested in the federal or state governments. In a
few countries private ownership is recognised. The owner, private individual or government, has
the right to decide on the use of the resource; for example, it can lease a forest to a firm that will
exploit it. In each case, the government aims to collect the maximum possible rent from the
resource.
A variety of instruments, which can be grouped into two categories: ex ante and ex post. With ex
ante instruments, the rent is collected by the government before the start of the exploration and
the exploitation of the resource. Typical ex ante instruments are auctioning of rights, and
payment of fixed fee for exploration and development. Ex post instruments are taxes and
royalties, free acquisition of equity and production sharing agreements. In other words, ex ante
instruments are targeted to collect expected rent, while ex post instruments will collect realised,
actual, rent. Ideally, all rent collecting instruments are available to any level of government.
A major feature concerning the exploitation of natural resources has to be borne in mind in
assessing assignment of taxing powers. The most important characteristic is the frequent, huge
geographic concentration of production which is pure geographical hazard. 110 Assignment of the
110
Petroleum production in Columbia is predominant in only two provinces; the Siberian Oblast of Tyumen
produces almost two-thirds of total Russian petroleum. In Argentina a single province, Nequen, produces more than
one-third of the total. The province of Katanga in the Democratic Repu blic of Congo possesses most of the mineral
68
right to the states governments tends to generate rivalries between the constituents units of the
same nations- between the central and local levels, and also across local governments. On the
other hand, the sharing of natural resources revenue, especially in developing countries with
large and unevenly distributed endowments of natural resources, often put considerable strains
on national unity. Brosio notes that there is increasing pressure for recognising the right of
subnational governments and, in some cases, indigenous communities, to a share of natural
resources. Minerals, petroleum, forests, hydropower energy and fisheries, are the main types of
natural resources that generate rents for local governments.
However, Brosio advanced three reasons against the allocation of taxing rights to the states.
First, if a tax is collected by a more efficient government, its net revenue will be higher. Usually,
the central government has more personnel and better organisation. This can be particularly true
for developing countries, where professional skill and organisation resources are generally
scarce. Also, tax authorities at the subnational levels generally do not have the sophisticated tax
administration required for dealing with big petroleum, or mineral international companies,
while the size and variability of potential revenue presents additional problems. The second
reason advanced against local taxation of natural resources is delay and variability in revenue.
This is a burden which state administration may find difficult to bear. The third reason is that
most of the taxes on natural resources are exported. Fourth, the tax rate setting and tax based
determination are better left to the central government, considering the national and even
international dimension of most natural resource extraction policies.
wealth of the country. This has fostered secessionist tendencies since the independence of the country (with strong
external interferences). See Brosio, G., Supra Note 75.
69
2.5. International Perspectives
This section is devoted to notable current international literature on Division of Taxing Powers.
Musgrave111 observes that the existing fiscal structures around the world have not been
established with fiscal logic but, rather, reflect the vagaries of geography and the historical forces
of nation making, wars, territory rivalry, colonialism, and regional disputes. The writer posits
that an adequate economic theory of efficient tax allocation calls for a joint analysis of tax and
expenditure functions.
Musgrave underscores the need for cooperation among different jurisdictions to overcome
practical limitations in the design of their tax structure. In this regard, each jurisdiction must
recognise that it cannot behave as it wishes and take account of possible retaliatory measures by
other jurisdictions. Otherwise, unbridled tax competition (war) becomes a negative sum game to
the group of jurisdictions taken together. In such situation, small jurisdictions are especially
threatened by base loss and have little opportunity for burden export.112 Musgrave posits that
cooperation must be guided by two basic principles viz: (i) Territoriality rule and (ii) Tax
neutrality. According to Territoriality rule, a jurisdiction is entitled to tax properties, income and
activities occurring within its territory including consumption of its residents and production of
consumer goods. This can be achieved by the origin-type product tax, such as a value added tax
and a destination-type product tax, such as a sales tax. Tax neutrality Rule prescribes that
interjurisdictional tax practices should not distort the flow of trade and factors and exclude the
use of discriminatory rates in order to advance the overall welfare of the group as a whole.
111
Musgrave, R.A., “Who should Tax, Where and What”, in McLure, C.E., (ed), Tax Assignment in Federal
Countries, (Canberra: The Australian National University:1983), p.2
112
Musgrave, R.A., supra note p.5.
70
Musgrave‟s work serves as springboard for a robust discussion of the subject of division of
taxing power by other writers.
Bird M.R. in his “Rethinking Tax Assignment: The Need for Better Subnational Taxes”113 notes
the recent tendencies to decentralise important expenditure in many countries resulting in
“irresponsible fiscal behaviour” by some state governments in their bid to generate revenue. The
unique contribution of this paper is that it draws attention to the fact that the emergence of VAT
has robbed states of the most significant source of their “own” revenue. This is because VAT is
generally assumed to be most suitable as a federal tax. With the exception of Brazil and a few
other countries114 In some developed countries, some balance was restored by allowing states
and in some cases local governments to “piggy back” on the national income taxes (for example,
by levying surcharges on the central personal income tax). But this option is not open to many
developing countries in which national government was able to secure little revenue from
personal income tax. Rather than trying to design grand and convoluted transfer systems in an
effort to bridge the resulting gap, Bird advocated that more adequate taxes should be made
available to the States. Bird suggests two useful guidelines for rethinking division of taxing
power problems in this regard. First, how much taxing power is vested in different levels should
depend on the assignment of spending responsibilities. Second, it is critical to be clear that
meaningful tax assignment refers to the assignment of the ability (and responsibility) to
determine own revenues in some meaningful way.
113
Available online at http://wwwlworldbank.org/wbiep/decentralization/module6/Topic06_printer.htm. Site visited
on 12th January 2006.
114
State VAT was generally regarded as an aberration.
71
Bird and Gendron in “VATs in Federal Countries: International Experience and Emerging
Possibilities”115 describes VAT as the biggest story of the third 20 th century since its evolution,116
The writers observed that it is hard to see what other major tax revenue sources state government
could utilise in developing countries other than retail sales tax. Considering that retail sales tax is
now almost an aberration,117 the emergence of VAT poses a serious problem for the finance of
state government since VAT is considered as most suitable for the federal government. For
example, McLure once noted that “it is not appropriate to assign the VAT to subnational
governments” Tait is also of the view that “the simplest way to run a federal-state sales tax
system (including VAT) is to adopt a form of revenue sharing..”118
The unique contribution of Bird and Gendron is their criticism of the the popular view that VAT
can only be used at the federal level and their conclusion that such an idea is not in sync with the
demand for fiscal autonomy by the states. According to the writers, there appears to be at least
three reasons why the question of state VAT needs to be reconsidered, particularly in federal
countries with important regional government. First, there are few other major revenue options
open to countries in which, for whatever reason, substantial expenditure responsibilities have
been shifted to lower levels of government, if those governments are to behave in a fiscally
responsible manner. Second, subnational VAT has now in fact been successfully operating in
Canada for decades and has also existed, if to less general acclaim, in Brazil for over 30 years.
Finally, several novel proposals have recently been made to overcome certain problems that
115
Bird, R.M & Gendron P., 2001, 1BDF Bulletin, p.203.
116
The evolution of modern VAT dates back to the reform of the French production tax in the early 50s. See Due,
J.F., Sales Taxation (Urbana: University of Illinois Press, 1965), p.23
117
Retail Sales Tax is still in use in US States and some Provinces in Canada.
118
Tait, A.A., Value Added Tax: International Practice and Problems (Washington, D.C.,: International Monetary
Fund, 1988), p..165.
72
some see with applying the system used in Canada to other countries in which tax administration
is less well developed.119
Canada probably provides the most curious example of co-existence and interrelationship
between sales tax and VAT. For instance, there is a federal VAT, the goods and service tax
(GST), which is imposed throughout the country. In one province (Alberta), the GST is the only
sales tax. Four provinces120 have a separate retail sales tax (RST) in addition to the GST. In
Prince Edward Island the provincial RST is applied to the GST-inclusive tax base. Three
Provinces121 have a joint federal-provincial VAT, called the Harmonised Sales Tax (HST), a tax
administered by the Federal Government at a uniform rate. Finally, Quebec has a provincial
VAT called the Quebec sales tax (QST) which is applied to the GST-inclusive tax base. The
QST is administered by the government of Quebec, which also administers the GST in the
province on behalf of the Federal Government. Canada thus offers a variety of interesting
situations: separate federal and provincial VATs administered provincially, joint federal and
provincial VATs administered federally, and separate federal VAT and provincial RSTs
administered separately.
The future of state VAT has been a concern for many years in countries like Brazil, Canada and
Argentina. Michael Keen, in “CVAT, VVAT and All That: New Forms of Value-Added Tax
For Federal Systems” embraces the challenge of how to deal with the fiscal dominance of the
Federal Government by discussing two schemes: the CVAT proposed by Varsano and further
developed by McLure and the VIVAT of Keen and Smith. While noting that neither is without
119
Bird, R.M & Gendron P, Supra., p.294
120
British Columbia, Sasketchchewan, Manitoba and Ontario)
121
Newfoundland, Nova Scotia and New Brunswick
73
flaws, the writer concludes that the key point, however, is that these conceptual developments
have taken us much closer to extending the VAT logic so as to allow the operation of distinct
VATs by lower-level governments within federal systems..
Wilson, “Tax Competition in a Federal Setting”122 writes that early models of tax competition123
that a rise in one region‟s tax rate may trigger mobile capital to relocate to other regions and
„race to the bottom” and „horizontal tax externalities is not without controversy. The writer
observes that there is now a literature on “welfare – improving tax competition”, much of which
is based on the notion that competition leads government to behave more efficiently than they
would in its absence. In this regard, one relatively recent development has been the construction
of tax competition models that contain an important role for a central government. This role
introduces a new externality, known as a „vertical tax externality‟, If the central government and
lower-level governments share the same tax base, then an increase in the taxation of this base by
one level of government may lower the size of this base for the other level of government. In
other words, with the cooperation of the federal and states, higher tax rates need not necessarily
negative externalities, which tend to lead to excessive taxation.
2.6. DISCUSSION
122
In Ahmad E & Borsio, G., Supra Note., p.339.
123
By Oate‟s (1972) and developed by Wilson (1986) and Zodrow and Mieszkowski (1986),
74
While there are plethora of literature124 and judicial decisions125 on the political aspects of
federalism in Nigeria, literature on the economic, especially taxation, aspects are rather lean. The
literature on economics of federalism reveal that federalism is not just a political but economic
devise to address human problems and improve the welfare of the people. 126 Therefore, if a
particular system is not advancing these laudable objectives it is symptomatic of a need for its
review. It is evident that Nigerian federalism is in dire need of reform. From a country that
seemed set on a path of development in the early sixties with potentials of emerging as a giant of
Africa, Nigeria now typifies perhaps the best example of wasted or missed opportunities.
Notwithstanding its enormous resources, the preponderant majority of Nigerians still live in
abject poverty. Corruption in public life became so much the order of the day that the country
recently emerged as the most corrupt nation in the world. 127
While it is generally agreed by Akanle, Emiko and Okorodudu, among others, that a dose of
decentralisation of powers is a necessary antidote to the Nigerian ailment, the normative
economic theory suggests that fiscal powers should be centralised in order to achieve efficient
124
See Awolowo, O, Path to Nigerian Freedom (London: Faber & Faber, 1947) p.47, Nwabueze, B.O., Federalism
in Nigeria under the Presidential Constitution (London: Sweet & Maxwell, 1983), Nwabueze, B.O., (1982),
Oyovbaire, S.O., “Federalism and the Balance of Political Power Under the 1999 Constitution” in Ayua, I.A., et al,
(eds), NIGERIA: Issues in the 1999 Constitution (Lagos: NIALS, 200), p.113, See generally, Akinyemi, B., et al.,
(eds), Readings on Federalism (Lagos: Nigerian Institute of International Affairs, 1979).
125
Attorney-General of Bendel State v Attorney-General of the Federation & 22 Ors [1982]3NCLR , Attorney-
General Federation v. Attorney-General Abia States & 35 Ors. [2002] 6 N.W.L.R. (Pt.764) 542, Attorney-General
of Ogun State v. Alhaja Ayinke Aberuagba. (1984) S.C. 20, [1985] 1 N.W.L.R., (Pt.- ) 395., Attorney-General, Ogun
State v Attorney-General, Federation (1982) 1-2- SC 13, (1982) 2 NCLR 166, Attorney General of Lagos State v.
Attorney General of Federation and 35 Ors. Suit No: SC/20/2008.
126
For instance, section 14(2)(b) of the 1999 Constitution provides “the security and welfare of the peo ple shall be
the primary purpose of government.” Section 16 (1) goes further to provide that “the State shall, within the context
of the ideals and objectives for which provisions are made in the Constitution – (a) harness the resources of the
nation and promote national prosperity and an efficient, dynamic and self-reliant economy; (b) control the national
economy in such manner as to secure the maximum welfare, freedom and happiness of every citizen on the basis of
social justice and equality of status and opportunity. See generally chapter 2 of the 1999 Constitution.
127
See “2006 Transparency International Corruption Perception Index”. Available online at
www.infoplease.com/ipa/A0781359.html. Site visited on 15th December 2008.
75
resource allocation, distribution and stabilisation of the economy. This prescription had made the
decentralisation of taxing power more difficult or slower than political powers. As a matter of
fact, the more states and local governments are created the lesser their fiscal power. The current
fiscal reality in Nigeria is that no state or local government is self sufficient in terms of its own
internally generated revenue.
The states are being saddled with increasing important responsibilities which make it imperative
to have access to more resources. Ironically, the taxing power of states is being threatened or
eroded by certain fiscal developments globally and domestically. Globally, the replacement of
sales tax (the best form of state tax) with VAT which is generally regarded as best administered
as a federal tax under revenue sharing arrangement has given rise to recent literatures which
challenge the notion of VAT as essentially a federal tax. The current trend in other countries
such as Brazil, Canada and Argentina is to design an appropriate state VAT.
Because of the revenue sharing arrangement in Nigeria, the focal point of public discourse has
always been on the “evolution of appropriate revenue formula”. The degree of lack of sensitivity
to the imperative of designing an appropriate constitutional framework for allocation of taxing
powers in Nigeria is worrisome. As remarkable as the case of Attorney General, Ogun State v
Alhaja Ayinke Aberuagba128 is on inter-governmental fiscal relations in Nigeria, it is regrettable
that the drafters of the 1999 Constitution completely failed to clearly allocate sales taxing power
to the Federal or State Government or both in view of the controversies generated in that case by
the same omission under the 1979 Constitution. This omission has given rise to the same
controversy in relation to the competence of the Federal Government to impose VAT under the
128
1984 S.C. 20, (1997) NRLR Pt.1 p 51.
76
1999 Constitution. If a problem that cropped up over two decades ago is yet to be resolved, the
question is when will the current problems be satisfactorily resolved? From the poor appreciation
of tax related issues by the judiciary in Nigeria, there is little hope for judicial resolution of the
issues in a satisfactory manner.
Taxes and Levies (Approved List for Collection) Act 129 which is designed to address problems of
multiplicity of taxes betrays lack of understanding of the meaning of a tax compared to other
related terms such as charges, fees etc. Yet the precise scope of these terms has to be borne in
mind for there to be a meaningful division of taxing power to avoid double taxation. .
Furthermore, in rethinking the basis of Nigerian federalism, it must be borne in mind that there
are costs for the adoption of a federal system just as there are benefits. Unlike the states whose
focus is limited to the advancement of the welfare of the people within their territories, the
federal government is concerned about the welfare of all and therefore responsible for
establishing and maintaining minimum standards, equalizing, protection of minority rights etc.
In fulfilling these mandates, measures of economic inefficiencies are inevitable in order to
achieve “political efficiency”. While economic prescription may dictate centralisation of taxing
powers, such a prognosis has been counterproductive in the light of developments in Nigeria.
Fiscal decentralisation is therefore to be preferred even if this will result in duplication of tax
authorities and duplication of compliance, which are technically regarded as inefficiencies. We
have seen in the example of United States how, for political reasons, the federal government has
refrained from imposing VAT in order to preserve states Retail Sales Tax.
129
Cap T2 LFN 2004.
77
Although the classical theory of federalism prescribes that both the federal and states should be
financially independent and coordinate, the reality is that federal government is usually in a
position to generate much more revenue than it requires compared to the states. This has made it
imperative to determine the basis of using the surplus revenue of the federal government. In
evolving the appropriate policy other problems of fiscal federalism requiring federal intervention
or coordination must be borne in mind. These include adequately compensating States for giving
up their taxing powers in favour of a centralised tax collection, addressing the problem of
spillovers among states in the provision of public goods, establishing a platform for inter-
jurisdictional or inter governmental cooperation usually in form of harmonization of taxes and
rates in order to attenuate problems of mobility and distribution of factors of production and
addressing the imbalance of revenue and development between states.
The problem with the current approach in Nigeria seems to be that too much emphasis is placed
on achieving horizontal equalisation in terms of revenue sharing. Under the current restructure,
all the tiers of government are virtually dependent on their monthly entitlement from the
Federation Account for their capital and recurrent expenditures. 130 As pointed out by Ayua,
Nigeria has experimented with at least 16 principles of allocation without success. (Highlight this
in the intro)
Sagay has suggested that we should go back to the 1960 and 1963 Constitutions under which the
Regions had substantial taxing power to raise their own revenue while distribution from the
common purse was based on principles which emphasised derivation. A major problem here,
however, is that the component units of Nigeria have been subdivided from four regions in 1963
130
Lagos State seems to be the exception as over 60 percent of its revenue are internally generated.
78
to thirty six States, a Federal Capital Territory, seven hundred and seventy four local
governments and six area councils.131 The proliferation of states has weakened the autonomy and
the voice of the states in the social political bargaining relating to inter governmental fiscal
relations.
A major recommendation made in this work is the adoption of a system of division of taxing
power which allows concurrent use of major taxes especially income tax and VAT/sales tax
among all the levels of government. As radical as this recommendation may seem, literatures
have shown that the recommendation had been made in the past. It is however remarkable that
the recommendations have not been improved upon in almost 3 decades since they were made.
The problem is perhaps attributable to the fact that with the emergence of an oil based economy
and military rule which drastically reduced the taxing power of states and reliance on tax revenue
generally, any suggestion that two or three levels of government should impose a tax will seem
to be unrealistic and academic. Therefore, in all the literatures during this interregnum, none has
suggested this model.
This work has recommended that the constitution should be amended to allow a concurrent use
of a few broad-based taxes such as income tax, VAT, Capital gains tax and stamp duties by both
the Federal and States for their independent revenue. This work has demonstrated the relevance
of such a paradigm shift as the panacea for the problem of fiscal federalism in Nigeria.
It allays the fears that might lead to excessive taxation or double taxation. This is because the
system works by crediting or deducting what has been paid to the lower levels of government
131
See section 3(1)&(2) of the 1999 Constitution.
79
either as a credit or deduction. In this way, each local government and state government are able
to get direct contribution from the individuals and activities within their territory, (a form of
incentive to maintain and improve their tax effort). It is inevitable that under the system, some
local governments or states will be richer than the other. The strength of the recommendation is
that at least some local governments and states might be financially self sufficient while the
surplus of the federal government can be organised in such a way to address the concern of the
poorer states and other problems of fiscal federalism. The ultimate challenge is to evolve a
system whereby each level of government will have access to sufficient revenue to discharge its
functions for the benefit of the citizenry. Thus, where there is reduction of the revenue accruing
to the federal government as a result of the changes proposed should be followed by a
corresponding reduction of its responsibilities and vice versa for the States.
80
CHAPTER THREE
CONCEPTUAL BASIS OF TAX & DIVISION OF TAXING POWERS
3.0. Introduction
The basic responsibilities of government include the maintenance of law and order, 132
provision and regulation of social infrastructures such as public roads, hospitals, airports
and schools, establishment and maintenance of organs and institutions of government, 133
establishment and maintenance of foreign relations with other countries, 134 maintenance of
diplomatic offices and provision of diplomatic services abroad.135 It is evident that funds
are required to discharge these responsibilities. There are four principal devices through
which a government can raise funds to discharge its functions. These are (a) printing
money; (b) raising loans; (c) charging for services rendered, and (d) taxation.136
The method of printing money to finance the public sector is prone to give rise to serious
economic consequences if not matched with the production of goods and services. 137 Loans
132
Law and order is maintained through institutions such as the Police, Army, navy and Prisons. Security of
lives and properties is said to be the primary objective and justification of a government. For various theories
of State and government, according to Batistat, “Property does not exist because there are laws, but laws
exist because there is property” See Batsita, F., “Property and Law”, in Selected Essays on Political
Economy, trans. Seymour C., ed (New York.: Foundation for Economic Education, 1964), p.97.
133
Such as the legislature, the judiciary and executive and the maintenance of the Civil Service.
134
This includes issuance of passports, establishment of embassies abroad, meeting obligations to
international organisations, etc.
135
Chapter 2 of the Constitution of the Federal Republic of Nigeria, 1999 Cap C23 Laws of Federation of
Nigeria, 2004(LFN) contains the obligation of the government to the people and the political, economic,
social, educational, foreign policy and environmental objectives of the governmen t, among other things.
136
Akanle, O, “The Government, The Constitution and the Taxpayer” in Tax Law and Tax Administration in
Nigeria, (Lagos: Nigerian Institute of Advanced Legal Studies, 1991), ed., Ajomo, M.A., p. 1.
137
For example, too much money in the economy without corresponding goods and services will lead to
hyper-inflation.
81
may prove to be costly in light of interests and conditions that may be attached to them. 138
In the case of charging for its services, in practical terms, a vast majority of government
services are difficult to allocate to specific beneficiaries. 139 If the enjoyment of government
benefits and services are directly tied to payments for these benefits and services that
would definitely be limited and accessible to those who can afford them. Consequently,
the quality of the benefits received by an individual will depend on the largeness or
otherwise of his purse. It is evident that commercialization of basic governmental services
may defeat the main purpose of government. Take for example, restricting the
maintenance of law and order only to those who can pay for them. This will be inimical to
the larger interests of the society because those who are unable to afford to pay for such
services will become endangered.140
While a combination of these methods can be, and are often employed to finance public
sector, it is ill-advised for them to be the major sources of funding for government. 141
138
Loans from international financial institutions such as the World Bank and the International Monetary
Fund (IMF) usually come with stringent conditions which may largely co mpromise the sovereignty of a
debtor country to determine its economic policies. For example, the conditions may require the devaluation
of the currency and removal of subsidies on some essential commodities etc. Writing on the effect of IMF
loan, a writer has this to say: “Who does not know that the IMF does not care a hoot about us? Who does not
know that Nigeria will continue to pay interests on the loan for ever and ever without any chance of ever
being able to pay the principal. Meanwhile, the IMF will have our economy by the balls manipulating it in
such a manner that its officials deem fit. They can say "devalue your currency!" "Ban importation of wheat!"
"Abolish UBE!" Like goons, our leaders will be scurrying to do their bidding, not caring about th e adverse
effects on the pulverized people they govern.” See Olusesi, T, “Paradigm Shift, Not IMF” available at
http://nigeriaworld.com/letters/2000/jun/302.ht ml. Site visited on 12 October 2007
139
For example, the police, the armed forces, roads, street lights, etc
140
Akanle, O., supra note 5, pp. 4-5.
141
External borrowing, especially from financial institutions such as the World Bank, International Monetary
Fund (IMF), etc usually come with conditions that will constrain the policy choices of a debtor country in
the management of its economy. For example, the creditors might prescribe the devaluation of the country‟s
currency and removal of subsidies on some goods and services. According to Ubok Udom, „Foreign capital
inflows are generally considered to bring economic benefits to developing countries. But they can also bring
costs, even in the case of grants. Thus, the need arises, especially in the case of loans, for weighing the
benefits against the costs and for ensuring that that net benefits accrue to the recipient country. See Udom
Ubok, E.U., “Development Through Dbt: Rationalizing the Cost of External Borrowing” Intereconomics,
82
Taxation is the process of transferring money from private hands into government treasury
in order to finance the public sector.142 Through taxation, government is able to generate
revenue for the provision of social services which cannot be provided on commercial and
private basis. Taxation is designed to provide government with a regular, dependable and
continuous source of revenue. A good tax system allocates the economic burden of the
taxpayers in a prescribed and understandable way that permits them to plan and pursue
their private affairs without fear of unexpected demands after the discharge of their
obligations.143 Taxation is usually regarded as the price of the social contract between the
government and the governed for the provision of basic goods and amenities. 144 Therefore,
every State, no matter how richly endowed it may be, usually requires some forms of
taxation from its citizens and or its residents. The significance of taxation was underscored
by Benjamin Franklin when he noted that “in this world nothing is certain but death and
taxes”.145 Section 24(f) of the 1999 Constitution for example provides that “it shall be the
duty of every citizen to declare his income honestly to appropriate and lawful agencies and
pay his tax promptly”.
Against this background, this chapter seeks to achieve three broad objectives. The first is
to establish the conceptual basis of tax and taxing power as a significant and indispensable
power of government in any nation. This is important because of the general low tax
Vol 14, No. 4, July 1979, p.168. Available online at

http://www.springerlink.com/content/a214946m35k06213/. Site visited on 3rd January 2010.
142
Graetz, M. J. & Schenk, D.H, Federal Income Taxation, Principles and Policies, 4th ed., (2001) Femdof
Press, N.Y., p.1
143
Fisher, G.W. “The Real Property Tax” in Handbook on Taxation, ed. Hildreth W.B., & Richardson, J.A.
(New York: Marcel Dekker Inc., 1999), p.101.
144
Naiyeju,J.K., Value Added Tax: The Facts of Positive Tax in Nigeria, (Nigeria: Kupag Public Affairs,
1996), p.12.
145
See“BenjaminFranklinQuote”. Available online at
www.brainyquote.com/quotes/quotes/b/benjaminfr151592.html. Site visited on 3rd February, 2010.
83
ethics146 in Nigeria and the seeming disconnection between the majority of people and
government in terms of discharging their mutual obligations towards each other.147 The
second objective is to define tax and taxing power within the context of this study and
distinguish between them and other related terms. The third objective is to examine the
limits of taxing power.
3.1. Functions of Taxation
The golden question is why does government levy taxes? Generally, there are three
categories of government‟s functions which justify the need to impose taxes. These are the
provisions of public goods and services, the distribution of resources and economic
stabilization.148 Each of these functions will be examined in seriatim.
3.1.1 Provision of public goods
Any society, whatever its socio-economic form, has to find some solutions to the
basic economic problem of planning its limited resources to meet unlimited needs thus
requiring that a rational choice be made about which needs should be met.149 The
production of goods and services with which to satisfy wants can take place in either the
146
Tax ethics is the norms of behaviour governing citizens as taxpayers in their relationship with the
government. Tax ethics is largely a determinant of the citizen‟s understanding and acceptance of his legal
obligation and the effectiveness of the law enforcement process, inter alia. See Song, Y. & Yarbrough, T.E.,
“Tax Ethics and Taxpayers Attitude: A survey” Public Administration‟s Review, Vol. 38, No.5. (Sep.-Oct.,
1978), p. 444.
147
There is a wide gap between the reasonable expectation of the teeming majority of Nigerians and the
performance of the government in terms of provision of social amenities and the needs of the citizenry.
Notwithstanding the fact that Nigeria is an oil rich country, it still ranks as one of the poorest and the most
corrupt countries in the world. Therefore, Nigerians are apt to question the rational for imposing (additional)
tax burden on them when government has failed to manage petroleum revenue efficiently. The argument is
that their tax revenue will also be similarly mismanaged by the government.
148
Miller A. & Oats L., Principles of International Taxation, (West Sussex: Tottel Publishing Ltd., 2006),
p.3.
149
Sanford, C., Economics of Public Finance, 4th edn., (United Kingdom: Pergamin Press Ltd, 1960), p.1.
84
private or the public sector; and their supply can either be financed through the normal
market mechanism or through taxation.150 The normal (private) market can function only
in a situation where the “exclusion principle” applies, i.e., where A‟s consumption is made
contingent on A paying the price, while B, who does not pay, is excluded. 151 However,
there are certain goods and services which have to be jointly provided and financed for the
overall welfare and security of everyone in the society. Such goods and services are
collectively called public or social goods. These are goods which are provided by the
Government principally because of the jointness of their consumption. Therefore, the first
need for taxation is the provision of public goods.152
Public goods can be divided into four categories viz: (i) private public goods; (ii) impure
public goods; (iii) pure public goods and (iv) merit goods.153 Private public goods are those
whose consumption is both enjoyed individually and capable of being made contingent
upon payment. Electricity and water are ready examples of such private public goods.
Impure public goods are those whose consumption is both collective and capable of being
made contingent upon payment. Payment of toll for usage of highways is an example of
impure public goods. Merits goods are goods which are provided by the Government
mainly because of the likelihood of their under-consumption by the populace due to
ignorance and externalities. Such merit goods are education and health services. For
example, the choice of an optimum amount of education may be too difficult for many to
150
Prest A.R. & Barr N.A., Public Finance in Theory and Practice, (London: Weidenfeld & Nicolson, 1985),
p.21.
151
Musgrave R.A. & Musgrave P.B., Public Finance in Theory and Practice, (New York: Mc-Graw –Hill
Book Company, 1984), p.48.
152
Allan, C.M., The Theory of Taxation, (Middlesex, England: Penguin Books Ltd, 1971), p.17.
153
Taiwo, I.O, “Fiscal Federalism: A Theoretical Framework” in Fiscal Federalism and Nigeria’s Economic
Development (Selected Papers Presented at the 1999 Annual Conference of the Nigerian Econo mic Society),
(Ibadan: The Nigerian Economic Society, 1999), p.5.
85
understand. Even if the private benefits are understood, the external benefits accruing to
the society as a whole as a result of literacy and numeracy cannot be taken into account in
a normal market economy.154 Pure public goods are those whose consumption is collective
and not contingent upon payment. Defence, International relations and fresh air are
examples of pure public goods.155 Their consumption is joint because the more one person
consumes, the more every other person consumes. 156 For instance, the more street lighting
a person gets the more street lighting everyone in that street gets. 157 In the economic
parlance, pure public goods are described as “non-excludable and/or non-rival in
consumption, subject to capacity constraints. 158 In other words, they are goods whose
provision benefits virtually everyone including those who did not or who are incapable of
paying for them, therefore leading to free riders concept. 159
Thus, the extent to which public goods generally are provided depends largely on the
policy of each government and the level of development.160 In some economies, private
154
For example, living and working in a modern advanced society requires a certain minimum level of
knowledge and training. But if anyone fails to reach this standard the penalties for not do ing so will be borne
to some extent by the community in general as well as the man himself. If for instance, a man who cannot
read is allowed to drive a car and because of his inability to observe traffic direction gets himself involved in
an accident, he suffers himself; but so do the other parties to the accident. Even if the benefits of education
are understood, the ultimate consumer is usually not in a position to pay for his education until after he has
consumed it. See Allan, C.M., p.14 supra note 21.
155
Taiwo, I.O., , supra note 22, p.6.
156
A pure public good can be contrasted with a private good such as food where the more one person
consumes the less is left for others.
157
Allan, C.M., supra note 21, p.14.
158
Agiobenebo, T.J., “Assignment, Criteria and the Fiscal Constitution: An Excursion into a Theory of
Rationale Fiscal Federalism”in Fiscal Federalism and Nigeria’s Economic Development, p.29, supra note 22.
159
Party that enjoys a benefit accruing from a collective effort, but contributes little or nothing to the effort.
Free riders take advantage of public goods without having to contribute to them. The concept of the free
rider closely relates to the Tragedy of the Commons . Garrett Hardin , the originator of that idea, said that
people would overuse resources that were unlimited to them. See “Free Rider”,
http://library.thinkquest.org/26026/Economics/free_riders.html. Site visited on 10th January 2010.
160
Nigeria operates a mixed economy. See Chapter 2 of the Constitution of the Federal Republic of Nigeria,
1999 for the duties and responsibilities of the government. See O. Akanle, Nigeria Income Tax Law and
Practice (Centre for Business and Investment Studies Limited, Nigeria, 1991), p. 4
86
public goods and impure public goods are provided by the private sector, subject to
government regulation.161 In some others, private public goods and impure public goods
are provided by governments, usually through corporations that operate as monopolies.
Until recently, the „major sectors in the Nigeria economy‟162 were managed, operated and
controlled exclusively by the Federal Government. However, since the commencement of
the privatization and commercialization policy of the Federal Government recently, the
private sector is now allowed to operate businesses such as telecommunication, airline,
shipping, radio and television broadcasting, etc. 163
3.1.2. Distributive functions
There may be disputes about the level of provisions for the poor. However, there
seems to be a general agreement that this is a proper function of government in the pursuit
of social welfare. Thus, beyond generating revenue for the government, taxation also aims
at achieving a measure of income redistribution.164 This means mobilising resources from
the private sector and directing them according to perceived needs through the provision of
social services for the benefit of all including those who ordinarily may not be able to
161
In recognition of the economic reality that there are many poor people who may not be able to pay for
such goods, governments in the developed countries have developed a system to relatively support those who
are unemployed, unemployable, sick or disabled either through a social security or social welfare system.
162
See s.16(4) of the 1999 Constitution provides For the purposes of subsection (1) of this section - (a) the
reference to the "major sectors of the economy" shall be construed as a reference to such economic activities
as may, from time to time, be declared by a resolution of each House of the National Assembly to be
managed and operated exclusively by the Government of the Federation, and until a resolution to the contrary
is made by the National Assembly, economic activities being operated exclusively by the Government of the
Federation on the date immediately preceding the day when this section comes into force, whether directly or
through the agencies of a statutory or other corporation or company, shall be deemed to be major sectors of
the economy; (b) "economic activities" includes activities directly concerned with the production,
distribution and exchange of weather or of goods and services; and (c) "participate" includes the rendering of
services and supplying of goods.
163
See generally, Nigerian Investment Promotion Commission Act, Cap N.117, LFN, 2004, Foreign
Exchange (Monitoring and Miscellaneous Provisions) Act , Cap F.34, LFN, 2004 and Public Enterprises
(Privatization and Commercialization) Act, Cap P38, LFN, 2004.
164
Allan, C.M., supra 21,pp 17-18
87
afford them.165 If a society were to operate on the basis of purely market economy, a few
may have more than enough while leaving a large section of the population destitute. 166
The basis of taxation has been summarised thus:
“Taxation is concerned with two problems. First, how to finance the provision of
those goods - defence, law and order are examples - which a market
economy cannot easily provide: call them public or collective goods. Second,
to finance those programmes which will eliminate the side effects of a market
economy - poverty, unemployment, urban blight and atmospheric pollution:
these are the public bads, usually discussed in social economics. Goods and
bads both arise because of deficiencies in the system of ownership rights in a
private enterprise economy. If I build a beautiful house someone else has a
pleasant view. If I do not possess the skills to earn a living wage who should
I blame for my genetic make-up? The imperfect market in parents? And there
can never be a once-and-for-all resolution of goods and bads since these
depend upon the changes thrown up by the hierarchy of wants which is how
tax problems are always with us.”167
3.1.3. Economic Stabilization
The third purpose for which taxes are imposed is economic stabilization. Without
public policy guidance, the economy tends to be subject to substantial fluctuation from
time to time which may lead to unemployment, inflation or even economic depression. 168
Governments often use taxation as part of the fiscal policy instruments for controlling, or
at least influencing the economy to achieve set objectives. 169 Thus, economic stabilization
may require the adjustment of the tax rate to curb inflation, encourage savings and foreign
investments and increase capacity utilization by companies. For example, in the 1930s,
with the United States reeling from the Great Depression, the government began to use
165
Miller, A. and Oats, L, supra note 17, p4
166
For example, those who through mental, physical or temperamental accident do not make much or any
contribution to output and whose parents did not provide a legacy of productive assets.
167
McCormick, B.J in his Editorial Foreword to, Allan, C.M., p.9 supra note 21.
168
Musgrave, R.A. & Musgrave, P.B., p.13, supra note 20.
169
Miller, A. and Oats, L, supra note 17, p4
88
fiscal policy not just to support itself or pursue social policies but to promote overall
economic growth and stability as well.170 President Bill Clinton was able to turn the
economy of the United States around from deficit to surplus through a tax policy. He is
generally acknowledged to have left office with the longest boom in US history.171 It is
therefore not surprising that developed countries have been reforming or adjusting their tax
system as part of the responses towards overcoming the challenges of the current global
economic meltdown.
In the light of the above, the system of division of taxing power in a country is bound to
affect how well these functions are performed. For example, a progressive personal income
tax and companies income tax are best suited for the attainment of the functions of
redistribution and economic stabilization. Since matters of economic stabilisation have to
do with macro-economic issues, a misallocation of these taxes to a lower level of
government may be dysfunctional. The general principle, therefore, is to allocate such
taxes to the federal level while taxes that have local benefit are allocated to the States.
170
Policy-makers were influenced by John Maynard Keynes, an English economist who argued in The
General Theory of Employment, Interest, and Money (1936) that the rampant joblessness of his time resulted
from inadequate demand for goods and services. According to Keynes, people did not have enough income
to buy everything the economy could produce, so prices fell and companies lost money or went bankrupt.
Without government intervention, Keynes said, this could become a vicious cycle. As more companies went
bankrupt, he argued, more people would lose their jobs, making income fall further and leading yet more
companies to fail in a frightening downward spiral. Keynes argued that government could halt the decline by
increasing spending on its own or by cutting taxes. Either way, incomes would rise, people would spend
more, and the economy could start growing again. If the government had to run up a deficit to achieve this
purpose, so be it, Keynes said. In his view, the alternative -- deepening economic decline -- would be worse.
Keynes' ideas were only partially accepted during the 1930s, but the huge boom in military spending during
World War II seemed to confirm his theories. As government spending surged, people's incomes rose,
factories again operated at full capacity, and the hardships of the depression faded into memory. After the
war, the economy continued to be fuelled by pent-up demand from families who had deferred buying homes
and starting families. See “Fiscal Policy and Economic Stabilization” Available at
http://economics.about.com/od/monetaryandfiscalpolicy/a/stabilization.htm. Site visited on 12th December
2007.
171
During the eight years of his presidency, the economy expanded by 50% in real terms, and by the end of
his tenure the US had a gross national product of $10,000bn - one quarter of the entire world economic
output. See “Bill Clinton's economic legacy” available at http://news.bbc.co.uk/1/hi/business/1110165.stm.
Site visited on 12th December 2007
89
3.2. Tax and Right to Property
Notwithstanding the essential nature of social services, it would be unrealistic to expect
people to voluntarily contribute to the government purse on a continuous basis. It is
unexpected that people will resist parting with their private wealth for the provision of
social services.172 Rather, they will prefer to retain and enjoy as much of their wealth
during their lifetime and or preserve them for their estate for the benefit of beneficiaries of
such estate after their death.173 Such expectation is not misplaced because the right not to
be arbitrarily deprived of one‟s property has traditionally been regarded as a „fundamental
right‟.174
The right to own and enjoy property are of central importance to common law. As rightly
noted in Entick v. Carrighton175 that:
“The great end for which men entered into society was to secure their
property. That right is preserved sacred and incommunicable in all
instances where it has not been abridged by some public law for the good
of the whole.”176
According to Blackstone the third „absolute right inherent in every Englishman‟ 177 is that
of property “which consists in the free use, enjoyment of all his acquisitions, without any
control or diminution save only by the law of the land.”178 Although his statement was
qualified by reference to the „laws of the land‟, Blackstone was still of the view that the
172
, W.B., & Richardson, J.A., “Introduction”, Handbook on Taxation, supra note 12, p.1.
173
S.O. Fashokun, “An Assessment of Efforts Against Tax Avoidance and Evasion. The Legal viewpoint”,
The Nigerian Law Journal of Contemporary Law, vol. 7 Nos. 1 and 3 April and Dec. 1976. p. 16.
174
Davis v. Mills (1904) 194 US 451, per Holmes J.
175
(1765) 19 State Tr 1029..
176
Id at 1060.
177
The first two being personal security and personal liberty.
178
Reproduced by Claytron, R. & Tomlinson H, The Law of Human Rights, (Oxford: Oxford University
Press, 2000), para 1802.
90
regard of the law for private property was so great “that it will not authorise the least
violation of it: not even for the general good of the whole community.”179
The right to property is also central to the United States Bill of Rights 180 and a striking
feature of the Universal Declaration of Human Rights. 181 The right is also enshrined in
Section 44 (1) of 1999 Constitution thus:
“No moveable property or any interest in an immovable property shall be

taken possession of compulsorily and no right over or interest in any such
property shall be acquired compulsorily in any part of Nigeria except in
the manner and for the purposes prescribed by a law.”182
Rights especially fundamental rights are not absolute. There are always exceptions to
rights. Accordingly, the right to property is not immutable.183 A measure of derogation is
lawful in the interest of defence, public safety, public order, public morality or public
health.184 Section 44(2) (a) of the Constitution expressly recognises taxation s exemption to
the right to property. It provides:
179
Id.
180
The Fifth Amendment to the US Constitution states that „No person shall…. be deprived of …. property
without due process of law; nor shall private property be taken for public use, without just compensation.”
See The Bill of Rights (Yale University Press, 1998) pp.79-80.
181
See Article 17 of the Universal Declaration of Human Right.
182
See section 44(1) Constitution of the Federal Republic of Nigeria, 1999. Right to property is also
protected by Article 17 of the Universal Declaration of Human Rights and Article 14 of the African Charter
on Human and People‟s Right.
183
There is a general derogation to all the fundamental human rights contained in Chapter IV of the
Constitution in section 45(1) which provides that “Nothing in section 37, 38, 39, 40 and 41 of this
Constitution shall invalidate any law that is reasonably justifiable in a democratic society – (a) in the interest
of defence, public safety, public order, public morality or public health. ; or (b) for purposes of protecting the
rights and freedom of other persons.
184
Section 45(1)(a) CFRN, 1999.
91
44(2) “Nothing in subsection (1) of this section shall be construed as
affecting any general law –
(a) for the imposition or enforcement of any tax, rate or duty.”185
Against this background, it is respectfully submitted that all the treaties and
constitutional provisions and statements affirming the right to property should be construed
as protecting property rights only against unlawful interference. They do not prohibit
lawful invasion, that is, the usurpation of the right by tax legislation. Thus, the rights to
property may be abolished, restricted, regulated or terminated by statute. The prospect of
such restriction of the right to property has made a writer to comment that:
“While in democracy other fundamental rights tend to thrive and flourish,

there is a marked tendency on the part of a sovereign Parliament, elected
by universal suffrage, to restrict property rights. It is a case of the rights of
a perpetual minority being at the mercy of politicians dependent on the
pleasure of the majority.186
There is however a presumption against the loss or abridgment of a person‟s
property right without clear words. Dicey puts it poignantly in these words:
“…but the point remains that all taxes are imposed by statute, and that no
one can be forced to pay a single shilling by way of taxation which
cannot be shown to the satisfaction of the judges to be due from him
under Act of Parliament.”187
185
See section 44(2)(a) 1999 Constitution.
186
Fundamental Rights, (London: Sweet & Maxwell, 1973), pp.73-74.
187
Dicey A.V., Introduction to the Study of the Law of the Constitution , (London: Macmillan & Co. Ltd.,
1959) p.315.
92
In the same vein, Lord Wilberforce had this to say in Vestey v Inland Revenue
Commissioners:188
“Taxes are imposed on subjects by Parliament. A citizen cannot be taxed

unless he is designated in clear terms by a taxing Act as a taxpayer and the
amount of his liability clearly defined. A proposition that whether a
subject is to be taxed or not, or that, if he is, the amount of his liability is
to be decided (even though within a limit) by an administrative body
represents a radical departure from constitutional principle.”189
Therefore, an arbitrary exaction is not a tax. It must be possible to point to the criteria by
reference to which the liability to pay the tax is imposed and to show that the way in which
the criteria are applied does not involve the imposition of a liability in an arbitrary or
capricious manner.190
However, where a tax is lawfully imposed by the government, the enforcement of the
provisions of the law will not amount to an infringement of the right to property. In First
Bank Plc v A.G. Anambra State,191 the Federal High Court discountenanced the argument
that the exercise of the power of the tax authority to distrain a taxpayer for non-payment of
tax was a violation of his rights. The Court held that:
“It cannot be said that imposition of a tax on taxable person, amounts to

violation of his fundamental rights under the Constitution. The imposition
of taxes is authorised by law”.192
188
[1980] AC 1148, p.1171.
189
At p. 1189.
190
DFC of T v Brown (1958) 100 CLR 32, 40.
191
(2000) 1. N.R.L.R., p.129.
192
Id. at p.142.
93
It is important to clearly define the concepts of „tax‟ and „taxing power‟ within the context
of this work. This is because some related words or concepts are often used
indiscriminately by policy makers and in legislations. There seems to be a lot of confusion
in the use of the word “taxes”, “levies”, “charges”, “fees” and “rates” in Nigeria. The
Taxes and Levies (Approved List for Collection) Act 193 employs some of these terms
indiscriminately as if they mean the same thing as a tax. A tax by its very nature is
fundamentally different from some of these terms and is subject to different rules.194 The
distinction between a tax and these terms is particularly important in the context of this
work in order to bring to the fore the prevalent practice whereby various government
departments, agencies or parastatals charge exorbitant amount of money that are in the
nature of taxes under the guise of fees, levies, rates or charges. It is our view that illegal
taxation by different levels of government in Nigeria has continued unabated partly
because of the failure to clearly make a distinction between a tax/taxing power and the
other related concepts.195
3.3.1. What is a tax?
The Oxford English Dictionary defines a tax as “a compulsory contribution to the
support of government levied on persons, property, income, commodities, transactions, etc,
now at a fixed rate mostly proportionate to the amount on which the contribution is
193
LFN. 2004, first enacted as Taxes and Levies (Approved List for Collection) Decree No 21 of 1998.
194
Another tax principle is that taxing statutes are to be interpreted literally. Nothing is to be read in; and
nothing is to be read out. See Brandy Syndicate v. IRC [1921] K.B. 64.
195
This problem is usually described as “multiplicity of taxes and levies”. This writer argues that the
description is inappropriate since it is a necessary consequence of a federal system that there will be local,
state and federal taxes. Alternative phrases of “disguise taxes” or “illegal taxes” are suggested.
94
levied.196 Tiley has criticised this definition on the basis that “when stripped of its limited
view as to the purpose of taxation, its irrelevant description of the tax base and its undue
stress on proportionate as opposed to progressive taxation, tells us very little, beyond the
fact that taxes are compulsory.197 The Black‟s Law Dictionary defines a tax as “an
imposition made for general public good or purpose. Public purpose is defined as an action
by or at the direction of a government for the benefit of a community as whole”.198 This
definition is deficient because of its failure to make any reference to the taxing authority
and the subject of taxation. Chief Justice Latham of Australia (as he then was) defined tax
as a compulsory exaction of money by a public authority for public purposes or raising
money for the purposes of government by means of contributions from individual
persons.199 This definition fails to underscore the compulsory nature of tax. It also gives
the wrong impression that tax is voluntary with the use of the word “contribution.” Akanle,
defines a tax as “a compulsory levy imposed on a subject or upon his property by the
government having authority over him. 200 This definition evidently fails to underscore the
element of tax as an imposition for public purposes.
In recognition of the fact that definitions are often arbitrary and ad hoc, therefore, making
it difficult if not impossible to have a universally acceptable definition of numerous legal
concepts, it may be useful to focus on the major attributes of a tax rather than the
definition. Thus, three major attributes can be deduced from the various attempts to define
196
Oxford Advanced Learner’s Dictionary, ed. S. Wehmeir, (Oxford University Press, 6th edn. 2001), p1227.
197
See Tiley, J., Revenue Law, (United States: Hart Publishing, 2005), p.3.
198
Black’s Law Dictionary, ed Bryan A. Garner, 7th edn., (St. Paul, Minn: West Group,1999), p.1245.
199
Matthews v Chicory Marketing Board (Vict), (1938) 60 C.L.R. 263 at 276.
200
See O. Akanle, supra note 29, p4. Naiyeju also defined “tax” as “a compulsory payment levied on the
citizens by the government for the purpose of achieving its goals. See J.K. Naiyeju, p. 12, supra note 13.
95
a tax. These are: (i) it is imposed by government, (ii) it is intended for public purposes and
(iii) it is compulsory.201
The first element of a tax is that it is an imposition by government through an organ of
government whose primary duty is to make laws, that is the Legislature. As a general rule,
a tax can only be imposed by a statute, hence the cliché “taxation is statutory.”202
The second element of a tax is that it is an imposition made for general public good or
public purpose. Public purpose is defined as an action by or at the direction of a
government for the benefit of a community as whole. 203 Therefore, a tax is generally not
levied for the direct benefit of a class or a group of people. The application of tax revenue
will depend on the policies and priorities of the government at a particular time. Although
governmental activities are usually expected to be beneficial to the society and even the
individual, such benefits are however not always enjoyed contemporaneously or
proportionately to the amount paid.204 In the tax parlance, it is said that a tax has no
element of quid pro quo. Thus, a taxpayer cannot insist on getting a particular benefit or a
measure of benefit as a precondition for payment of his tax.
The third element of a tax is that it is compulsory. It will be exceptional to see any person
voluntarily making continuous financial contributions to government when no direct
benefit accrues to him in return. If a person is of the opinion that the government is failing
in the discharge of its obligations or that certain other people are benefiting more from the
201
F.R. Davies, Introduction to Revenue Law, 2nd ed. (London: Sweet & Maxwell, 1985), p.3.
202
In Australian Tape Manufacturers Association v Commonwealth (1993) 176 CLR 480 , a levy was imposed
on blank recording tapes payable to a body set up by the music industry to compensate artistes. This was held
to be a tax even though it was not levied by a public authority; what mattered was that there was a
compulsory acquisition of money under statutory powers which was not a payment for services.
203
Black’s Law Dictionary, ed Bryan A. Garner, West Group, St. Paul, Minn., 7th ed (1999), p.1245.
204
Akanle O, The Taxpayer, supra note 5, p.1.
96
government services than their levels of contribution, there is a tendency for such a person
to refuse to pay. Hence taxation is compulsory by nature.
Once a tax passes the necessary constitutional and legal litmus tests, no socio-political,
religious, ethnic considerations would lawfully excuse non payment of such a tax.205 A
writer has highlighted the coercive element of property tax in the following words:
“The property tax relies on force or the threat of force for collection. If
one does not pay the property tax, liens are placed on the property and
the State can come onto the property, seize it and sell it for the amount
of taxes "owed," which may be far less than the property's market
value.”206
The element that the collection be compulsory was held to be satisfied where the state
compulsorily acquired an asset (flour) and then allowed the former owner to reacquire it at a
higher price, requiring him to store it at his own risk in the meantime. 207 The difference
between the two prices was held to be an excise tax even though there was no legal
obligation, as opposed to commercial necessity, to buy the flour back.
In view of the foregoing, a tax is a payment with all these three features irrespective of the
nomenclature that may be ascribed to it – whether a levy, duty, excise, charge.
205
A person cannot refuse to pay because he thinks that he is not getting enough from the State or that the
rate is too high. At best such a person may choose to: (i) vote with his or her feet; or (ii) or vote against the
government; and (iii) contest an election and implement what he or she perceives as the right tax policy.
206
R.W. McGee, “The Ethical Case for Charging User Fees for Education”, Journal of Accounting Ethics &
Public Policy, Vol. 2, No.1, p.235.
207
A-G (NSW) v. Homebrush Flour Mills Ltd (1937) 56 CLR 390.
97
3.3.2. Levy
The word “levy” is synonymous with a tax. The Oxford English Dictionary defines
a levy as “an extra amount of money that has to be paid, especially as a tax to
government.”208 Usually, levy is used to describe a tax of a fixed amount regardless of the
status and circumstances of the taxpayer. However, the Taxes and Levies (Approved List
for Collection) Act 209 gives the impression that levies are restricted for the use of the State
and Local Governments. This is because Part 1, where federal taxes were itemised, does
not contain any levy. This is unlike Parts II & III which relate to States and Local
governments210 .
It appears that the use of the word levy, for the kind of payments stated above is a misuse
of the word since the payments are usually made in exchange for specific privilege or
benefits, and therefore fall short of our definition of a tax. For instance, “market taxes or
levies” are paid for allocation or usage of shops while motor park levies are paid for the
usage of motor parks. Merriment and road closure levy is paid for the privilege of using a
public road, usually grade C roads, to hold private functions or events, leading to
temporary closure of such roads from public use. Therefore, these payments are user
charges rather than levies and ought not to have featured at all in the Taxes and Levies
208
Oxford Advanced Learner’s Dictionary, ed. S. Wehmeir, (Oxford University Press, 6th edn. 2001) p.681.
209
No. 21 Cap T2, LFN. 2004.
210
For ease of reference the said parts II and III read as follows:
PART II
11. Market taxes etc.
PARTIII
8. Market taxes and levies excluding any market where State finance is involved.
9. Motor park levies
13. Merriment and road closure levy.
98
(Approved List for Collection) Act. The inclusion of these and other items has made the
Parts II & III much longer and unwieldy.
From the administrative perspective, it is counter-productive to describe payments which
have elements of qui pro quo as „taxes and levies‟ in view of the general aversion for taxes
and levies compared to other user charges where there is an underlying transaction in
respect of which payment is being demanded.
3.3.3. Duty
A duty is a form of tax, often associated with customs levied on specific
commodities, financial transactions, estates and documents. Examples of duties include
import duties, export duties, excise duties, death or succession duties and stamp duties.
These are compulsory payments made without any direct benefit being received in return
and therefore satisfy our definition of “tax”. Duties are usually contained in separate
legislations from other tax legislations211 and collected by a separate agency other than the
tax authority.212
211
In England, customs duties were traditionally part of the customary revenue of the king, and therefore did
not need parliamentary consent to be levied, unlike excise duties, land tax, or other impositions.
http://en.wikipedia.org/wiki/Duty_(economics).
212
Although this is not uniformly the case and a number of countries have found that it makes sense to
consolidate tax and customs under one roof, particularly given the importance of VAT. See Thuronyi, V,
Comparative Tax Law, (Alphen aan den Rijn : Kluwer Law International, 2003) p.335-6.
99
3.3.4. Fee/Charge
Generally, the words “fee” and “charge” are synonymous. A “fee” is an amount
paid for doing or promising to do something.213 A “charge” is an amount of money usually
in exchange for goods or service.214 In the context of this thesis, a fee or charge is the
amount paid in exchange for the services provided by Government, its Ministry, Agency or
Parastatals.
Firstly, a fee is usually paid in exchange for a service rendered or a benefit conferred. 215
There is therefore a substantial difference between paying for international passport, school
fees, a toll on one part, and paying for the defence of one‟s country on the other part.216
Secondly, some reasonable relationship exists between the amount of the fee and the value
of the service or benefit.217 Thirdly, unlike taxes, fees and charges are not compulsory. If
fees and charges become too prohibitive, people may elect not to patronise the government
services. For example, if the cost of perfecting title documents is set too high some people
may choose not to perfect their title documents. There is however the danger that such a
person is not recognised as the owner or proprietor of the property. This may be a risk
worth taking where he is sure that his vendor will not sell the same property to a third
party.
213
Supra note 75, p. 512.
214
Id, p.182.
215
Duff CJ, in Re Tax on Foreign Legations and High Comrs' Residence [1943] SCR 208 (Can). Note the refusal
of Lord Cairns to use the presumption of a strict interpretation of tax law when considering tolls: Pryce v
Monmouthshire Canal and Rly Companies [1879] 4 App Cas 197, 202.
216
Tiley, J, supra note 66, P. 4.
217
Saginaw Co. v John Sexton Corp of Michighan, 232 Mich App 202, 210.
100
Also, while the revenue derivable from taxes forms part of the general fund of the State, 218
fees and charges are usually earmarked for defraying the expenses incurred by the
Ministry, Agency or Parastatals charged with the provisions of such services. 219 Another
key feature of fees and charges is that they are usually lower than the cost of providing the
goods or services. Accordingly, they usually have some elements of hidden subsidy. 220
The phrase “land use charge” was recently introduced to Nigerian fiscal lexicon by the
Lagos State Government through the Land Use Charge Law (LUCL).221 The main
objective of the LUCL is to consolidate land-based taxes and rates hitherto payable under
the Land Rates Law,222 the Neighbourhood Improvement Charge Law 223 and Tenement
Rates Law224 in Lagos State.225 The LUC is an improved version of the tenement rate. It is
submitted that the ascription of “charge” to the payment imposed by LUCL is a misuse of
the word “charge” in the true sense of the word. This is in view of the fact that the payment
218
All revenues collected by the Federal Government are mandated to be paid into the Federation Account
under section 162 of the 1999 Constitution. Similarly, all revenues collected by the State Government are
mandated to be paid into the Consolidated Revenue Fund of the State under section 120 of the 1999
Constitution.
219
A special fund is usually established into which all the revenue of such agencies including their internally
generated revenue (IGR) is paid. See for instance, section 17(1) of Nigerian Tourism Development
Corporation Act, Cap N137, LFN 2004, section 25 of the Consumer Protection Council Act Cap C25, LFN,
2004, Section 7 of the Administration of Justice Commission, Cap A3, L.F.N., 2004. However, certain taxes
may be earmarked and utilis ed to finance specific services, just like fees and charges. They are based on the
premise that taxpayers will be willing to pay if a clear link could be established between the tax and the
immediate benefit to be derived. For instance, vehicle duties were originally intended to fund highway
construction and maintenance while the television license fee was intended to fund the British Broadcasting
Company (BBC). See O.H. Phillips & Jackson, Constitutional & Administrative Law, Sweet & Maxwell,
London, 8th ed., (2001), p.653, para 28-003. In Nigeria, Education Tax is raised to provide particular benefits
specified in section 5 of the Education Tax Act Cap E4 LFN, 2004.
220
I.B Bello & R.O. Eronini, “ Fee and Charges”, Local Government Finance in Nigeria, ed. I. B. Bello-
Imam, p.51.
221
No. 11 of 2001, Cap L.61, Laws of Lagos State of Nigeria, 2003.
222
Cap L.59, Laws of Lagos State of Nigeria, 2003.
223
Cap N4, Laws of Lagos State of Nigeria, 2003.
224
Cap T2, Laws of Lagos State of Nigeria, 2003
225
See the Preamble to the LUCL.
101
required under it is not for specific services being provided or to be provided by the
226
government.
In United States v Shoe Corp.,227 a Harbour Maintenance Fund (HMF) was levied at a rate
of 0.125 percent of the value of cargo passing through U.S ports. The levy was designed as
compensation for Government supplied services, facilities, or benefits.228 Its proceeds were
deposited in the Harbour Maintenance Trust Fund and used for harbour maintenance and
development projects. The question was whether a Harbour Maintenance Tax (HMF) is a
tax within the meaning of the Export Clause. 229 The Court held that the HMF could not be
considered a user fee because it bore no relation to the extent of port use, being based on
the value of the cargo.
The distinction between taxes and charges has also been highlighted in Mapleview Estate,
Inc v City of Brown City.230 In that case, the Plaintiff, a developer of a manufactured
housing community sued the defendant for increasing the fee for connecting homes to its
central water supply and sewer systems. The plaintiff argued that the fee was actually a
disguised tax and should have been submitted to popular vote as required by the Headlee
Amendment which among other things prohibited a City from increasing authorised rate
without approval of the electorates. The trial court agreed with the plaintiff and granted his
motion for summary disposition. On appeal, the defendant argued that the tap-in fee was a
226
Montgomery J in Societe Centrale D'Hypothesques v Cite de Quebec [1961] QLR 661; see also in respect of
water rates and Daymond v South West Water Authority [1976] AC 609; [1976] 1 All ER 39.
227
523 U.S. 360 (1998)
228
Id at 363.
229
See Art 1, s.9 of the US Constitution.
230
No. 236366 Sanilac Circuit Court, LC No. 00-027282-CZ, decided on July 1st , 2003 by the State of
Michigan Court of Appeal. Available at
http://caselaw.lp.findlaw.com/data2/michiganstatecases/appeals/070103/19545.pdf
102
user fee, not a tax, and therefore not subject to the Headlee Amendment. Much more, the
amount charged as the tap-in fee was said to be reasonable. An engineering report
commissioned by the City showed that the fee for connecting a single site to the water
system should be $706 and the fee for connecting a single site to the sewer system should
be $1,630 whereas the fees set by the council were $600 and $800. The Court found as of
fact that the fees being charged were in fact less than the actual cost of buying into the
system. Therefore, they were held not to be excessive and revenue producing.
There are three factors to consider when deciding if a charge is a fee or a tax. To be
considered a fee, a charge must (1) serve as a regulatory purpose rather than a revenue
raising purpose; (2) be proportionate to the necessary costs of the service; and (3) be
voluntary, in the sense that the payer may choose not to avail himself of the benefit and
thereby avoid the charge. It was held that the increased tap-in fee was voluntary because
plaintiff need not pay the tap-in fee unless it decides to install a home site in a particular
location. It has the ability to choose whether to use the service at all, and those who occupy
plaintiff‟s home have the ability to choose how much water and sewer they wish to use.
The increased tap-in fee was held to be a fee and not a tax.
3.3.5. Rates
„Rates‟ is defined as “charge, price, cost, tariff, a tax levied according to the value
of building and land”.231 Perhaps, the two most common examples of rates are water and
electricity rates. However, in Nigeria, the word „rates‟ is commonly used in relation to
payment for local government services or local government taxes. For instance, Part III of
231
Supra note 76 p.512.
103
the Taxes and Levies (Approved List for Collection) Act itemises “shops and kiosk rates”
and “tenement rates” as falling within the fiscal competence of the local Government
Council.232
Based on our criteria of a tax, water and electricity rates will not qualify as taxes since they
have elements of underlying services or benefits. There cannot be any legal basis for
charging rates where no services are provided. This is however not the case for tenement
rate in Nigeria. While it is well-established that revenue from property tax (including
tenement rates) should be used for the provision of local infrastructure, this has not been
the experience in Nigeria. It is regrettable to note that the local government is not under
any obligation to collect refuse (from house to house) or perform specific services in return
as it is usually the case in other jurisdictions. Therefore, tenement rates fits into our
definition of a tax being a compulsory payment to government without any specific benefit
to the taxpayer. Tenement rate is chargeable in respect of buildings on land and all other
immovable properties which are permanently attached to land excluding vacant land. 233
Tenement rate is a variant of property tax or council tax elsewhere.234
3.3.6. Fines
A fine is the sum of money paid as a punishment for breaking the law. 235 They
differ from taxes in that they are assessed on illegal behaviour, such as dangerous driving,
wrong parking, entering of a bus or train without a valid pass etc. Ostensibly, in an attempt
232
See the Taxes and Levies (Approved List for Collection) Act No 21, 1998, Cap T2, LFN, 2004
233
Shell Petroleum Development Company of Nigeria Limited v. Burutu Local Government Council (2002)
1.N.R.L.R.p.1, at p.22.
234
For instance in United Kingdom.
235
Loc cit, at p.230.
104
to deter certain behaviours in the society, penalties for certain offences may be set quite
high. For example, a fine for the offence of driving on a one-way road was recently
increased by the Lagos State Government to N50,000.00. The question is whether this is a
fine or a tax in disguise. While, the motive to generate revenue cannot be ruled out, it is
our view that payment in such circumstance will still qualify as a fine since the aim is
primarily to punish and not to raise revenue. More so, those who do not transgress the law
are not under any obligation to pay. If the aim were to generate revenue, one can imagine
what will be the lot of the State in the unlikely event that everyone keeps within the law.
Most of what are described as “environmental taxes” are in actual fact fines and fees levied
directly on environmental activities such as toxic discharges, or indirectly through some
medium, such as energy input.236 Attempt has been made in foregoing analysis to clearly
distinguish between taxes and other similar concepts. A levy is tax of a fixed amount
regardless of the status and circumstances of the taxpayer. However, under the Taxes and
Levies (Approved List for Collection) Act,237 levies and payments that are purely charges
such as market levies and motor park levies have been wrongly labelled as taxes and
levies. Also, a duty is a variant of taxes such as stamp duties, excise duties and custom
duties. A charge is definitely not a tax since it has an element of qui pro quo. Evidence of a
misuse or careless use of the word can also be seen in the case of Land Use Charge Law of
Lagos State which gave the erroneous impression that payments under the law are being
made in exchange for certain direct benefits. Rates such as water and electricity rates are
definitely not taxes since they have elements of qui pro quo. Tenement rate, however, has
236
Farber, S.C., “Environmental Taxes and Fees”, supra, note p.329.
237
See Supra note 77
105
all the features of a tax and therefore an exemption to the rule. Although fines are not
taxes since they are charged as punishment for the violation of law, but some
environmental taxes are fines dressed in the garb of taxes.
Thus, a tax may be one of the two certainties in the world;238 however it is sometimes
difficult in practice to distinguish a tax from other forms of levies. Davies noted the
confusion on this issue when he stated:
“The question “what is a tax?” is surprisingly difficult to answer. Even the

well-known reply of the man who was asked to define an elephant does
not work very well here. He said I can‟t define an elephant, but I know
one when I see one.”239
3.3.7. Taxing Power
Taxing power is the power of a government to raise revenue through taxes within the
limits of its jurisdiction. It is the power of the government to demand a compulsory
payment from the people without directly providing any specific service in return for the
payment. Taxing power is an attribute of sovereignty which need not be expressly
conferred.240 In the words of Justice Latham, taxing power is:
“…the one great power upon which the whole national fabric is based. It is
as necessary to the existence and prosperity of a nation as the air he
238
“But in this world nothing can be said to be certain, except death and taxes,” Benjamin Franklin in a letter
to Jean Batiste Le Roy, November 13, 1789. See D.R. Salter & J.L.B. Kerr, Easson: Cases and `Materials on
Revenue Law, 2nd edn., (London, Sweet & Maxwell, 1990), p. 1.
239
Davies, F.R. supra note 69, p.3.
240
Id. at p. 1.
106
breathes to the natural man. It is not only the power to destroy; it is also
the power to keep alive.”241
The implication of this profound statement in the context of this work is that every level of
government has inherent taxing power unless such is expressly restricted by the
Constitution. Therefore, in a federation, both the Federal and States Government have
power to impose any form of tax, subject only to the express provisions of the
Constitution.
Taxation involves the determination of which level of government is to be vested with
power to (i) impose a particular tax, (ii) determine its rate and (iii) administer the tax. The
power to determine these three elements of taxation may vest in only one level of
government or be divided among two levels. There is a significant distinction between the
power to impose a tax and determine its rate and the power to merely collect tax or receive
part of the revenue collected by another level. The former is legislative in nature while the
latter is administrative. Taxing power within the context of this work is limited to power of
a level of government to impose a particular tax and or determine the rate of the tax by its
own legislation. Taxing power does not extend to the power of a level of government to
merely collect taxes whose base and rates are determined in a law enacted by another level
of government.
In practice, taxing power in respect of a particular tax (tax base) can be assigned either
exclusively to one level of government or shared between two or more levels of
government. In other words, a tax base can be reserved for the exclusive use of a level of
241
Nichols v Ames (173 U.S. 509 (1929), p.505.
107
government or be available for the concurrent use by two or more levels of government.
For example, there is exclusive use of a tax base where power to impose personal income
tax is vested only in the Federal Government while the States are precluded from enacting
law and determining the rate of income tax within their jurisdictions. Since other levels of
government are precluded from imposing tax on the same base, there are two options to
ensure that the other levels of government are able to access revenue. First, the proceeds of
the tax may be shared with other level(s) of government based on a formula, usually
determined by the government vested with the power of imposition. Second, the power to
administer the tax may be shared with or delegated to another level of government under
an arrangement where each level retains what is generated by it. The last scenario which is
typical of most federal taxes in Nigeria concentrates all the taxing power in only one level
of government leaving the others bereft of any real taxing power.
There, is however, a concurrent (joint) use of a tax base where more than one level of
government has power to impose the same tax and determine their rates under their
independent legislation and retain the revenue accruing from it. 242 Under this model, the
Federal Government and each of the 36 States can impose their personal income tax under
their respective laws and determine the applicable rates within their jurisdictions.
242
Ahmad, Ethisham & Motu E., “Oil Revenue Assignments: Country Experiences and Issues, International
Monetary Fund Working Paper, WP/02/203, 2002,. p.9, Available at
www.imf.org/external/pubs/ft/wp/2002/wp02203.pdf. Site visited on 20 January 2009.
108
3.3.8. Regulatory Powers
“To regulate” is to control something by means of rules while “regulation” is an
official rule made by a government or some other authorities. 243 The regulatory power of a
government is synonymous with its police power to make all necessary and proper laws to
preserve public security, order, health, morality and justice.244 The Black‟s Law Dictionary
defined police power as:
“The inherent and plenary power of a sovereign to make all laws

necessary and proper to preserve the public security, order, health,
morality and justice. It is a fundamental power essential to
government, and it cannot be surrendered by the legislature or
irrevocably transferred away from government.”245
Regulation may be positive by requiring certain things to be done or negative by
prohibiting certain conducts. For instance, the government may require school attendance
up to age 16; it may insist on car drivers having “third party‟ insurance; it may forbid the
sale and purchase of narcotics, prescribe licensing conditions for alcoholic liquors and
restrict cigarette advertising. It may endeavour to preserve the social benefits of a locality
by imposing planning controls over property developers, prevent the use of certain fuels in
“smokeless zones‟; and proscribe prescriptive practices246 or introduce congestion charge
to limit flow of traffic to certain areas of a city.
243
Oxford Advanced Learner’s Dictionary, ed. S. Wehmeir, 6th ed. (Oxford: Oxford University Press, 2001),
p. 986.
244
See Black‟s Law Dictionary, Supra note 66, p.1178
245
Id. p.1195.
246
Sanford, C. supra note 18. P.13
109
While taxes also do affect behaviour and may be specially designed to either discourage or
encourage certain activities, the primary purpose of tax is usually to generate revenue. 247
Distinguishing between taxing and regulatory laws, Lane has this to say:
“Both the taxing and regulatory laws brought in revenue, but the latter
(regulatory) was rather concerned with the conduct of the subject than
with obtaining of funds. Conversely, those very duties of excise imposed
by the taxing law, although a source of revenue, were also a medium
through which activities of the dutiable producers could be regulated.”248
Practical problems have arisen in Nigeria whereby a company after discharging its tax
obligation to the Federal Inland Revenue Services (FIRS) is regularly confronted with
demands from other federal agencies for certain payments in pursuance of their regulatory
powers under their enabling statutes. For instance, every company operating a guest house
or hotel in Nigeria is obliged to register with the Nigerian Tourism Development
Corporation established under Nigerian Tourism Development Corporation Act. 249 Any
owner or manager of a Hospitality or Tourism Establishment who fails to apply for
registration risks the payment of a fine or his establishment being sealed up on conviction
after the expiration of the period specified for registration. 250 Pursuant to the provisions of
the Nigerian Tourism Development Corporation Act and the Regulations made under it,
the Corporation has been charging a registration fee of a specific sum per room per
annum251 depending on the classification of each Hospitality or Tourism Establishment.
247
Taxes may be imposed for achieving other socio-economic, political and cultural objectives. For instance,
appropriate dozes of tax incentives can be used to attract investment to certain sector of the economy or
designated “enterprises zones . For instance, tax holiday may be granted to qualified pioneer industries under
the Industrial Development (Income Tax Relief), see supra note 77.
248
Quoted in O. Akanle, Supra note 5, pp. 4-5.
249
No 81 of 1992, Cap N137 LFN 2004. See also See Regulation 1 of the Hospitality and Tourism
Establishments (Registration, Grading and Classification) Regulation 1997
250
See id. Regulation 14(1).
251
For instance, N2, 500.00 or N1, 500.00
110
Sometime in 2001, there was an attempt to replace the registration fee with a Tourism
Development Levy at the rate of 5% of the hotel rate per room.252
Telecommunication companies have protested against the power of an agency of Lagos
State to regulate erection of telecommunication masts and the laying of pipes within the
State. The agency has insisted that certain payments which the companies considered to be
too exorbitant must be paid before the requisite approval can be granted. In Registered
Trustees of Association of the Licensed Telecommunications Operators of Nigeria & Ors v.
Lagos State Government & Ors253 the applicants who were communication companies
licensed by the National Communication Commission to operate telecommunication
business in Nigeria challenged some sections of the Lagos State Infrastructure
Maintenance and Regulatory Agency Law,254 inter alia on the basis that the Law amounted
to imposition of tax on the operations. Section 3 of the Law vested the agency with power
to issue permit for the use of right of way and they have the power to dismantle cables or
switch it off. Section 16 prohibits the erection of any mast without a permit issued by the
agency. The applicant argued that the law was meant to tax the telecommunication
companies. The defendants argued that the law was made pursuant to the residual power of
the State to regulate the use of land in accordance with its planning policy and law.
Holding in favour of the Applicants the learned Judge said:
“The IMRA Law, from the name it looks very innocent. That is a law to
establish, the Lagos State Infrastructure Maintenance and Regulating
252
Due to the concerted opposition of the stakeholders in the hospitality industry, this writer understands that
a compromise to pay a lesser percent was reached. The implication of this, therefore, is that the exact amount
being paid as registration is not specifically stated in any law.
253
(Unreported) Suit No. FHC/L/CS/517/06 delivered by Justice Auta N. of the Federal High Court, Lagos
on 25th February, 2007.
254
Of 2004.
111
Agency to regulate and Control the erection and installation of Mast,
Towers and for connected purposes. A look at the provisions of the IMRA
Law section 2 dealing with the functions of the Agency seems to take over
the NCC Act especially the provisions of section 136-137, which deal with
installation of Network facilities, Access Road to Network etc. The IMRA
Law imposes the responsibility of enforcing the said regulation of the law
on itself and not on the NCC. This I believe is an encroachment of the
powers of the NCC. The Lagos State is camouflaging under the Urban and
Regional Planning but the Lagos State has already made rules under
section 35 and 96. The State Government has the ESL Cap 5 of 2004,
which deals with the issue of mast and Towers. The question to ask is why
this specialized law with regards to communication? From the content of
the law, the driving force is just to make money for the State, as the State
has numerous laws dealing with the issue of urban planning and even tax
of properties, regardless of whether they are companies or private
residence”255
The learned Judge went on to reiterate the revenue objective of the law:
“.What the Lagos State is doing is to create an agency that will get its own
share of the booty, as their counsel said that their operators are making
billions of Naira.”256
The above statement is in our view good law and unimpeachable. To permit innumerable
governmental agencies to impose different forms of fees and charges without the
requirements that such should be commensurate to the level of services being conferred
will make the scope of the tax obligation of companies uncertain and worsen the problems
of double taxation.
There is, therefore, the need for the policy makers to keep in view the main objectives of
regulatory powers and taxing powers in order to avoid a situation whereby the exercise of
these powers is unreasonably skewed in the opposite direction. It is our submission that a
regulatory power is abused where, from the facts of a case, it is established that the
255
Id at. p.22.
256
See pp 23-24.
112
administrative fee being charged by a government department, agency or parastatal places
undue emphasis on revenue generation than regulating behaviour and ensuring efficiency.
The emphasis on revenue generation becomes misplaced, in our view, when the larger
public interests of regulating certain activities is subdued or sacrificed on the altar of
generating more revenue.
3.4. Distinguishing Between Taxing Powers and Legislative Powers
Legislative power is the power to enact laws. 257 It is the power of a government to make
laws generally on all the subject matters within its legislative competence. In this regard,
Section 4(2) of the 1999 Constitution sets the tone for the legislative power of the Federal
Government thus:
“(2) The National Assembly shall have power to make laws for the peace,
order and good government of the Federation or any part thereof with
respect to any matter included in the Exclusive Legislative List set out in
Part 1 of the Second Schedule to this Constitution.
(3) The power of the National Assembly to make laws for the peace, order
and good government of the Federation with respect to any matter
included in the exclusive legislative list shall, save as otherwise provided
in this Constitution to be the exclusion of the Houses of Assembly of
States………………………
(9) Notwithstanding the foregoing provisions of this section, the National

Assembly or a House of Assembly shall not, in relation to any criminal
offence whatsoever, have power to make any law which shall have
retrospective effect.”
It can be seen from these provisions that the legislative powers of the Federal Government
are quite extensive with regard to the subject matters in the Exclusive Legislative List.
257
Black‟s Law Dictionary, p.919, supra note 66.
113
Since taxation power is exercised through legislative power by enacting appropriate
statutes clearly defining the basis and scope of the taxes and prescribing the framework for
their administration, the question is whether the taxing power of government is co-
terminus with its general legislative power. In other words, whether the power of a level of
government to impose a particular tax can be inferred from other item(s) within the
legislative competence of that government?
It was held in Attorney-General of Ogun State v. Alhaja Ayinke Aberuagba 258 that the
taxing power of a level of government is co-extensive with its legislative power. In that
case, notwithstanding that Sales Tax is not enumerated on the Exclusive Legislative List
under the 1979 Constitution, the Supreme Court nevertheless held that the Federal
Government has power to impose sales tax pursuant to item 61(a) of the Exclusive
Legislative List on trade and commerce.259
The Supreme Court has been urged to review and depart from the above interpretation
given to item 61(a) of the Exclusive Legislative List in the ongoing case of Attorney
General of Lagos State v Attorney General of Federation and 35 Ors. 260 In that case,
Lagos State has invoked the original jurisdiction of the Supreme Court to determine the
constitutionality of VAT Act as a federal statute. Relying on Aberuagba’s case, the
plaintiff argues that the VAT Act is void to the extent that it imposes tax on supply of
goods and services within Lagos State. The 30 th respondent261 argued that VAT is a multi
258
(1984) S.C. 20, [1985] 1 N.W.L.R., (Pt.3 ) 395.
259
Now item 62(a) of the Exclusive Legislative List of the 1999 Constitution.
260
Suit No SC/20/2008.
261
Oyo State is the 30th defendant in the suit.
114
stage tax which is paid and collected at all the chains of production and shifted forward to
the final consumer through an input and output mechanism. The VAT system is essentially
a national and international tax compared to Sales tax which is a one stage local tax. To
that extent the Aberuagba’s case which Lagos State heavily relied on was inapplicable. In
its reply, Lagos State has submitted that taxing power cannot be implied from the trade and
commerce clause and urged the Supreme Court to depart from its decision in Aberuagba’s
case.
This development has brought to the fore the need to clarify the distinction between
legislative power and taxing power. It is noteworthy, that the 1999 Constitution does not
contain substantive provision where the taxes within the jurisdiction of each level of
Government are itemised. On the contrary, the technique of division of taxing powers
adopted by the Constitution is to subsume taxing powers under the rubric of legislative
powers by itemising some taxes or tax bases in the Exclusive Legislative List of the
Federal Government and making reference to some taxes under the Concurrent Legislative
List. Hence, a determination of the extent of the taxing power of a level of government has
to be discussed in the context of legislative power.
In the absence of a clear distinction between taxing power and legislative power, it follows
that the Federal Government will be able to impose taxes on all the 68 items over which it
has power to legislate. Such a prospect is bound to considerably whittle down the taxing
power and make the residual power of the States less meaningful. It is suggested that the
taxes within the legislative competence of the Federal Government should be clearly
115
itemised within the body of the Constitution as independent powers and not in a Schedule
as incidental to legislative powers.
3.5. Limits of Taxing Powers
The focus of this section is to consider the general restrictions to the exercise of taxing
power of government.262 As admirable as the idea of taxing power as an attribute of
sovereignty might be, it has far-reaching consequences in practice. Short of any limitation,
it would mean that each level of government would be able to impose any form of taxes
notwithstanding the ability of the taxpayers to bear the burden or even the possible effects
on the economy at large. In real life, there is no sovereign that possesses such enormous
power in modern times, as the taxing power of any government is subject to a number of
limitations.
3.5.1 Constitutional limitations
The extent of the taxing power of government is often defined in the Constitution.
This is particularly true in federal systems where emphasis is placed on division of powers
between power in every country. In Nigeria the power to impose taxes such as customs,
excise, income tax, stamp duties, capital gains is exclusively vested in the Federal
Government vide section 4 of the 1999 Constitution263 . In the same vein, the collection of
tenement is expressly reserved for the local governments 264 although Lagos State seems to
262
Our discussion of the specific limits to the taxing powers of each level of government
will be deferred to chapter six.
263
Constitution of the Federal Republic of Nigeria 1999.
264
The combined reading of Section 7(5) and Item 1(j) of the Fourth Schedule of the 1999 Constitution
mandate each House of Assembly to confer on its Local Government Councils the functions itemized in the
116
have departed from this under the Land Use Charge Law. 265 The allocation of these taxes
to the federal and local government, have by necessary implications, limited the taxing
power of the State Governments.
The constitution may also expressly limit the taxing power of a level of government for
various reasons. For instance, the taxing power of the states to impose taxes on inter state
transactions may be either prohibited or abridged in order to foster a common market
throughout the federation. In this regard, Article 10(2) of the United States Constitution
provides:
“No State shall, without the consent of the Congress, lay Impost or Duties
on Imports or Exports, except what may be absolutely necessary for
executing its inspection Laws: and the net produce of all Duties and
Imposts, laid by any State on Imports or Exports, shall be for the use of
the Treasury of the United States; and all such laws shall be subject to
revisions and control of the Congress.”
Section 8(1) of the same Constitution (of the United States of America) vests the Congress
with the "power to lay and collect taxes, duties, impost and excises…subject to the
condition that the taxes, duties, import and excises shall be uniform throughout the Unites
States”. Apart from the requirement of uniformity throughout the United States, Article
9(4) also mandates that direct taxes must be apportioned based on population. It is well
Fourth Schedule including “assessment of privately owned houses or tenements for the pu rpose of levying
such rates”.
265
No. 20 of 2001, Cap L61, Laws of Lagos State, 2003.
117
established principle that any action or power exercised by a level of government in
violation of the provisions of the constitution will be ultra vires, null and void.266
3.5.2. Policy considerations
Policies are the fundamental principles which guide the orderly development of tax
laws and administration and, therefore, form the foundation of the entire tax system. If the
tax policies are inconsistent or weak, it is certain that the entire tax system will be
dysfunctional. Hence, since Adam Smith‟s Wealth of Nations in 1776,267 different nations
have tried to align their tax systems, as much as possible, with the principles of equity,
certainty, convenience and administrative efficiency propounded by Smith in his epic
work.
While taxation is a device for raising revenue and achieving other fiscal objectives, how
the power is exercised from time to time is largely a function of the policy of each
government or administration. A particular government might prefer a certain tax mix by
either raising or lowering the tax rate or even abolishing certain taxes in order to achieve
its set goals. This is why tax matters usually play significant roles in the electoral success
or failure especially in developed countries. It is significant to note that bad tax policy has
proved catastrophic for certain governments. History is replete with how bad tax policy has
brought political Empires to an end.268
266
See Attorney General of Ondo State v. Attorney General of Federation (2002) 9 NWLR 223; Attorney
General of Ogun State v. Aberuagba (1985) 1 NWLR 395.
267
Adams Smith, “An Inquiry into the Nature and Causes of the Wealth of Nations”, 5 th ed, Edwin Canaan,
ed, (London: Methuen & Co., Ltd., 1904)
268
Nigeria has had a dose of tax riots such as Aba riot of 1929 and Iseyin riot of 1921.
118
The ongoing attempt by the Federal Government to clearly articulate its tax policy in a
comprehensive document is commendable. This intervention will no doubt provide the
stakeholders a reliable indication of the future direction of the tax system of the Federal
Government. The main objectives of the Draft Document on the National Tax Policy269 are
to “provide a set of principles for all taxation in Nigeria” and serve as a “standard on which
all stakeholders will be held accountable”. The 50-page document contains proposed
measures to achieve these objectives which include reduction of the number of taxes,
shifting the focus of the tax system from direct to indirect taxes, reduction of internal
multiple taxation, streamlining the tax incentives, strengthening the Joint Tax Board (JTB),
comprehensive review of tax laws every three years, honouring and concluding more
international tax treaties, ensuring that taxes are collected by career tax administrators, etc.
It is envisaged that the document will eventually become an integral part of the
Constitution of the Federal Republic of Nigeria, 1999 “after it has been approved by the
Federal Executive Council (FEC) and enacted into law by the National Assembly.”
Concern has, however, been expressed about the appropriateness or even constitutionality
of a „National‟ Tax Policy in a federation. The Federal Government does not have the
exclusive preserve of managing the economy, including its tax system. Thus, the
Constitution has vested the power to concurrently manage the economy on the federal,
state and local governments respectively, within the limits of their legislative powers. 270
The intendment, here, is to divide the field of tax policy decision between the federal and
state governments, in such a way that neither can dictate its policy preferences to the other.
269
See Draft Document of the National Tax Policy presented by National Committee on National Tax Policy,
at p.18.
270
See Aberuagba‟s case, supra, note 125
119
Therefore, it is advisable for the Tax Policy Document to be limited to the Federal
Government and the Federal Capital Territory while the States are encouraged to adopt it
with or without necessary modifications.
3.5.3. Legislative hurdle
Since taxation is statutory, another hurdle that must be crossed is getting the
necessary enactment through the legislature. 271 The principle that taxation requires the
consent of the legislature has become well established in virtually all jurisdictions.272 This
underscores the need for an enabling law as a basis for raising revenue through taxation. 273
This principle, among other things, aims at ensuring certainty in the level of the financial
contributions that an individual is expected to make to government‟s finance and limit the
government‟s intrusion into the right to property. 274 The principle also aims at promoting
greater transparency and accountability in the raising and the spending of tax revenue. This
is because the enactment of a statute goes through layers of rigorous procedure which often
make consultation and consensus-building imperative.275 The principle is therefore a
271
See s. 58 of the Constitution which provides that the power of t he National Assembly to make laws shall
be exercised by bills passed by both the Senate and the House of Representatives and, except as otherwise
provided by subsection (5) of this section, assented to by the President.
272
.In some countries, there must not only be a statutory basis for levying a tax, the statute must be initiated in
the House of Representative or the Lower House either by express constitutional provision or by convention.
See section 7 of the Constitution of the United States of America, section 53 of the British North American
Act, 1867, Section 53 of the Commonwealth of Australia Constitution Act, 1900. Sections 109 and 198 of the
Constitution of India, Section 59(1)(b) of the Constitution of the Federal Republic of Nigeria, 1999 (1999
Constitution).
273
.Taxes are imposed under the authority of the legislature. Tax laws being entirely statutory, tax disputes
almost always raise issues of statutory interpretation. See M.T., Abdulrazaq, Abdulrazaq Nigerian Revenue
Law, Malthouse Press Limited, (2005), p.10. S.A. Authority v. Regional Tax Board (1967) N.C.L.R. 452,
Tennant v. Smith (1892) A.C. 154, Coltness Iron Company v. Black (1881) 6 A.C.315.
274
Section 44(1) of the Constitution of the Federal Republic of Nigeria, 1999 Cap C – LFN, 2004 (1999
Constitution) prohibits compulsory acquisition of property or any interests in property except in the manner
and for the purposes prescribe by law.
275
See section 58 and 59 of the 1999 Constitution on the mode of exercising legislative powers.
120
bulwark against arbitrary imposition of or increase in taxes by the government. Section 58
of the 1999 Constitution provides:
58. (1) The power of the National Assembly to make laws shall be
exercised by bills passed by both the Senate and the House of
Representatives and, except as otherwise provided by subsection (5) of
this section, assented to by the President.
(2) A bill may originate in either the Senate or the House of

Representatives and shall not become law unless it has been passed and,
except as otherwise provided by this section and section 59 of this
Constitution, assented to in accordance with the provisions of this section.
(3) Where a bill has been passed by the House in which it originated, it
shall be sent to the other House, and it shall be presented to the President
for assent when it has been passed by that other House and agreement has
been reached between the two Houses on any amendment made on it.
(4) Where a bill is presented to the President for assent, he shall within
thirty days thereof signify that he assents or that he withholds assent.
(5) Where the President withholds his assent and the bill is again passed
by each House by two-thirds majority, the bill shall become law and the
assent of the President shall not be required.”
Therefore, although a particular tax might be within the powers of a level of government,
the executive may find it difficult to get the necessary approval of the legislature. A recent
example is the refusal of the National Assembly in Nigeria to approve the proposal by the
Federal Government to increase the rate of the Value Added Tax from 5 per cent to 10 per
cent.276
276
The Value Added Tax (Amended) Bill of --- was one of the Eight Bill forwarded by the Federal
Executive Council to the Legislature in following the recommendations of the Study Group on the Reform
of the Nigerian Tax System. The other Bills are A Bill for an Act to establish the Federal Inland Revenue
Service, A Bill for an Act to amend the Companies Income Tax Act, A Bill for an Act to amend the Personal
Income Tax Act; A Bill for an Act to amend the Petroleum Profits Tax Act; A Bill for an Act to amend the
Education Tax Act, A Bill for an Act to amend the Customs, Excise Tariffs etc (Consolidation) Act; A Bill
for an Act to amend the National Sugar Development Council Act and A Bill for an Act to amend the
121
3.5.4. Administrative Constraints
It is not the imposition of taxes that matters but the ability of the government to
administer the taxes effectively in order to meet its objectives. It is not enough to have a
good tax law; it must be complemented with good administration. The agency responsible
for the tax administration must be adequately staffed and equipped. The cost of
administering the tax should be reasonable. 277 Furthermore, the provisions of the law must
be enforced as much possible in order to ensure that the objectives of the tax system is
achieved. John F. Due in his book Government Finance stressed the importance of tax
administration thus:
“No tax can conform to expected standard of equity if it cannot be

administered with a high degree of effectiveness. If persons are able to
escape, by legal or illegal means, the tax to which they should logically be
subject under general scope of tax, the theoretical equity of the tax is to a
large measure lost.278
Therefore, the taxing power of a government can only be as good as its
administrative machinery. The power of a government will be severely constrained if the
administrative machinery either does not exist or is slack. This is a major challenge facing
the tax system in Nigeria especially at the State and Local Government levels.
Notwithstanding that the Local Government Councils in Nigeria are given exclusive power
National Automotive Council Act. See “Hike in VAT rate will be devastating to Industries say CITN Chief”
Daily Independent, Friday, January 27th 2006, p.C7.
277
In the mid 1990‟s, some state governments engaged the services of private firms to collect taxes on
grounds of inefficiency of the State Board on Internal Revenue. The cost of collecting the various taxes by
the FBIR is about 2 percent of the revenue collected.
278
Quoted from O. Oladunjoye, “Tax Administration-The problems of Assessment and Collection” see O.
Akanle, p. 96, supra note 5
122
to collect tenement rates, most of them have not been able to utilize this power due to a
number of factors which includes lack of administrative capability.
3.5.5. Territorial jurisdiction
The taxing power of a country or state does not extend beyond its geographical
boundaries. As far back as 1735 in the case of Boucher v Lawson,279 it had been firmly
established that “a forum court would not take notice of the revenue law of another
country”. Thus, in Government of India v Taylor280 the House of Lords rejected the claim
for the recovery of capital gains tax levied by an Indian Government on a company trading
in India but whose assets have been transferred to England shortly before it was wound
up.281 The challenge posed by this rule therefore is that a country must devise means of
collecting the taxes due to it from a foreign taxpayer while the taxpayer and or his property
are still within its jurisdiction. This development has, inter alia, led to the concept of
withholding tax on income of non resident taxpayers who may not be available in the
country during the normal tax period to file assessment and duly pay his tax.
While the Federal Government‟s jurisdiction extends to all the 36 States and the Federal
Capital Territory together with their respective local government councils and the area
councils, the jurisdiction of each state is limited to its boundaries. Therefore, a State
Government cannot enforce the payment of its tax against a taxpayer in another State. The
279
(1735) Cas. Temp. Hard 85. (1738) Cunning P. 144
280
[1955] A.C. 491 (H.L.)
281
The principle is no longer good law within European Union because of EU Mutual Assistance Directive
which requires the government of any EU Member State (A) to assists any other EU government (B) to
collect the tax due or allegedly due to B by deploying A‟s tax enforcement resources to act directly against a
taxpayer on behalf of B where the taxpayer or his property is located within A‟s jurisdiction. There is also
OECD FATF and European Union Code of Conduct .
123
mechanism put in place to overcome this obstacle is the establishment of the Joint Tax
Board (JTB) with the mandate to promote uniformity in the law and administration of
income tax throughout Nigeria.282 However, notwithstanding the establishment of the JTB
over four decades ago, the body is yet to develop a legal framework for simple information
sharing to assist the State in the task of tax administration.
3.6. Problems Associated with Division of Taxing Power
The theoretical literature on taxation in federal systems is largely a product of post the
Second World War. Thus, the task of allocating taxing powers was undertaken by the
drafters of the Constitutions of most federations, especially the older ones, 283 without the
knowledge and practical experiences that are available today. According to Groenewegen:
“The issue of tax assignment and revenue sharing had to be faced by the
drafters of the Constitutions of old, established federations such as
Switzerland and the United States and of the relatively new federations
such as Australia, whose federal history is confined to the twentieth
century. The development of normative rules on these subjects occurred
well after the events on which they were designed to shed light.”284
The various principles on tax assignment are mainly products of Economists who
have carefully studied fiscal developments in federal countries. 285 This is not surprising
because federalism is a political devise to further ends which are always partly and
sometimes predominantly economic.286 The focal point of their analysis was how to
282
Section 86(1) of the Personal Income Tax Act, No 104, 1993 Cap P8LFN, 2004.
283
Such as United States of America, Canada and Australia.
284
Groenewegen, .P, “Tax Assignment and Revenue Sharing”, in McLure, C.E., op. cit., p.293.
285
See generally McLure, C.E., ed, Tax Assignment in Federal Countries, (Canberra, The Australian
National University:1983).
286
Birch, A.H., “Approaches to the Study of Federalism” Political Studies, 14, 1 (1966), p.15, Riker, W.H.,
Federalism; Origin, Operation, Significance, (Boston: Little, Brown Inc, 1964), p.113.
124
address problems which are common to federal systems of government. This section is
devoted to the discussion of these problems in seriatim.
3.6.1. Spillovers or Externalities
As a general rule, taxes are imposed to finance public good.287 Where certain public
goods are provided locally, the costs and benefits may spill over from one jurisdiction into
others.288 For example, if a particular locality acts independently to maximize the welfare
of its residents, such as health or education sector, it may attract people from other locality
to take advantage of the facilities to the detriment while the residents of the former locality
are left to bear the cost. Also, a locality may engage in certain activities for the benefit of
its residents which may impose economic burden on non-residents,289 for instance, by
engaging in tax exportation.290 Inter-jurisdictional or inter governmental cooperation are
usually required to satisfactorily address the problems of spillovers by localities in a
country. The challenge, however, is to determine the appropriate strategy for the
intervention or coordination.
287
See section 3.1.1 above for a discussion on different types of public goods.
288
Sandler, Todd & A. J. Culyer, “Joint Products and Multi jurisdictional Spillovers,” 97 Quarterly Journal
of Economics, pp. 707-716 (1982).
289
Gordon, Roger H., “An Optimal Taxation Approach to Fiscal Federalism,” 98 Quarterly Journal of
Economics, pp. 567-86 (1983), Oates, Wallace E. & Robert M. Schwab, “Economic Competition Among
Jurisdictions: Efficiency Enhancing or Distortion Inducing?” 35 Journal of Public Economics, pp. 333- 354
(1988), Inman, Robert P. & Daniel L. Rubinfeld, “The Judicial Pursuit of Local Fiscal Equity,” 92 Harvard
Law Review, pp. 1663-1750 (1979), Shaviro, Daniel, “An Economic and Political Look at Federalism in
Taxation,” 22 Michigan Law Review, pp. 895-991 (1992).
290
Tax exporting occurs when a country (or other jurisdiction) encourages economic activity to move to
another country (or jurisdiction) because its taxes are too high. This is more likely if t he economic activity is
more mobile. For example, land is not mobile, so it is difficult (if not impossible) for a country to export land
taxes to another country. On the other hand, investment capital is more mobile, so heavy capital taxes will
encourage capital to move another country. Tax exporting is not just relevant for countries. Sub -national
jurisdictions (such as states, provinces and local governments) can export economic activity to nearby
jurisdictions if their tax rates are excessive. See “Tax Exporting” available at
http://en.wikipedia.org/wiki/Tax_exporting. Visited on 20th July 2008
125
3.6.2. Impact of Tax Policy on Mobility and Distribution of Factors of Production
The extent to which factors of production are mobile within a federal system may
affect the distribution of resources.291 Depending on the extent of the mobility of the
factors of production,292 local jurisdictions may engage in unhealthy rivalries to attract
resources to their jurisdictions for example by lowering taxes or granting other
incentives.293 While a measure of competition is healthy for a tax system, high degree of
mobility on account of tax rate or tax system will distort factor prices and utilization to the
detriment of the entire economy in the long run. Thus, the alleviation of the concern of
mobility and distribution of factors of production will also require a measure of inter-
jurisdictional or inter governmental cooperation usually in form of harmonization of taxes
and rates. The problem is in determining the extent to which tax system and rates should be
harmonised without compromising the independence of a locality to determine its tax
policy and rate based on the level of services it wants to provide for the people.
3.6.3. Imbalance of revenue and development between States
Another problem which frequently occurs in federation arises from the fact that
some states lag behind in economic development and provision of social amenities. To a
291
Buchanan, James M, „„Federal Grants and Resource Allocation,” 60 (1952) Journal of Political Economy,
pp. 208–21.
292
Some groups of citizens are less mobile than others. For example, retirees and childless individuals may
be more mobile, resulting in state policies designed to attract them at the expense of the less mobile.
Businesses generally may be more mobile than individuals, as business is becoming increasingly national and
international and states therefore increasingly fungible as business environments. See Ribstein, L.E. &
Kobayashi, B., “The Economics of federalism”, Illinois Law and Economics Working Papers Series,
Working Paper No. LE06-001, January, 2006. Available online at http://ssrn.com/abstract=875626, p. 6.
293
Epple, D & Thomas, R. “Mobility and Redistribution,” 99 (1991).Journal of Political Economy, pp. 828-
58
126
large extent, this is an inevitable feature of federal system. 294 Developing the appropriate
intervention to this problem is not easy. The “poor” localities on one hand will claim they
are entitled to share part of the resources of the rich localities in order to facilitate even
development across the federation while the rich localities on the other hand will argue that
each locality should be allowed to develop at its pace based on its available resources.
While both arguments may be valid to some extent, there is, however, a limit to which they
could go. If the poor localities are continuously financed by the resources of the rich, it
may not only be financially imprudent but place the poor localities in perpetual financial
dependence on the rich states. At the same time, to allow the “rich” States to keep all its
wealth will negate the concept of one nation in a federal system. Thus, where the
differences in the average level of social welfare between localities are substantial and
possibly increasing, the intervention of state or federal or both in aid of the poorer
localities become imperative. According to Ayua:
“Taking care of the unevenness among the States in Nigeria still remains
an important policy matter in the sharing of national revenue resources.
Accordingly, the centralizing consideration seems to be still
important.”295
The problem, however, is in designing the appropriate measure of state/federal intervention
to address problems of uneven distribution of resources. This lies at the root of the current
agitation for resource control in Nigeria. 296
294
See generally “Lowest-income counties in the United States, Available online at
http://en.wikipedia.org/wiki/Poorest_places_in_the_United_St ates. Site visited on 24th June 2008.
295
Ayua, I, “Nigerian Constitutional Scheme on the Sharing of Revenue Resources and Its Implementation:
An Assessments” In Nigeria: Issues in the 1999 Constitution, ed Ayua I.A., et al., (Lagos: NIALS, 2000),
pp.128.
296
Resource control is discussed section Chapter 2 of this Thesis.
127
3.6.4. Imbalance of revenue in favour of the federal government
The concept of federalism emphasises the availability of resources for each level of
government to perform the functions assigned to it under the Constitution. This is
particularly true of the States in order to be truly independent of the Federal Government.
According to K.C Wheare that there is no federalism where the States are financially
subordinate to the Federal Government.297
However, it has not been possible in any known federation to guarantee financial
autonomy of both levels of government. Even if that feat was achieved initially at the time
the Constitution was framed, there can be no assurance that the balance could be
maintained.298 The pendulum of financial power does not always remain in a state of
equilibrium, but tends to swing in the direction of the central government. 299 The mere
spatial or geographical jurisdictional competence of the Federal Government often makes
it better suited than States and Local Governments to administer certain taxes from the
points of view of economic efficiency and ease of administration. For these reasons, the
Federal Government is usually in a position to generate far more revenue than the States.
The problem, however, is in developing appropriate principles for transferring some of the
„federal revenue‟ to the State in order to enable them fulfil their constitutional
297
Wheare, K.C. op.cit., pp. 30-31.
298
Dare, L.O., op.cit., p.28.
299
The Regions were richer than the Central Government during the First Republic under the 1960
Independence Constitution and 1963 Republican Constitution.
128
responsibilities. It is noteworthy that Nigeria has experimented with about 16 principles
without success.300
3.6.5. Compensating States for revenue loss
Where taxes are centralised it will translate to loss of autonomy for the States in
utilizing certain taxes to generate their independent revenue. Centralization of the tax
system is bound to impact differently on the revenue of each State depending on their
circumstances. For example, the arguments of the oil producing States is that if local
taxation of mineral resources were to be permitted, they would have been able to generate
more revenue on their own than they are receiving from Federation Account. The
contention of Lagos State is that the State is receiving far less revenue from what is being
generated from the State. There is, therefore, the need to develop, for reasons of equity,
principles on how to „compensate‟ the States that have more to lose for giving up their
revenue base for the common good of the federation.
3.7. Approaches to Allocating Taxing Powers
Bearing in mind all the fiscal problems inherent in a federal system, a country will have to
determine the permissible degree of centralisation or decentralisation in the allocation of
taxing powers. Assuming that all revenues of a government consist of tax revenue, it is
helpful to first determine whether taxing powers should be centralised or decentralised. In
300
See Ayua, I, p.129, supra note 156.
129
practice, there is no known federal system301 that has adopted any of the extreme options.
According to Hockley:
“We thus reach an important conclusion that a mix of local and central
finance is likely to result in a better community choice of services than
either a purely local or purely central system of finance.”302
A State may arrive at the appropriate level of centralization or decentralization through an
admixture or combination of the three different aspects of a tax: (i) the legislative power to
impose a tax and determine the tax base; (ii) the legislative power to determine the tax
rates and (iii) the executive power to administer the tax.303 While all the three aspects may
be wholly allocated to a level of government, it is also possible to allocate them between
Federal and State Governments. For example, in Nigeria, the power to impose the Personal
Income Tax, Capital Gains Tax and Stamp Duties304 is vested on the Federal Government,
while the State Governments are largely responsible for their collection. 305 Chapter five of
this work interrogates the extent which this arrangement has been successfully operated.
301
Even in a unitary system, there is a measure of decentralization from country to country. For example,
there are certain taxes which the Regions and Boroughs in UK can impose but which our States in Nigeria
are not allowed to can impose.
302
Hockley, C.G., pp. 294-5 supra.
303
C.E. McLure, Jr, Comments on “Fiscal Federalism and Decentralization: A Review of some efficiency
and Macro economic aspects”, Annual World Bank Conference on Develop ment Economics, M. Bruno and
B. Pleskovic, eds World Bank, p.317.
304
Pursuant to item 59 of the Exclusive Legislative List of the First Column Second Schedule of the 1999
Constitution.
305
Item D9-10 of the Concurrent Legislative List permits the Federal Go vernment to delegate the collection
administration of the Personal Income Tax, Capital Gains Tax and Stamp Duties to the State upon such terms
as the National Assembly may prescribe pursuant to which the PITA has delegated the administration of PIT
to the states in respect of their residents. The jurisdiction of the Federal Government with regard to
administration of PIT is only limited to those who are residents in the Federal Capital Territory and other
listed in Section 2(1)(b) of PITA.
130
3.7.1. Should Tax Base be utilised exclusively or concurrently?
In determining the permissible degree of centralisation or decentralisation in the
allocation of taxing powers, one of the most important policy decisions required is whether
to allow more than one level of government to make use of a tax base or grant exclusive
use of a tax base to only one level. The two important concepts are discussed below.
3.7.1.1. Exclusive Base Utilization
Under this arrangement, once a tax base is allocated to a level of government, the
use of the base by another level is not permitted. Thus, there is an element of rigidity in the
allocation of federal and local taxes in the sense that they are allocated respectively
different taxes to the exclusion of each other. While, this structure makes for clarity and
simplicity in the determination of taxes within the jurisdiction of each level of government,
it may inevitably lead to one level of government, having access to the most significant
and elastic sources of tax revenue than the other one thereby giving rise to the need for
revenue sharing with the other level of government based on some prearranged formula. 306
Thus, exclusive tax base utilization usually goes pari pasu with revenue sharing.307
Revenue sharing has been the dominant feature of the allocation of taxing power in Nigeria
under the 1999 Constitution.308 This is in sharp contrast to the system in the United States
where revenue sharing has never been employed in Federal-State financial relations.309
306
Buchanan, J.M., The Public Finances, (Illinois: Richard D. Irwin Inc. Ltd., 1960), p.489.
307
Id. p. 490.
308
This is also true of the arrangements under the 1960 and 1963 Constitution, the major difference under
those Constitutions being that the principle of derivation was given primacy in revenue sharing.
309
Although revenue sharing is widely used in the relations between the state governments and the counties.
The allocation of taxing power in the United States is discussed in Chapter Four.
131
The exclusive tax base utilization might at first sight seem attractive because it obviates the
duplication of tax administration and makes compliance relatively easier. Furthermore, it
would appear that if a correct division of tax sources is arrived at, maximum freedom is
given to all levels of authority to utilize the tax base within their jurisdictions. 310 However,
the structure has been criticised on the basis that governments are less careful about the use
of taxes they do not themselves impose.311 The system also lacks flexibility to meet
changes in expenditure and revenue over time. 312 In this regard, the states and local
governments are tied to the fiscal apron string of the federal in terms of survival and could
do very little to improve their situations. According to Buchanan:
“The fiscal independence of the State could hardly be preserved under

such an arrangement, however, and, even if this were not significant, the
working out of a generally accepted sharing formula would be extremely
difficult. There is much to be said against such a system.”313
Most importantly, it is difficult, if not impossible, to develop a sharing formula that will
satisfy all parties.314 If efficiency or equity were the only relevant consideration taken into
account in organising, there would be a strong argument for levying all taxes at the federal
level. But efficiency and equity considerations are not, of course, the only considerations.
There may be some other considerations, such as political, which may outweigh the
advantages of efficiency and equity considerations. Considering the present mood in
Nigeria on the imperative of decentralisation exclusive base utilisation of the most
important taxes by the Federal Government will have to be reviewed.
310
Hockley, C.G., p.296 supra note 163.
311
Due J.F, Government Finance: An economic analysis, (Illinois: Irwin Publishing Inc., 1954) p.326.
312
Hockley, C.G., p.297, supra note 163
313
Buchanan, J.M., p.490. supra note 152
314
Herber, B.P., p.339. Supra.
132
3.7.1.2. Concurrent Utilization of Tax Base
This refers to a system whereby different levels of government are entitled to make
use of the same tax base to generate their „independent‟ revenue. The major difference
between this arrangement and exclusive tax base utilization is that there is concurrent use
of the same base by two or more levels of government instead of granting the federal
government the exclusive use of the tax base. 315 The mere thought of having two levels of
government taxing the same person or thing may be frightening and rejected on the basis
that it will inexorably lead to double taxation.316 A concurrent utilisation of tax base may
however not be totally strange bearing in mind that in classical federations 317 the
coordinate units (that came together to form the federation) had been imposing virtually all
taxes including customs duties before the formation of the central government. Therefore,
at the formation of the federation, it was unlikely for the coordinate units to surrender all
their powers to the newly created “distant” federal government. While they may more
readily concede to yield their powers in respect of some taxes such as customs duties to the
Federal Government, this may not be so for other taxes, especially, income and
consumption taxes. The competing interests of the federal government and the federating
units, therefore, make it imperative to reach a compromise on tax base sharing instead of
exclusive utilisation by either level of government.
In the absence of efficient co-ordinating mechanism, concurrent use of tax base may give
rise to two major problems. Firstly, if every Local Government Council and State should
have different tax rate, it may lead to a 'tax jungle' and harmful tax competition as some
315
id., p.347.
316
Hockley, C.G., p.297, supra note 163.
317
For instance, United States, Australia and Canada.
133
localities may seek to attract industry by giving tax concessions to taxpayers at the
detriment of their revenue requirements. If other localities were to follow suit, this will
lead to lower tax rates across localities and may ultimately fail in their revenue objective.
Secondly, areas may compete also, in a negative sense of not imposing taxes, for fear of
318
driving industry or people out of their jurisdictions. Thus, a system where local areas
are relying on local sources, without some form of cooperation with other areas, can have a
severe limitation on their ability to finance services they consider necessary.
In order to attenuate the problems of harmful tax competition and erosion of tax base, a
number of a measure of coordination will be required between different levels of
government. The different mechanism developed to allow concurrent use of the same tax
by different levels of government within a framework where each level is able to determine
its tax rate are discussed below. This is the arrangement favoured and recommended for
adoption in Nigeria by this writer in this thesis because of its potentials for addressing the
problem of centralisation of taxing powers in the hand of the Federal Government and the
need to increase the tax efforts of other levels of government. A cursory look of this
arrangement might give rise to the fear that it will inexorably leads to double taxation. It is
arguable that such a fear betrays a proper understanding of constitutes double taxation. In
our view, the adoption and execution of the various mechanisms for federal-state fiscal co-
ordination discussed below will go a long way in addressing any concern of over
burdening the taxpayer with taxes by three levels on the same thing.
318
Id., p.299.
134
It suffices to say that concept of internal double taxation has generated much heat without
light in Nigeria. The correct view of internal double taxation is captured thus:
“For there to be double taxation, the same item or piece of property should
be subject to tax twice or more to the same person. ..Indeed, there can be
no double taxation where the second tax is payable to a different taxing
authority. Thus, in a federation, it is no double taxation merely because the
same property is submitted to both federal and state taxation. It will be so
where two or more taxes are imposed on the same property by the same
authority, during the same period, and for the same purpose. 319
This view has received judicial support in the United States case of Second St Properties
Inc v. Fiscal Court of Jefferson County320 that:
“To constitute double taxation the two taxes must be imposed on the same
property by the same governing body both during the same taxing period
for the same taxing purposes.”321
3.7.2. Mechanism for Federal-State Fiscal Coordination
It is not enough to decentralise taxing power and allow each level to determine its
tax rate, machinery for co-ordination and periodic review are required. 322 There are devices
whereby the Federal Government could encourage the lower levels of government to use a
particular tax source and yet effectively coordinate the overall fiscal system in such a way
that will attenuate some of the concerns expressed above about the concurrent tax base
utilization. These include (i) tax credit, (ii) tax deduction, (iii) tax supplement, (iv)
piggybacking and (v) grant. These devices will be discussed in seriatim.
319
Akanle, O., The Power to Tax and Federalism in Nigeria (Lagos: Centre for Business and Investments
Studies, 1988), pp.54-55.
320
K.Y. 442d 709 at 715.
321
At p.715.
322
Hockley, C.G., p. 299 supra note 163.
135
3.7.2.1. Tax credit system
Under a tax credit system, a taxpayer is allowed to net off the tax paid to one level
of government against his tax liability to another level of government. The federal
government could allow a credit against a federal tax liability for a particular tax or taxes
paid to a state and/or local government, or a state government might do likewise with
certain taxes paid to a local government. Where the Federal, State and Local Governments
are allowed to impose income tax at different rates, the tax paid to the Local Government
will be allowed as a credit against the State tax while the taxes paid to the Local and State
Government will be allowed as credit against the Federal tax. Assuming that a taxpayer has
paid tax of N1,000 per to the Local Government, the amount be allowed as a credit when
paying his tax to the State Government. Thus, where his State tax is N2, 000 the taxpayer
will be required to pay only N1,000 to the State. In a similar fashion, the taxes paid to the
Local and State Government will be credited against his Federal income tax liability.
Assuming that the taxpayer is liable to pay N3, 000 federal income tax, the N2, 000 taxes
paid to both the State and Local Governments will be credited against his liability leaving
him an actual liability of N1, 000 to the Federal Government. This system allows each
level of government the opportunity to derive income from the same source without
unnecessarily overburdening the taxpayer.
It is important to point out that it does not follow that every taxpayer will ultimately be
liable to pay tax to the three levels of government. This will depend on the extent of the
income of a taxpayer as different income thresholds are established for each government.
The local tax rates are usually set very low at a flat rate (in form of a poll tax or
136
development level) and cut across all income strata. The low income earners in the locality
who are not earning up to the thresholds established for the State and Federal income taxes
have responsibility to pay only the local tax. Generally, the middle income earners will be
liable to pay both the local and State income taxes while the rich who may not be more
than five percent of the entire population will be liable to pay federal income tax.
Under the tax credit system, the fear that local governments and states might lose taxpayers
and economic activities if they impose certain taxes is eliminated to a large extent. If a
Local Government or State does not impose a tax, its residents would still be liable to pay
tax in full to the Federal Government while nothing accrues to the Local Government and
States. Therefore, an introduction of a credit system has the potential of increasing the tax
capacity of the state without necessarily increasing the tax burden of the people. 323
This feature effectively removes the differential advantage that a State might bestow on its
wealthy residents, at least up to the point of the federal liability. If the state reduced its tax
below the size of the federal credit allowable, the individual would be liable for the federal
tax payment anyway.324 This system is commonly used especially in US as incentives to
make the states to utilize income tax and estate and inheritance tax. It is also employed in
Canada for both personal and corporate income taxes. 325
323
Due J.F., p. 327, supra note 172.
324
Buchanan, J.M., p.489, supra note 152.
325
Due, J.F., loc.cit., p.327.
137
However, the system does not totally eliminate duplication of administration326 and may
pose considerable administrative complications and problems with regard to equity and
stabilisation. If the tax credit covers the whole of the tax paid locally, then there is little
incentive for economy at the lower level. It has also been argued that the tax credit benefits
wealthier states the most thereby still making equalization to be necessary to some
extent.327
3.7.2.2. Tax deduction
The deduction technique is another means whereby the Federal Government may
encourage the States to develop their own tax sources. Here, the individual taxpayer, in
computing his taxable income for the purpose of determining his federal income tax
liability, is allowed to deduct his State and Local taxes from his gross income. An income
tax deduction differs from a credit in that it represents a subtraction from the chargeable
income prior to the application of the tax rate, while the credit represents a subtraction of
the State and Local taxes from the federal tax liability after the application of the rate to the
base naira for naira or dollar for dollar.328 The tax deduction system, thus, effectively shifts
only a portion of the State and Local tax burden to the Federal Government.
The deduction approach could be employed by the Federal Government to encourage
States to utilize particular forms of tax. The tax deduction approach is also employed in
America. The most significant use, however, involves the various deductions of state-local
326
Id.
327
Hockley, C.G., p.299, supra note 163.
328
Herber, B.P., p.344, supra note 174.
138
taxes such as the personal income tax, general sales tax, and property tax from the adjusted
gross income of federal income tax.329
However, some have criticized this approach on the basis that it is a weapon often used as
a federal control of state-local fiscal systems rather than being a genuine coordination. 330 It
has also been criticized on the basis that where a substantial part of state-local tax
payments are allowed, the real costs of state-local services to local citizens is reduced
while the burden is shifted to federal taxpayers. 331 Also, the tax expenditure to the central
government in terms of alternative forgone may be more than the benefit to the local
citizens if the federal government were to provide the requisite services directly or
alleviate the fiscal positions of the states through other means such as grants.
3.7.2.3. Tax Supplement
Tax supplement has been developed to address the objection that governments are less
careful in the use of revenue from taxes that they do not impose.332 Under this structure,
the administrative structure of a particular tax is streamlined for all levels of government
while each level of government is allowed to determine its rates of tax. 333 Under this
arrangement, the Federal Government normally imposes the basic tax while each State will
adopt the tax base of the Federal Government tax, applies its own tax rates to this base, and
then collects the tax itself.334
329
Id.
330
Id.
331
Id.
332
Due, J.F., p.326, supra note 172.
333
Buchanan, J.M., p.486, supra note 152.
334
Herber, B.P., p.347, supra note 174.
139
Tax supplement allows for diversity in rates among local units; avoids duplication of
administration and compliance activities and ensures uniformity of tax base. However, it
fails to address the concern of tax competition whereby some States may be unwilling to
impose a higher rate for fear of losing economic activities to other jurisdictions. Therefore,
the system works best when rates of the supplement are not set too high to allow for undue
competition or when common rates are employed.12
3.7.2.4. Piggybacking
To piggyback on somebody or something is to use something that already exists as a
support for your own work; to use a larger organisation, etc for your own advantage. 335 In
order to address the problem of overlapping administration, the Federal Government or
State Government, as the case may be, will collect, along with its own levy, a supplement
tax imposed by the lower level of government. 336 To allow for piggybacking, the lower
level of government would define its tax base in precisely the same manner as that of the
Federal or State taxes, for example by allowing the same exemptions and deductions in the
case of income tax. Under this arrangement, the lower level of government would utilize
the collection machinery and procedure of the higher level of government while the
taxpayer pays all his taxes and submits a single return to the tax authority of the higher
level. This technique is usually adopted for States and Local Governments to utilise sales
and income taxes.
335
Hornby, A.S., Oxford Advance Learner’s Dictionary of Current English , 6th edn (Oxford: Oxford
University Press, 2000), p. 878
336
Buchana, J.M., pp.488, supra note 152.
140
The tax piggybacking technique has the advantage of reducing tax enforcement costs, due
to the economies of scale inherent in centralized tax collection. The technique however
requires the full cooperation of both the Federal and State Governments to work
efficiently, which may not always be easy. It has also been criticized on the basis that it
requires the lower level of government to wholly submit to the over-all structure of the
higher level of government, even to the extent of allowing the same loopholes. If there
were imperfections in the taxes of the higher level, the utilization of precisely the same
structure by the lower level would multiply the effects of the distortions generated by the
imperfections. Whereas the tax of the lower level, if organized on a different basis, might
be used to offset federal tax imperfections rather than to reinforce them.337
3.7.2.5 Grants
This approach focuses on inter-governmental transfer of funds to address problem of
relative fiscal capacity of different states. It recognises that the government unit that
collects taxes need not necessarily be the same unit that would expend public funds.338
There are two types of grants viz: (i) Unconditional grant (block grant) and (ii) conditional
grant (grant-in-aid). The Federal Government could dictate how the grants should be spent
in order to achieve certain set objectives. On the other hand, the grant could be
unconditional, especially if the objective is to solve distributional inequities between
jurisdictions.339
337
See generally, id, pp.487-490.
338
Due, J.F., p.23, supra note 172.
339
Buchanan, J..M, „„Federal Grants and Resource Allocation,” 60 Journal of Political Economy, pp. 208–21
(1952).
141
CHAPTER FOUR
LEGAL FRAMEWORK & PRACTICE OF DIVISION OF TAXING POWERS –
INTERNATIONAL PERSPECTIVE
4.0. Introduction
The theories of division of taxing powers were developed after the establishment of
virtually all the existing federal systems including that of the eldest, the United States of
America.340 It will be recalled that the theories provided analytical interventions to
deconstruct problems engendered by the fiscal structures of federal systems for purposes of
reform.341 This chapter reviews the origin and the context within which the division of
taxing powers was established and evolved in some federal countries. It provides an
overview of the interplay of historical, socio-economic and political factors responsible for
the initial framework and the subsequent adjustments of the systems. The extent of
decentralisation of taxing power to the States in terms of the ability of states to raise taxes
or allowed to share the same tax base with the federal government will be examined in the
United States, Canada, Australia, Brazil and India. These countries have been selected on
the basis that they represent a mix of developed and developing countries in order to
present a balanced approach of how the system of division of taxing power works in
different socio-political environments. The chapter concludes with lessons that may be
learnt from these countries in reforming the division of taxing power in Nigeria.
340
Groenewegen wrote “The issue of tax assignment and revenue sharing had to be faced by the drafters of
the Constitutions of old, established federations such as Switzerland and the United States and of the
relatively new federations such as Australia, whose federal history is confined to the twentieth century. The
development of normative rules on these subjects occurred well after the events on which they were designed
to shed light.” See Groenewegen, .P, “Tax Assignment and Revenue Sharing”, in McLure, C.E., ed, Tax
Assignment in Federal Countries, (Canberra, The Australian National University:1983), p.293
341
This was discussed in Chapter Three.
142
4.1. United States of America
Currently, the Federal Government in United States generates bulk of its revenue from
income and social security taxes while the States generate bulk of their tax revenue from
Sales Tax.342 Although both the Federal and States have power to concurrently impose
income tax and sales tax, the Federal has so far deliberately chosen to leave sales tax for
the States while there is concurrent taxation of income under an informal cooperative
arrangement.343
The United States consists of 50 States and a federal district and over 3,000 counties. 344
With a population of over 300 million people and geographical area of 9.83 million square
kilometres, the United States is perhaps the world's fourth largest nation . 345 The United
States was founded by thirteen colonies of Great Britain. 346 On July 4, 1776, they issued
342
Tariffs were the largest source of federal revenue from the 1790s to the eve o f World War I, until they
were surpassed by income taxes. The next largest tax is Social Security tax formally known as the Federal
Insurance and Contributions Act (FICA). See „Taxation in the United States” available online at
http://en.wikipedia.org/wiki/Taxat ion_in_the_United_States . Site visited on 20th June 2010.
343
The United States is the only G-20 country without a federal VAT or Goods and Services Tax. However,
more than half of the senior business executives recently surveyed some type of value -added tax to be
introduced in the United States within five years. In fact, 57 percent of the executives in the survey said they
believe VAT legislation will be introduced within five years, while 18 percent expect it within 10 years. The
huge increase in government s pending coupled with diminishing sources of revenue makes it increasingly
likely. See however „VAT is coming to US” available online at http://www.webcpa.com/news/VAT-
Coming-to-US-52704-1.html. Site visited on 20th June 2010.
344
In the United States, a county is a local level of government below the state (or federal territory).
Counties are used in 48 of the 50 states, while Louisiana is divided into parishes and Alaska into boroughs.
There are on average 62 counties per state. As of the 2000 Census, the average U.S. county population is
about 100,000. At the last count, there were 3143 counties in the US. See “Counties in the Un ited States”.
Available online at http://www.n9jig.com/counties/county.html, See also
http://en.wikipedia.org/wiki/County_(United_States). Site visited on 12th May 2010.
345
After China, Russia and Canada. It is estimated that the population of United States will be 310,232,863
by July 2010. “The World Fact Book, United States” Available online at
https://www.cia.gov/library/publications/the-world-factbook/geos/us.html. Site visited on 12th May 2010.
346
The original 13 colonies are: New Hampshire, Massachusetts-bay, Rhode Island and Providence
Plantations, Connecticut, New York, New Jersey, Pennsylvania, Delaware, Virginia, North -Carolina, South-
143
the Declaration of Independence which proclaimed their independence from Great Britain
and their formation of a cooperative union.347 It is remarkable to note that the American
Revolutionary War was precipitated by a rejection of the tax policy of Britain which
crystallised in the war slogan of “no taxation without representation”. 348
Sequel to the declaration of independence, the colonies assumed responsibility for the
imposition of taxes such as capitation,349 income tax and import duties. Apparently
because of the desire to jealously guard their fiscal autonomy, the colonies initially
adopted a confederation under an Articles of Confederation, 1777. 350 The Articles of
Confederation established a weak federal government under which the colonies were
Carolina and Georgia. See the Article of Confederation, 1777. Available online at
http://www.nationalcenter.org/ArticlesofConfederation.html. Site visited on 12th May 2010.
347
The 13 British American colonies broke were recognized as the new nation of the United States of
America following the Treaty of Paris in 1783. During the 19th and 20th centuries, 37 new states were added
to the original 13 as the nation expanded across the North American continent and acquired a number of
overseas possessions. See “United States” https://www.cia.gov/library/publications/the -world-
factbook/geos/us.html. Site visited on 12th May 2010.
348
A fundamental difference of opinion had developed between British authorities and the Americans on the
related issues of taxing the colonists and their representation in Parliament. On the surface, the Americans
held to the view of actual representation, meaning that in order to be taxed by Parliament, the Americans
rightly should have actual legislators seated and voting in London. The British, on the other hand, supported
the concept of virtual representation, which was based on the belief that a Member of Parliament virtually
represented every person in the empire and there was no need for a specific representative from Virginia or
Massachusetts, for example. In fact, virtual representation was not unknown in America. Legislators in the
Virginia House of Burgesses could live in one district while representing another one. It could also be argued
that property-owning adult males in much of colonial America virtually represented non -voting women,
slaves and men without property. Yet the differentiation between actual and virtual representat ion was really
a convenient fiction from the American side. Most colonists realized the total impracticability of sending
representatives across the Atlantic. London was too far away, too much time would be needed to issue
instructions to colonial representatives, and any American representation would be so badly outnumbered as
to make it totally ineffectual. If taxes were necessary, then the Americans wanted their own assemblies to
impose them. Further, the colonists wanted Parliamentary recognition of this perceived right. Essentially,
"No taxation without representation" really meant, "No taxation by Parliament. No representation in
Parliament. Let us run our own affairs”. See Colonial America, The American Revolution. Available online
at http://www.u-s-history.com/pages/h640.html. Site visited on 12th May 2010.
349
An assessment levied by the government upon a person at a fixed rate regardless of income or worth.
Since it is a tax upon the individual, and not upon merchandise, a capitation tax is frequently labelled a head
tax. A poll tax is a capitation tax. See “Capitation Tax”. Available online at http://legal-
dictionary.thefreedictionary.com/Capitation+Tax. Site visited on 15th May 2010.
350
Supra note 5.
144
making financial contributions towards the financing of the centre which lacked the power
to raise its own revenue by imposing taxes directly on the people. 351
Before the American Revolution, there were certain features in the composition of the
colonies which greatly influenced the fiscal structure adopted under the Constitution of the
United States. The Southern America (South) was inhabited predominantly by people of
British or Scotch-Irish origin while the Northern America (North) was inhabited by a much
wider variety of groups including the Dutch, the Swedes, the Quakers, the Puritans, and so
on. Also, while the main stay of the economy of the South was agriculture 352
manufacturing and industry played a large role in the economy of the South. 353 Because of
the opportunities created by the large industries a large number of immigrants was
attracted to the North and made the North more populated. The South was consistent in its
defence of the institution of slavery which was perceived as essential for the development
of its agricultural potentials and prosperity. In the North, a small but growing and
passionate group called abolitionists declared that slavery was immoral and had to be
ended, by force if necessary. In addition, the North's rapidly growing population gave it
increasing power in the federal government, a fact which worried Southerners who felt that
a Northern-dominated government might try to free the slaves. The sharp divergence
between the industrial anti-slavery North and agrarian Southern slaveholders over the issue
of slavery did not only influence the legal framework for division of taxing power under
351
Tax can only be raised for “all charges of war, and all other expenses that shall be incurred for the
common defence or general welfare” of the League. The taxes “sh all be laid and levied by the authority and
direction of the Legislatures of the several States within the time agreed upon by the United States in
Congress. See Article VIII. Article of Confederation, Id.
352
Southern farmers often focused on growing a few large cash crops, such as cotton or tobacco. See supra
note 3.
353
The colder climate and rockier soils of the North led to less emphasis on agriculture than in the South. Id.
145
the Constitution of the United States but eventually provoked the American Civil War of
the 1860s.354
One of the main concerns in developing the Constitution of the United States was how to
strengthen the Union by vesting the Congress with powers to generate revenue to discharge
its responsibilities through the imposition of taxes. 355 This called for limitation on the
taxing powers of the colonies and the delimitation of how far the taxing power of the
Union could go.
There was a limited number of taxes in existence in 1776 when the United States
Constitution was enacted. Hence, a few taxes such as capitation, excise and import taxes
were specifically mentioned in the Constitution. It is remarkable to note that there is no
allocation of specific taxes to each level of government under the Constitution of the
United State as we have in Nigeria. Not even the taxes that are traditionally federal in
nature are allocated to the Union. Rather, taxing power is divided under the Constitution of
the United States on the basis of direct and indirect taxes. A direct tax is one which is
demanded from the very person, who, it is intended or desired, should pay it. An indirect
tax is one which is demanded from one person in the expectation and intention that he shall
354
The American civil war of 1861-1865 started with the secession of South Carolina from the Union on
December 20, 1860 followed within two months by Mississippi, Florida, Alabama, Georgia, Louisiana and
Texas. See “The American Civil War (1860-1865). Available online at
http://www.thelatinlibrary.com/chron/civilwar.ht ml. Site visited on 12th May 2010.
355
The term federalism is often used to mean a loose association of states in which the central is subordinate
to the states. See Wheare, K.C., Federal Government, 4th edn., (London: OUP, 1953), p.10. Black defines a
confederation as “a league or union of states or nations, each of which retains its sovereignty but also
delegates some rights and powers to a central authority”. See Black’s Law Dictionary, Bryan A. G., ed.,
(West Group, St. Paul, Minn., 8th edn.,1999), p.316.
146
indemnify himself at the expense of others. 356 The major distinction between direct and
indirect is that indirect taxes upon goods and services are usually passed to the ultimate
consumer of the goods and services in form of higher prices. Examples of direct taxes are
income tax, property tax and capital gains tax. Those within the category of indirect
taxation are value added tax, purchase or sales tax, custom duty, excise duty etc. Generally,
indirect taxes are easier to administer and less politically volatile.
4.1.1. Federal taxing power
The governing provisions on division of taxing power under the United States
Constitution are Article 1 sections 8(1), 9(4) and 9(5) of the Constitution. Section 8(1)
vests the Congress with the "power to lay and collect taxes, duties, impost and
excises…subject to the condition that the taxes, duties, impost and excises shall be uniform
throughout the Unites States”. The drafters of the US Constitution were reluctant to vest
the Congress with plenary taxing power. The taxing powers of the Congress are expressly
limited by the Constitution in four ways thus:
(i) “taxes, duties, impost and excises” shall be uniform throughout the United
States;357
(ii) direct taxes shall be apportioned among the States;358
(iii) no capitation, or other direct tax shall be laid, unless in proportion to the
Census359 and
(iv) tax on slaves shall not exceed $10 per slave pending the prohibition of
importation of slaves.360
356
See generally, Smith, A., “An Inquiry into the Nature and causes of the Wealth of Nations”, ed, Hutchins,
R.M., (Chicago: Encyclopaedia Britannica, Inc., 1952, 13th Printing, 1988) See generally Chapter IV on
Systems of Political Economy, Book V, Ch.3.
357
Article 1 Section 8(1) United States Constitution.
358
Article 1 Section 9(4) id.
359
360
147
The requirement of uniformity of federal taxes, duties, impost and excises is to ensure that
there is no discrimination either in favour or against any particular State or area. The
practical effect is that federal tax statute shall have general application throughout the
United States without any discrimination between States. The requirement of
apportionment was meant to ensure that the burden of financing the federal government
does not fall too heavily on some States than the other. Since, the federal is a joint
enterprise, the financing mute be borne by all. In a literal sense, the requirement of
apportionment implies that if the Union desires to raise a particular amount from direct
taxes, the total amount shall be distributed among the States.
It can be inferred from these provisions that the drafters of the Constitution were
seemingly driven by the requirement of fairness to ensure that the burden of direct taxes by
the Union is distributed evenly across persons within territories to avoid a situation where
some States will have to bear disproportionate tax burden. This also explains the
requirement that Capitation (a flat rate imposed per head) shall be imposed in proportion to
the census. The conceptual basis of this requirement is questionable since the capitation tax
is supposed to be imposed directly on the citizens and not on the States. Therefore, whether
or not a census is conducted, each citizen is obliged to pay only once which forecloses the
possibility of some States bearing disproportionate burden. It is suspected that this
framework is a carryover from the structure under the confederation whereby states were
making subventions to the central government. The limitation of slave tax to $10 was a
148
compromise between the slave abolitionists North and the slave owner and protectionist
South.
The requirement that direct taxes should be apportioned among the States ordinarily would
have proved to be a significant constraint on the taxing power of the Congress but for the
liberal interpretation of the meaning of direct taxes by the court. Shortly after the
ratification of the Constitution,361 the limits of the power of the Congress to impose direct
tax was tested in Hylton v United States.362 In that case, the plaintiff challenged a tax which
imposed on carriage on the basis that it was unconstitutional being not apportioned among
the States. Holding in favour of the Congress, it was held that the tax was not direct. Direct
taxes were said to be limited to property and capitation taxes, which were the two most
dreadful taxes at the time. This reasoning was applied in Springer v. United States363
which upheld unapportioned income tax, Scholey v. Rew 364 which upheld unapportioned
inheritance tax, Veazie Bank v. Fenno,365 which upheld unapportioned tax on State bank
notes.
361
The United States Constitution was adopted on September 17, 1787. Article VII of the US Constitution
provides that “The Ratification of the Conventions of nine States, shall be sufficient for the Establishment of
this Constitution between the States so ratifying the Same”. Following the Constitutional Convention, a great
debate took place throughout America over the Constitution that had been proposed. was ratified by all
thirteen states, with Rhode Island signing on last in May 1790. See “History of of the United States
Constitution”. Available online at
http://en.wikipedia.org/wiki/History_of_the_United_States_Constitution#Ratification. Site visited on 13 th
June 2010.
362
3 U.S. (3 Dall) 171 (1796)
363
102 U.S. 586 (1880).
364
90 U.S./ (23 Wall) 331 (1874)
365
75 U.S. (8 Wall) 533 91869)
149
However, in 1895 in the celebrated case of Pollock v. Farmers’ Loans and Trust Ltd, 366 the
Supreme Court of United States declared ultra vires an income tax of 2 per cent which
exempted income below $4,000, therefore falling on few tax payers in few states. It was
held that for the tax to be valid, it must be apportioned among the States. This decision
seems to be in sync with the underlying principle that the burden of direct taxes should not
fall disproportionately on a few. The decision in Pollock was a reawakening of the
practical constraint of the requirements of apportionment. It follows that the Congress
would be infinitely constrained to structure the income tax in a way that may achieve set
objectives such as redistribution of income unless the requirement of apportionment is
dealt with. To overcome this challenge, Constitution was amended vide the 16 th
Amendment of the Constitution which provides that:
“The Congress shall have power to lay and collect taxes on incomes, from
whatever source derived, without apportionment among several Sates, and
without regard to any census or enumerations.”
Sequel to this amendment, Congress was able to tax impose income tax on individuals,
corporations concurrently with the States. A writer had described the 16 th Amendment as
“correcting that mistake, re-establishing the plenary taxing power of the Congress”367 The
power, significance, relevance and pre-eminence of the federal government including its
taxing was gradually expanded during war or emergency periods to cover estate and gift
taxes and social security tax.
366
157 U.S. 429 (1895), 158 U.S. 601 (1895
367
Jenson, E.M., “The Taxing Powers, the Sixteenth Amendment and the Meaning of 'Incomes'”. Available
online at
http://www.taxhistory.org/thp/readings.nsf/ArtWeb/736DB4705B4EE21D85256F2B00548FA3?OpenDocum
ent. Site visited on 4th May, 2010.
150
4.1.2. State taxing powers
It will be recalled that the States had been imposing different types of taxes such as
capitation, import duties, excise, income tax on individuals and corporate bodies and
property tax. With the emergence of a Union, to what extent is the taxing power of the
States restricted or redefined ostensibly to allow some scope for the Congress?
The taxing power of the States under the United States Constitution is only restricted with
respect to import and export taxes in Article 1 section 10(2) thus:
“No State shall, without the consent of the Congress, lay Impost or Duties
on Imports or Exports, except what they may be absolutely necessary for
executing its inspection Laws: and the net produce of all Duties and
Imposts, laid by any State on Imports or Exports, shall be for the use of
the Treasury of the United States; and all such laws shall be subject to
revisions and control of the Congress.”
The above provisions recognise the rights of a State to exercise inspection powers over
goods that are being imported or exported into or from the Union through its Ports or Ports
located within its territory. However, the exercise of such powers must be with the consent
of the Congress while the law made shall be subject to the revision and control of the
Congress. Furthermore, the revenue from the State import and export taxes will be for the
benefit of the Treasury of the Union. Ostensibly due to the restrictions on the exercise of
this power, no State has bothered to impose import and export taxes in practice. 368
368
Inman, Robert P. & Daniel L. Rubinfeld, “The Judicial Pursuit of Local Fiscal Equity,” 92 Harvard Law
Review, pp. 1663-1750 (1979) p.215.
151
The States continued to exercise taxing powers over income of individuals and
corporation, estate and gift taxes, stamp duties, etc. simultaneously or concurrently with
the Federal Government. Being a federal system, there is a measure of diversity in the
State taxes. For example, some State chose not to impose income tax in order to achieve
set social economic objectives.369 The bulk of the revenue of most of the States comes
from Sales tax.370 The tax rates of income tax and sales tax vary from one jurisdiction to
the other which allow cross border shopping in some cases. 371
It is useful to closely examine how the Federal and State in the United States manage to
exercise their taxing power on the same base concurrently. This is achieved through a
system of cooperation between the Federal and States in structuring their tax system. For
example, there is a progressive federal income tax on income of individuals. At the state
level, income tax is also imposed at a proportional372 (or mildly progressive rate) by some
369
The fact that a state does not have an income tax does not necessarily mean that its residents
pay less in taxes than residents of states with an income tax. All states must generate revenue and
they do so through various taxes including income taxes, sales taxes, property taxes, license taxes,
fuel taxes, and estate and inheritance taxes, just to name a few. In states without state income tax,
higher sales, property and other assorted taxes can exceed the annual cost of a state income tax.
The following states do not impose an income tax on individuals Alaska, Florida, Nevada, South
Dakota, Texas, Washington, and Wyoming. See “Tax Free States: Which States Have No
Income Tax? Available online at http://taxes.about.com/od/statebystate/qt/taxfreestates.htm. Site
th
visited on 12 May, 2010.
370
Sales tax represented the average of 33.3 percent of State income in 2009. See “State
Guesstimated Government Revenue GDP-Chart-Deficit Debt.
th
http://www.usgovernmentrevenue.com/#usgs302a. Site visited on 12 May, 2010.
371
Cross border shopping refers to a situation where a resident of a State travel to a neighbouring state with a
favourable tax rate to shop. For example, residents of New York travelling to New Jersey (where there is no
sales tax) to shop.
372
A proportional tax is a tax imposed so that the tax rate is fixed as the amount subject to
[1]
taxation increases. In simple terms, it imposes an equal burden (relative to resources) on the rich
and poor. A good example of a proportional tax is poll tax. Most consumption taxes are usually
proportional. For instance, the Value Added Tax (VAT) rate on all taxable goods in Nigeria is 5
percent. Thus, proportional taxes also usually favour the rich more than the poor because the rich
are left with higher percentage of their income after tax. See Ayua, I.A., The Nigerian Tax Law,
(Ibadan: Spectrum Law Publishing, 1996) p.11.
152
States while some States do not even impose personal income tax. Through the
intervention of Multi State Tax Commission, a model income tax is generally adopted by
the States which adopt a similar base with the Federal income tax in terms of rate,
allowances, deduction etc. Every taxpayer pays income tax at a flat rate first to its county.
Taxpayers earning above a certain threshold are liable to pay tax at a proportional rate to
the State under an arrangement whereby the county tax is deductible from the tax due to
the State. Taxpayers earning above a certain threshold are also liable to pay tax at a
progressive rate to the Federal Government under an arrangement whereby the county and
the state income taxes are deductible from the federal tax. In effect, only the high nets
worth individuals representing about 5 per cent of the American population are liable to
pay federal income tax.373
Also, businesses are taxed at the State level through the various types of state corporate
income and franchise taxes.374 In addition, businesses are taxed are taxed at the local level
through the business component of property tax. Most empirical studies suggest that even
relatively high taxes on business do not even have substantial locational effects. This may
be because these taxes represent a small share of the cost of doing business. 375
Over the years, the dynamics of division of taxing powers showed that the struggle was on
the extent of the power of the Congress to tax income tax. The constitutional limitations
373
Element of welfare is inherent in the income tax system of America.
374
The franchise tax is a privilege tax imposed on corporations, including banking corporations and limited
liability companies that are chartered in State. The tax is also imposed on non -state corporations that do
business in he State. See “Texas Franchise Tax”. Available online at
http://www.window.state.tx.us/taxinfo/franchise/franfaq.html. Site visited on 3rd March 2010.
375
Inman, Robert P. & Daniel L. Rubinfeld,, supra note 29, at p.218.
153
placed on the power of the Congress were alleviated through judicial activism and later by
constitutional amendment. Over the past five or six decades, the tax system of United
States has changed substantially both in terms of the form of taxes used and the level of
government utilizing those taxes. As table – illustrates, the personal income tax has grown
as a source of financing, with growth taking place at both the State and the federal level.
Notwithstanding the growth of income tax revenues, payroll tax has supplanted the
personal income tax as the largest single revenue source for the federal.
A remarkable feature of the United States tax system is the absence of a federal Value
Added Tax (VAT). Notwithstanding the seduction of Value Added Tax as a federal tax376
and the absence of any constitutional limitation on its part, the United States Congress has
imposed self-restraint from introducing a federal VAT ostensibly to preserve the taxing
powers of the States on sales tax.377 However, only the future will tell for how long the
Congress will be able to restrain itself from the economic prospects of federal VAT.
Notwithstanding that the fiscal capacity of States in the United States will vary widely,378 it
is remarkable to note that the United States Constitution does not contain express
376
Countries introduce a VAT because they are dissatisfied with their existing tax structure This
dissatisfaction falls broadly into one or all, of four categories: (1) the existing sales taxes are unsatisfactory;
(2) a customs union requires discriminatory border taxes to be abolished; (3) a reduction in other taxation is
sought, or (4) the evolution of the system has not kept pace with the development of the country. See Tait,
A.A, Value Added Tax International Practice and Problems, (London, New York: McGraw-Hill 1972), p.9.
377
So far, the Congress has refused to heed the call of some respected writers to introduce a federal VAT.
378
The main oil producing States in US include Louisiana, Alaska, Texas and California. See List of Oil
Producing States. Available online at http://en.wikipedia.org/wiki/List_of_oil-producing_states
154
provisions for equalization. In practice, the Federal Government is pursuing equalization
within the framework of grants379 and unfunded mandates.380
4.2. Canada
In Canada, there is currently a concurrent utilisation of income tax and sales tax by both
the Dominion and the provinces (achieved through cooperative arrangement)
notwithstanding the original intention by the drafters of the Constitution to pigeon hole the
Dominion into indirect taxes (mainly customs and excise) and that of the provinces into
direct taxes (mainly income and property tax) respectively. The provinces are able to
generate about 50 percent of their consolidated expenditure while the balance is obtained
through revenue sharing and grants from the Dominion. 381
Canada is a federation of ten provinces and two territories. With a population of about 30
millions and a total area of 9.9 million square kilometers, represents the second largest
country with the lowest population density in the world. 382 Canada started as a
confederation ostensibly to create a stronger and more efficient centre. 383 However, there
379
This is a giving of federal funds to a state or local government to subsidize a public project. A giving of
funds to an institution or a person in order to subsidize a project or program. See “Grant -in-Aid”. Available
online at http://www.answers.com/topic/grant-in-aid. Site visited on 13 February 2010.
380
Unfunded Mandate is shorthand for what happens when one branch of government (A)
requires that another branch (B) do something that requires resources, but B has to foot the bill. It
usually refers to the federal government, but states can do the same to locals. Because there is no
firm definition, the Advisory Commission on Intergovernmental Relations suggests using "federally
induced costs" when discussing federal unfundated mandates. See “What Is An
Unfunded Mandate?” Available online at
http://uspolitics.about.com/od/politicaljunkies/g/unfunded_mand.htm
381
See Shah, A, “Intergovernmental Fiscal Relations in Canada: An Overview”. p.236.
382
Id. p233
383
Canadian Confederation was the process by which the federal Dominion of Canada was formed, officially
beginning on July 1, 1867, with the new provinces of Ontario and Quebec (until then together comprising the
Province of Canada) along with two other British colonies, New Brunswick and Nova Scotia, which also
became provinces. See “Canadian Confederation”. Available online on
http://en.wikipedia.org/wiki/Canadian_Confederation. Site visited on 12th May 2010.
155
is a sharp contrast between the division of taxing powers in Canada and United States as a
result of the fundamental difference in the historical development of their federal systems.
While the American federalism started with the colonies holding and guiding their fiscal
autonomies jealously, the Canadian federalism was designed ab initio to establish a very
strong centre by vesting the most important functions on the Dominion vis-à-vis and the
Provinces.384
The distribution of fiscal powers under the Canadian Constitution can be best understood
by reference to the situation of the British North American colonies at Confederation. 385
During the period around 1867, the bulk of the revenue of the British American colonies
was derived from customs and excise.386 The province of Canada (now Ontario and
Quebec) which was more developed derived bulk of its income from customs and excise
while these taxes were negligible in the Maritime Provinces. At confederation, the
immediate and most urgent tasks facing Canada related to the economic development of
the isolated pioneer communities which comprised British North America. Hence, the task
of building of railways, roads, canals, harbours and bridges to link the provinces with each
other and with the rest of the world was recognised as a prerequisite for economic
development and accordingly assigned to the Dominion. 387
384
May, R.J., op.cit, p.67.
385
This statement is based on the Report of the Royal Commission on Dominion -Provincial Relations
(Rowell-Sirois Commission) (Ottawa, 1940) Bk 1. Quoted from Forest, p.1
386
Customs alone provided 80% of the revenue of provinces of Nova Scotia and New Brunswick, and 66%
of the revenue of the province of Canada (now Ontario and Quebec). Id.
387
Important functions were also assigned to the province such as the administration of justice, health,
education, education , welfare and local matters. See Hogg, p.144
156
The division of powers in Canada was guided by the British North America Act of 1867
until 1982 when the Canadian Constitution Act resulted in repatriation of the act and
vested the power to amend the Constitution with the Parliament.
4.2.3. Taxing power of the Dominion
The division of power was explicitly stated in the British North America Act, 1867
(renamed the Constitution Act of 1982). Section 91(3) vests the Dominion with plenary
power to raise money by “any mode or system of taxation” whether direct or indirect as it
may deem fit. Due to the envisaged impact of the sweeping taxing powers of the
Dominion on the revenue of the provinces, express provisions were made for the
Dominion had to undertake responsibility for the payment of subsidies (grants) to the
provincial governments and the settlement of portions of provincial debts. Initially, the
federal subsidies were so large that they amounted to about half of the entire of the
provinces. The original design was to make the provinces to largely depend on federal
subsidies without any significant revenue of their own388 in flagrant violation of the
normative principle that responsibility for financing expenditure should devolve on the
spending government.
4.2.4. Taxing Power of the Province
The founding fathers of the Canadian federalism at the outset did not favour
permitting the provinces to impose indirect taxes on the basis that it would foster the
388
Thirsk, W.R., P.236.
157
creation of inter provincial trade barriers.389 Towards this end, by section 122 of the BNA
Act „the customs and excise laws of each province” (the most lucrative sources of revenue
for some provinces) were transferred to the Dominion. The provinces were vested with
specific taxing powers while the residual powers resided in the Dominion.
Section 92(9) of the Canadian Constitution attempts to restrict the provincial revenue
power to “direct taxation within the province”. The existing direct taxes in Canada in 1867
were limited to property tax and income tax and it was not envisaged that these taxes could
become significant sources of revenue because of their relatively unpopularity and
administrative complexity. Since, the provinces could not generate sufficient revenue from
direct taxes (and licences and fees) express provisions were made in the Constitution for
payment of annual subsidies by the federal to the provinces. 390 The statutory subsidies still
form a major part of the revenue of provinces till today. 391
Corporate income taxes predated the personal income tax in most provinces. Virtually all
provinces were taxing corporation on the basis of place of business, paid up capital, and so
on by 1930. Ontario was the first to impose an Inheritance Tax in 1892 which was
eventually „copied‟ by all the other provinces. 392 Despite all the efforts aimed at generating
tax revenue, most of the provinces were initially only able to generate about 20% of their
revenue requirement. It soon became clear that the founding fathers of the Canadian
Constitution had underestimated the expenditure requirements of the provinces. The
389
Thirsk, W.R., supra, p.236.
390
Hogg, P..W., Constitutional Law of Canada, 4th edn, (Toronto: Carswell, 2001), p. 150
391
See section 118 BNA Act.
392
Hogg, P.W., p.150. supra note 49.
158
problems worsen as the provinces started undertaking developmental projects such as
railways, roads and bridges through budget deficit. The general result was that most of the
provinces soon ran into debt.393
The provinces were compelled by their financial difficulties to expand the scope of their
taxing powers394 by imposing tax on the paid up share capital of banks. In action filed to
challenge the constitutionality of the tax in Bank of Toronto v. Lambe,395 the Privy Council
gave an extended meaning to direct taxation and held that the tax was a direct tax within
the meaning of the Constitution. Once the constitutional hurdle had been scaled, all the
provinces eventually introduced a similar tax. 396 The Supreme Court of Canada broadened
the jurisdiction of the province on direct taxes by interpreting sales taxes as direct taxes.
As a result of increasing demand by the provinces for federal subsidies, the customs and
excise taxes eventually proved to be insufficient for the Dominion. The financial
requirements of the Dominion were heightened by the exigencies of the First World War
which were initially financed by loans and increases in customs and excise. When these
sources proved to be inadequate, the Federal was constrained to impose income tax (direct
tax) for the first time, vide the War Profits Act in 1916. This was followed in 1917 by the
introduction of federal corporate income taxes and sales tax. 397 These taxes were regarded
as temporary measures only, because it was generally agreed that the field of direct
393
La Forest, G.V., Allocation of Taxing Power under the Canadian Constitution , 2nd edn (Toronto:
Canadian Tax Foundation, 1981), p.19.
394
The first provincial personal income tax was levied by British Columbia in 1876 and the second by Prince
Edward Island in 1894.
395
(1887) 12 A.C. 575
396
Hogg, P.W., p.150. Supra note 49.
397
La Forest, G,V., p. 21. Supra note 52.
159
taxation should be left to the provinces. The power of the Federal Government to impose
income taxes was called to question in Caron v. The King.398 The Privy Council held that it
was permissible for the Federal to impose direct taxes for its own purposes, and that the
Federal and the provinces had concurrent jurisdiction over direct taxation.399 As a result of
the judicial affirmation, the Federal Government was able to meet the financial exigencies
of the war and carry out the economic functions required of it.
Following the World War 1, the provinces not only resumed but extended their activities in
terms of improvement of public welfare, education and highways. The increased provincial
expenditures were met through the introduction of gasoline tax, motor vehicle and liquor
licensing and control therefore leading to the expansion of the provincial taxation field to
what is generally known as indirect tax with the liberal interpretation by the court. 400
While the judiciary has helped in addressing the scope of taxing powers of the Dominion
and provinces through their interpretations, there still remained unaddressed the perceived
economic imbalance between provinces in terms of fiscal capacity. For instance, the
concentration of industrial and commercial establishments in the central provinces had
placed them in a favourable position for raising revenues which accentuated the gap
between them and the “poorer” maritime provinces. 401 In 1926, the Dominion appointed
the Duncan Commission402 and later the White Commission403 to examine the insistent
398
[1924] A.C. 999
399
La Forest, G,V., p21. Supra note 52.
400
Id. p21
401
Id. p.22.
402
The Maritime Rights Movement arose in the 1920s in response to perceived unfair economic policies in
Canada that were impacting the economies of the provinces of New Brunswick, Nova Scotia and Prince
160
claims of the maritime provinces that the national policies of the Dominion had placed
them in a disadvantageous position within the Confederation. The White Commission
recommended an increment in federal subsidies to these provinces. 404
The Dominion continued with the taxation of income (which was initially meant to provide
temporary relief) because of huge war debt overhang. 405 Rather than relinquishing the tax,
the Dominion was confronted with the need to find new revenue sources thus sequel to the
depression of the 1930s . Consequently, the Dominion was constrained to enter extensively
into the direct and indirect taxation fields with increases in corporation and personal
income taxes and sales tax among others. 406 Similarly, the depression period also induced
the provinces to expand their tax bases in an effort to cope with financial pressures. By the
end of 1930s, virtually all the provinces had personal income corporate income taxes.
Retail sales tax also appeared in a few provinces and withstood the court‟s challenge of
being an indirect tax through carefully worded legislation which stipulated that the tax was
being placed directly on the purchaser with the seller having the role of a provincially
appointed tax collector.407
Edward Island. The "movement" attempted to address issues relating to interprovincial trade barriers, freight
rates on railways, and various other indicators that were believed to be behind an economic decline since the
early 20th century and aggravated by World War I. See “The Maritime Rights Movement” available online at
http://en.wikipedia.org/wiki/Maritime_ Rights_Movement. Site visited on 5th May, 2010.
403
The "Duncan Commission" of enquiry was established in 1926 by Prime Minister MacKenzie King to
address the issues raised by the Maritime Rights Movement. It made recommendations to lower tariffs,
decrease freight rates, and change other federal policies to help the regional economy, however few of these
recommendations were ever implemented as King largely ignored the commission
404
405
Canada's war debt totalled $2 billion. See The history of consumption taxes and income tax ,
Written by Claire Gourdeau, historian , Translated by C.J. MacDonald. Available onlone at
http://www.revenu.gouv.qc.ca/en/ministere/centre_information/carrefour_doc/jeunes_enseig
nants/8_histoire.aspx. Site visisted on 5th May, 2010.
406
407
Thirsk, W.R., p.237. Supra note 47.
161
The search for new revenue source led the Dominion to introduce an inheritance tax during
the Second World War in 1941.408 Thus, tax base sharing became the hall mark of the
Canadian taxing power arrangement during the pre and post World War II period.
Apparently due to lack of effective coordination, the situation became rather chaotic, with
the existence of federal, provincial and municipal taxes of various kinds, at different rates
on different bases, producing a complex burden of taxation which varied greatly from
municipality to municipality and region to region.409 In order to stem the ugly
development, Rowell-Sirois Commission was appointed in 1937 to review the whole
financial structure of Canadian government and make recommendations. 410 The
Commission recommended that the provinces should cede all their direct taxes to the
Dominion. And that only the Dominion should levy three the three standard taxes on
personal income, corporate income and inheritances. 411 To offset for the revenue loss, it
was recommended that the Dominion assume all provincial debt and the burden of
unemployment compensation and provide “annual national adjustment grants” to the
poorer provinces which would allow every province to provide an adequate level of public
services (at the average Canadian standard) without having to impose higher than average
tax rates.412
408
409
Id, p.63.
410
411
412
162
The Report of the Commission was rejected at the 1941 Dominion-Provincial Conference
because of the opposition of Alberta, British Columbia and Ontario – the three provinces
which would have received nothing under the proposed system of adjustment grants.413
Nevertheless, the Report marked the direction of federal fiscal policies for many years to
come.
Nevertheless, in 1941 during the World War II, the Dominion proposed to the provinces
that they should temporarily forgo their rights to collect personal and corporate taxes and
inheritance taxes “for duration of the second World War”. In return, the provinces were to
receive unconditional payments as compensation for the lost revenue. The Dominion
undertook that at the end of the war it would reduce federal taxes so as to make “room” for
the provinces to resume levying the three taxes. 414 (It was made a temporary arrangement.
Why can‟t we try the same?) Throughout the period, the three most significant direct taxes:
the personal and corporate income taxes and succession duty were imposed by the Federal
Government throughout Canada.
The Dominion wanted the arrangement to continue in order to further the goals of
financing peacetime reconstruction and using centralized policy as a tool of national
economic management.415 In 1947, the Dominion persuaded all provinces except Ontario
and Quebec to enter into a 5-year “tax rental agreement” (TRA) under which the Dominion
“rented” from each consenting province the right to levy personal income tax, corporate
413
414
415
In addition to its general policy of reconstruction and a more activist approach, particularly in welfare, the
government considered it essential to centralize taxation power to promote the Keynesian economic policies
which it proposed to embark on, and which it followed with considerable success for along time during the
post-war period with a single mindedness that was probably unmatched in any country. See La Forest, p.26.
163
income tax and succession duty. The consenting provinces did not levy these taxes but
received grants (“rent”) from the Dominion to compensate for the foregone revenue. Since
Ontario and Quebec did not consent to the TRA, they re-imposed their respective corporate
income taxes and succession duties but chose not to impose personal income tax. 416
The Federal Government markedly expanded its activities during the last stages of the
Second World War and the post war period into subject matters that were within the sphere
of the Province such as the old age pension, unemployment insurance, payment of family
allowances (monthly payment to all children under 16 years of age), 417 and disability
allowances, financial grant for construction of hospitals, universities education,
construction of Trans-Canada Highway, and many others.418
When the TRA became due in 1952, the Dominion introduced additional formula which
Ontario considered sufficient to consent to the agreement. Quebec thus remained the sole
dissentient province which preferred jealously its autonomy as a sacrifice for financial gain
under the TRA.419 Initially, the federal Income Tax Act allows a taxpayer to deduct 5% of
provincial income tax up from the federal tax. In effect, such a province is expected to
streamline its income tax rate accordingly. This provision was ignored by Quebec which
imposed a personal income tax amounting to 15% of the federal tax while maintaining that
its taxpayers were entitled to deduct the entire amount. 420 In 1955, the Dominion agreed to
reduce its income tax by 10% in any province imposing an income tax. 421
416
417
In Angers v. Minister of National Revenue [1957] Ex CB 342 the validity of the scheme was upheld.
418
419
Id. p. 26.
420
Id, p.27.
421
Id, p.26.
164
When the 1952 TRA became due in 1957, a number of major changes were conceded in
favour of the provinces.422 Under these agreements, the standard rates were of federal
personal income tax was increased from 10 to 13% in 1958, federal corporation income tax
was increased from 9% to 15% in 1960 and 50% of the federal tax on estates was allowed.
The provinces had an option of either imposing their own taxes at “standard” rates (for
which the federal government would allow a rebate against its taxes), or “rent” its taxes to
the Dominion in return for a payment. Furthermore, every province, whether or not it
entered into the agreement, was entitled to an “equalization” payment by the federal
government sufficient to bring the per capital yield of the three taxes up to the level of the
average per capital yield in the two wealthiest provinces, which incidentally were Ontario
and Quebec.423
All the provinces except Quebec consented to RTA. Ontario chose a middle course renting
its personal income tax and continued with the administration of its own succession duties
and corporate income tax at 11% which is 2% higher than the federal standard rate. 424
Quebec was by far the most vocal in seeking fiscal adjustments. So strong were the
pressures for a larger share of governmental responsibility and fiscal power by this
422
During this period of strained relations between the Dominion government and the government of
Quebec, Quebec established a Royal Commission (the Tramblay Commission) in 1953 to inquire into
constitutional problems, including in particular the distribution of taxes between the Dominion and the
provinces, “encroachment by the central power in the field of direct taxations” and constitutional problems
of a legislative and financial nature in general”. The Recommendations of this Commission formed the
fulcrum of the official position of Quebec in Dominion – provincial fiscal relations. The Commission in its
report, roundly condemned intervention by the Dominion by means of grant -in aids in matters falling within
provincial regulatory control, proposed a reallocation of taxing power giving the provinces jurisdiction over
succession duties and personal and corporate income taxes; other sources of revenue, like customs and excise
and realty taxes, were to remain unchanged. It foresaw some of the difficulties inherent in this de centralized
system by recommending equalization measure to redress the disparities among the various provinces; to
promote policies of stabilizing the economy it recommended inter-provincial and federal-provincial co-
ordination of policies. The general thesis, it will be seen, is diametrically opposed to that of the Rowell-Sirois
Commission. See Hogg, P.W., p.152. Supra note 49.
423
424
Id.
165
province that by it threatened to secede from the Canadian Union in 1964. 425 In a way, the
provinces were beginning to loose their sovereignty because they were indirectly being
directed towards the execution of some of the federal programmes at the expense of their
programme which they may consider to be more beneficial as a pre condition for enjoying
some grants.426
Against this background, the TRA Agreement was not renewed when it came to an end in
1962. Rather, the Federal-Provincial Fiscal Arrangement Act (FPFAA) offered more
concessions to the provinces. For instance, the Dominion undertook to gradually withdraw
from the personal Income Tax field up to 20% in 1966 and from the corporate income tax
by 9%. Under the FPFAA, the Dominion further offered to collect income taxes levied by
the provinces free of charge provided the provincial tax base was identical with federal
base. All the provinces accepted this offer with the exception of Ontario and Quebec;
Ontario accepted in so far as personal income taxes were concerned, but continued to
collect its own corporation income tax. Quebec continued to collect both its personal and
corporate income taxes.427 Quebec demanded, (sometimes in tones that bothered on
ultimatum), the whole of the succession duties and 25% of the personal and corporate
income taxes.
Following the federal-provincial conference in the Spring of 1964, the Dominion agreed to
make additional concession by withdrawing an additional 2% in the personal income tax in
the 1965 tax year and a further 2% in the 1966 tax year to make a total of 24%. By 1964,
425
Id, pp. 28-29.
426
Id.
427
Id.
166
the 50% of the federal estate taxes collected in each province were paid back to them while
50% abatement was granted on federal taxes for the provinces to Quebec and Ontario and
later British Columbia which chose to impose their succession duties. The payment or
abatement as the case may be on succession duties was later increased to 75%.428
Provisions were also made in the Federal-Provincial Fiscal Arrangement Act to provide for
equalization for all the provinces up to national average per capital. The FPFAA has been
reviewed periodically. The current version came to force on 12th March, 2009. Under this
new arrangement, revenue that would have flowed to the federal government began to flow
directly to provincial and territorial governments.This transfer could not be reversed by
subsequent governments, meaning that the federal government had no fiscal leverage over
this component of the transfer.429
The provincial governments today enjoy overlapping taxing jurisdiction with the federal
government in all areas except customs, unemployment‟s insurance premium, the
constitution to Canada Pension Plan. Nevertheless, the tax system in Canada is
harmonised. This has been made possible through the federal initiatives to enter into tax
collection agreements with the provinces where the federal government would agree to
collect taxes at no cost to the provinces provided they agree to use the federal base for
levying their supplementary tax rates. Nine provinces have agreed to federal collection and
administration of their income taxes. For corporate income taxation, seven provinces have
428
Id. p. 29.
429
http://en.wikipedia.org/wiki/Canada_Health_Act. See generally, Soucy, J & Wrobel, M.G., “Fiscal Policy
in Canada: The Changing Role of the Federal and Provincial Governments”. Available online at http://dsp-
psd.pwgsc.gc.ca/Collection-R/LoPBdP/CIR/912-e.ht m. Site visited on 15th May 2010.
167
agreed to federal collection and administration. The remaining provinces that administer
their own income taxes also follow the federal tax base. 430
Canada presents an interesting case study in implementing VAT in a federal country. The
Canadian Constitution restricts provincial government access to direct taxes, but the
Canadian Supreme Courts have interpreted a retail sales tax to be a direct tax. Before 1991
Canada has a manufacturer‟s sales tax (collected at the production‟s stage) at the federal
level and a retail sales tax in nine of the ten provinces. The federal government tried but
failed to win support for a combined federal-provincial VAT. It then acted alone and
introduced a VAT called the “goods and services tax” (GST) at 7 percent in 1991. The
GST is presently not harmonised with provincial retail sales tax except in the province of
Quebec. Pressure from business groups for harmonization of federal and provincial taxes
continue to mount.431
4.3. Australia
Australia came into existence as result of a complex range of historical, socio-economic
and geographic factors.432 The Commonwealth dates back to 1901 when six self
governing colonies federated together after series of Conventions and referendum. Since
then, the six colonies (now States) of Australian federation remain the same and two
territories. Australia is a two-tier federation with legislative power distributed between the
Commonwealth and the States. All the States have approximately 77 local governments.
430
Shan, A, supra, p.235.
431
Shan, A., p.239. Supra note 89.
432
Egan, M, “Reshaping Fiscal Federalism in Australia” in ed. Warren, N.A., Reshaping Fiscal Federalism in
Australia,p.116.
168
The units are extremely heterogeneous by population and landmass. Section 51 of the
Commonwealth of Australian Constitution Act, 1900 433 (Australian Constitution)
enumerates the subject matter over which the Commonwealth can legislate exclusively.434
There are also subject matters on which the Commonwealth and States can legislate on but
in case of inconsistency, the Commonwealth law shall prevail. 435
The drafting of the federal taxing power was heavily influenced by legal decisions in the
United States and Canada. Hence, it has been said that legal, rather than economic
436
consideration dominated the discussion during the Conventions. Before establishment
of a federation, the colonies got about 75% of their most of their revenue from customs and
excise although the revenue raised by them differed substantially between individual
colonies. Therefore, the tariff question played a crucial role in designing inter-
governmental financial relations.437 The objective as far as customs duty was concerned
was to guarantee absolutely free inter colonial trade intercourse by vesting the tax
exclusively on the Commonwealth.438 Hence section 90 of the Constitution provides:
“On the imposition of uniform duties of customs the power of the

Parliament to impose duties of uniform customs and excise, and grant
bounties on the production or export of goods, shall become exclusive”
433
The constitution was enacted in 1989-1900 and ratified on July, 1900. It came into force on 1 January
1901, at which time the Commonwealth of Australia came into being. See “Australian Constitutional Law”,
Available online at http://en.wikipedia.org/wiki/Australian_cons titutional_law. Site visited on 25th May,
2010.
434
See section 52. Australian Constitution.
435
See section 109. Id.
436
Groenewegenen, P., p. 294. Supra note 1.
437
Id., p. 294
438
Id., p Id., p. 295
169
The above has been described as the most important economic provisions of the
Constitution.439 Following the United States model, rather than granting custom duties
exclusively to the federal government, the Australian Constitution recognizes that a State
might have a legitimate interest in regulating the passage of certain goods through its ports
and hence the need to vest the States with a measure of inspection and revenue powers.
Any revenue generated in excess of the cost of inspection shall be forfeited to the
Commonwealth.440
Definitions of “customs” and “excise” were quite important and highly litigated
constitutional issues in Australia.441 The Court gave a very wide interpretation to the
meaning of excise as generally understood by economists and thereby expanded the scope
of the Commonwealth taxation to cover sales tax. The States were thereby excluded from
the consumption tax base since federation. In Peterswald v. Batley,442 the first case to be
decided on the meaning of “customs and excise” the court adopted a narrow view of excise
as a “tax on the quantity and value of particular goods produced within a country”. The
decision was therefore favourable to the State as it afforded them the opportunity to
impose consumption tax provided it is not discriminatory between States. However, this
view was gradually abandoned in favour of a broader interpretation in Bolten v. Madsen443
where it was held that:
439
Egan, M,, p.41. Supra note 91.
440
See section 112 of the Constitution.
441
See Mathews v Chicory Marketing Board 60C.L.R., 263, Parton v. Milk Board 80 C.L.R., 229, Western
Australia v. Chamberlain Industries Property Ltd., 121 C.L.R., 1 and Dickenson’s Arcade Pty Ltd. v. The
State of Tasmania & Anor (1974) 130 C.L.R, 177., Parton v Milk Board (Victoria) [(1949) 80 CLR 229],
Dennis Hotels Pty Ltd v Victoria [(1959-1960) 104 CLR 529]
442
(1904) 1 CLR 497
443
1963) 110 CLR 264
170
`“It is now established t
The transfer of customs and excise duties to the Commonwealth affected the States in
different degrees. The New South Wales was least affected, 445 it affected South Australia
relatively little, Victoria and Queensland to a considerable extent and Tasmania even more.
Western Australia with its particular heavy financial needs was strongly affected.
Consequently, Western Australia was the most reluctant members of the initial
federation.446 This explain the temporary special tariff provision for that State in section 87
of the constitution which is otherwise known as the Braddon clause 447 which provides that
a minimum of three quarters of the net customs and excise revenue of the Commonwealth
448
had to be paid to the States at least during the first ten years of the federation.
In addition to uniform customs duties, the Commonwealth was given a general power to
raise money with the only qualification that the tax imposed shall not discriminate between
States or part of the States. In this regard, section 51 (ii) provides:
444
Id at 271.
445
The New South Wales, the largest State, was a low tariff State consistent with it‟s a strong bias for free
trade.
446
Western Australia was predominantly an agro base area with primary producer of goods and little import
substituting domestic industry. It paid tariff on its inputs and unable to determine the tariff on its output.
447
Sir Edward Braddon was an important proponent of federation in Tasmania. He was elected as one of the
Tasmanian representatives to the Constitutional Convention of 1897. At the Convention, he was responsible
for the so-called "Braddon Clause" (or "Braddon Blot", as it was known by its opponents). The proposed
Constitution provided that the Federal Government would assume the power to levy customs duties, an
important source of revenue for the states. The Braddon Clause provided that the Commonwealth would have
to return at least three quarters of all duties collected.After fierce debate, during which George Reid
threatened to withdraw New South Wales from the Convention, the Clause was limited in operation to ten
years after Federation. The now-defunct Clause is still part of the Constitution of Australia as Section 87,
however it was superseded by the Surplus Revenue Act 1910. See “Edward Braddon” Available online at
http://en.wikipedia.org/wiki/Edward_ Braddon. Site visited on 25th May, 2010.
448
See section 87 of the Australian Constitution
171
“The Parliament shall subject to this Constitution, have powers to make
laws for the peace, order and good government of the Commonwealth
with respect to:-
(ii) Taxation; but so as not to discriminate between
States or parts of States.”
Since the revenue accruing to the Commonwealth was envisaged to be far in excess of the
requirements of the new federal government, it was agreed that surplus revenue should
share among the States. Thus section 96 of the Constitution provides a general power for
the Commonwealth to grant financial assistance to States on any condition as it may think
fit.449
Apart from share revenue from federally collected customs and excise, States rely on
income tax, probate, stamp duties and land tax. Intergovernmental tax immunity is
provided in section 114 to limit the taxing powers of the State and Commonwealth thus:
“A State shall not, without the consent of the Parliament of the

Commonwealth, raise or maintain any naval or military force, or impose
any tax on property of any kind belonging to the Commonwealth, nor
shall the Commonwealth impose any tax on property of any kind
belonging to a State.”
The Great Depression worsen the relatively weak financial position of Western Australia
such that in a 1933 Referendum, its voters voted by a margin of 2:1 to secede from the
Commonwealth.450 This development led to the establishment of Commonwealth Grant
Commission in the same year as a statutory Body to report to the Governor on any
application from a State for financial assistance under section 96 of the Constitution. The
449
See section 96. Id.
450
Shan, A Supra note 89 p.241.
172
mandate of the Commission is to help alleviate States who are in serious financial
difficulties for purposes of achieving horizontal equalization451 in some regards.452
Prior to 1942, income tax was concurrently imposed by the Commonwealth and States.
However, in 1942, the Commonwealth passed the Income Tax (Assessment) Act, 1942 453
and the States Grants (Income Tax Reimbursement) Act, 1942 with the aim of
monopolizing income tax. The latter Act provided that Commonwealth funding will be
provided to the States only on the “condition” that they refrain from imposing any income
tax of their own.454 The former Act then set the Commonwealth income tax rate very high
to incorporate both the Commonwealth and that of the States in such a way that it became
very difficult if not impossible for the States to still impose its income tax without
wrecking hardship on taxpayers.455 This was because the Income Tax (Assessment) Act
mandated the taxpayers to first pay the Commonwealth tax before that of the States. In
effect, the States were faced with a Hobson choice to either take or leave it.456 Since then
no State has imposed income taxes while they have been receiving compensatory grant
451
Because the taxing potential of the states is unevenly distributed, the economically weaker or smaller
states share in the tax revenue of the richer or more populous states through a process of “horizontal financial
equalization,” See http://www.britannica.com/EBchecked/topic/931069/horizontal-financial-equalization.
“Germany (in Germany: Labour and taxation) “ Available online at
http://www.britannica.com/EBchecked/topic/931069/horizontal-financial-equalization. Site visited on 3rd
May, 2010.
452
However, the appropriate formula to achieve this objective has not been free from controversies as some
have accused the GCC of surreptitiously making the formula more egalitarian without statutory warrant. See
generally, FFA, pp. 5-6.. Supra note 109.
453
No. 2 of 1942
454
This Act was made pursuant to section 96 of the A ustralian Constitution which provides that “parliament
may grant financial assistance to any such States on such terms and conditions as the Parliament thinks fit.”
The State Grant Act, therefore, stipulated the “terms and conditions” that the States should not impose
income tax as a pre-requisite for funding.
455
Groenewegenen, P., p. 295. Supra note 1.
456
The development did not go without some change from the States. However, the courts interpreted the
phrase „terms and condition” broadly in favour of the Commonwealth in South Australia v. Commonwealth
(First Uniform Tax Case) (1942) 65 CLR 373., Victoria v. Common (Second Income Tax Case) (1957) 99
CLR 575.
173
from the Commonwealth pursuant to section 96 of the Constitution. The general Sales tax
is also administered federally and distributed between the Commonwealth and the States.
States have not relented in challenging the overarching federal fiscal power. As recently as
1997, in Ha v. New South Wales,457 a State excise and franchise tax was struck down on
the ground that it amounted to an excise tax under the Australian Constitution. The States
most important taxes are therefore on payrolls, financial and capital transactions, gambling,
insurance and motor vehicles.458 Thus, up till now, the monopoly of the Commonwealth in
tax administration is one of the distinguishing attributes of the Australian‟s fiscal
system.459
4.4. India
India is the most populous federal country with a population of about one billion people. 460
India became an independent democratic nation from Britain in 1947 and a Republic in
1950. Historical factors have played an important part in the adoption of a federal
Constitution with strong unitary flavour by India.461 Unlike in Nigeria where the
philosophy before and after independence was for the Regions to develop at their pace,462
India consciously build on the colonial system by adopting a planned development strategy
457
(1997) 189 CLR 465
458
Reserve Bank of India, “Fiscal Federalism: Theory and Practice”, Availab le online at
www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=1159 p.113
459
Id.
460
Rao, M.G., “Changing Contour in Fiscal Federalism in India”, available online at www.econ.hit-
u.ac.jp/~kokyo/APPPsympo04/PDF.../Rao-Final2.pdf - Site visisted on 23rd June 2010.
461
For a discussion on the historical development of Indian‟s system of intergovernmental fiscal relations see
Singh, N, “Indian‟s System of Intergovernmental Fiscal Relations”.pp-2-5.
462
Regional self-government was attained by both Eastern and Western Nigeria in 1957 while the Northern
region attained the same status in 1959. ... Three years later, on October 1, 1963, Nigeria became a Republic
thus breaking all ties.
174
which required the Planning Commission to allocate resources according to priorities
based on federal preferences.463
India has been a constitutional democracy since 1950 now comprises of 28 States, six
Union Territories (UT) and a National Capital Territory (NCT) in Delhi. 464 Below the State
level are more than 250,000 local governments of which 3,000 are in the urban areas while
others are in the rural areas. Rural local government otherwise called Panchayat, again
have three sub political levels – District, Taluk (Block) and Village. However, since 1992,
the Constitution has been amended to accord recognitions to rural and urban local
governments.465
The Indian Constitution clearly laid out the area of responsibility of the Central and State
Governments with respect to functions, revenue raising instruments and legislation needed
to implement them. The Indian Constitution, in its Seventh Schedule, assigns the powers
and functions of the centre and states. The Schedule specifies the exclusive power of the
Centre in the Union list; exclusive powers of the states in the State list; and those falling
under the joint jurisdiction are placed in the Concurrent list. All the residuary powers are
assigned to the Centre.466 The functions assigned to the central government are those
463
Rao, M.G.,, p.3. For example, the princely states that existed at the time of independ ence, under the
umbrella of British rule, were rapidly absorbed and consolidated into a new political structure and accorded
special status which were totally removed only in 1970. See “The Nigerian Embassy - History”. Available
online at
http://www.google.com.ng/search?hl=en&q=the+western+nigeria+became+independent+in+1957&btnG=Se
arch&meta=&aq=f&aqi=&aql=&oq=&gs_rfai=
464
India began as federation with two-tier structure consisting of the Union Government and 22 States. The
States boundaries were not inviolate and have been repeatedly redrawn by unilateral actions of the Union as
allowed by the Constitution. Rao, M.G.,, p.3, Id.
465
Id., p.3
466
Singh, pp. 6-7. Supra note 119.
175
required to maintain macroeconomic stability, international trade and relations, and those
having implications for more than one state. such as defence, external affairs,
communications, constitution, organisation of Supreme Courts and the high Court,
election, etc. The States are exclusively vested with powers on important functions
touching on the life and welfare of the people such as public order, police, local
governments, public health, agriculture, land, etc. List III is a concurrent list covering
administration of justice, economic and social planning, trade, commerce etc. Although
both the Union and the State can make laws on the subject matters in List III, the law of
the Union will prevail in case of inconsistency.
The allocation of taxing powers in India is based on a principle of separation, i.e., different
taxes are specifically exclusively assigned either to the Centre or to the State. 467 The union
and the states have certain taxes that are exclusive to them; there are some taxes that are
collected by the union but are required to be shared between the union and the states.
The Union is exclusively vested with power to levy and collect tax on production (Union
Excise duties), personal income tax (other than income from agriculture), corporation tax,
wealth tax (excluding agriculture wealth), estate duties, import duties, export duties, stamp
duties and a few other miscellaneous taxes. The most significant of these taxes is excise
duties accounting for about 17 percent of the total revenue of the country. Due to the
negative impact of export duties on some States the Constitution, at inception, provide a
grant in lieu of export duties to a number of States under Article 273.468
467
Id.
468
The States are Assam, Bilhar, Orissa and West Bengal.
176
Article 269 provides for the second variant of Union taxes which are federally imposed and
administer under a revenue sharing arrangement between the Union and the State.
Accordingly, the revenues from the following federal taxes are shared between the Union
and States in accordance with the formula as may be prescribed by the Finance
Commission:
(a) duties in respect of succession to property other than agricultural land;

(b) estate duties in respect of property other than agricultural land;
(c) terminal taxes on goods or passengers carried by railway, sea or air;
(d) taxes on railway and far freights;
(e) taxes other than stamp duties on transactions in stock-exchanges and
future
markets;
(f) taxes on sale or purchase of newspapers and on advertisements published
therein;
(g) taxes on the sale or purchase of newspapers, where such sale or purchase
takes place in the course of inter-State trade or commerce;
(g) taxes on the consignment of goods (whether the consignment is in the
person
(h) making it or to any other person), where such consignment takes place in
the course of inter-State trade or commerce.469
The third variant is Stamp duties levied by the Union but administered by the States for
their exclusive use. However, stamp duties, within the Union Territories are administered
by the Union but assigned to the States. 470
A long list of taxes has been allocated to the States under article 275 including sales tax on
the sale and purchase of goods471 (exclusive services), agricultural income and wealth.
However, only the tax on sales and purchase of goods has been significant for state
469
See section 272 of the Indian Constitution.
470
See Article 268. Id.
471
Item 54 on the State List. Id.
177
revenues.472 Since sales taxes are imposed by the States under their laws the tax varies in
its design from State to State but generally levied at the first point of sale within a State. 473
The States, on the average, are able to raise about 38 percent of the total revenue. 474
The system of allocation of taxing power has some problematic features. Article 267
originally vested powers on the originating States to impose tax on inter State sales based
on originating principle. This resulted into certain administrative problems arising from
different rates on different goods entering inter-state trade. To avoid this difficulty, a
central co-ordination was introduced vide a Constitutional amendment which introduced
Entry 92A in the List I of the Legislative List. Pursuant to this provision, the Central Sales
Tax Act, 1956475 was enacted to vest the sales taxing power in India on the Destination
State.476 Also, the separation of income taxation between the centre and states based on
whether the source of income is agriculture or non-agriculture has opened up avenues for
both avoidance and evasion of personal income tax as a result of the difficulty by states in
taxing agricultural income. Second, the fact that states are able to impose tax on sale and
purchase of goods but not services has posed a major problem in designing and
implementing a comprehensive value added tax (VAT).477
472
Singh, p.7. Supra note 125.
473
Pandey, J., “Fiscal Federalism in India – An Insight into the Concept and structure of Sales Taxation”
Available online at http://www.legalserviceindia.com/articles/fiscal. htm. Site visited on March 26, 2009.
474
In 2002-2003, the states on the average raised about 38 percent of government revenue. See Singh, p.7.,
Supra note, 125.
475
No 74 of 1956.
476
Under the destination principle, VAT is imposed only at the place where the goods are consumed. Thus,
in an international sale, export of the goods will not be taxed while VAT will only be paid on import. See
Ogundele, E.A., Value Added Tax (VAT), Theory and Practice, (Lagos: Libriserve Ltd, 1996). P.
477
Singh, p. 7. Supra note, 125.
178
Local Governments are generally responsible for primary education, maintenance of roads,
sanitation and public health, public safety, the provision of public conveniences and basic
amenities, all of which tend to rise with fast expanding population and growing
expectation of the people. Article 243X of the Constitution provides a basis for the State to
delegate the administration of taxes to the local government thus:
“The Legislature of a state may, by law –

(a) authorise a Municipality to levy, collect and appropriate such
taxes, duties tolls and fees in accordance with such procedure and
subject to such limits;
(b) assign to a Municipality such taxes, duties, tolls and fees levied
and collected by the State Government for such purposes and subject
to such conditions and limits.
However, property tax and other minor taxes, which are frequently assigned to them by
State Government, tend to be insufficient, partly due to the constraint usually imposed by
State Law on tax rates and tax bases and the relatively poor administrative structure thus
making state and federal grant inevitable. 478 In 1992, the Constitution was amended to
accord constitutional recognition to rural and urban local governments 479 by establishing a
separate Legislative List of 29 functions for rural local governments and 18 functions for
urban local governments.480 Furthermore, each State was required to appoint a State
Finance Commission to recommend tax devolution and grants to the local governments. In
practice, the States have devolved meagre taxing powers to the local governments such as
taxes on land and property, levies on motorised transport, local entertainment and licence
fee fair. Some State allow their urban local governments to levy a tax called, octroi, on the
entry of goods into a local area for consumption. In case of entertainment tax, some states
478
Id.
479
See the 73rd and 74th Constitutional Amendments to the Constitution
480
See the Eleventh and Twelfth Schedule to the Constitution.
179
allow the local government to administer while in others, it is administered by the State
while the revenue is assigned to the local government.
In 1975, the Union entered into an agreement with the States to abolish sales tax on three
products viz; textile, sugar and tobacco which were replaced with additional export duties
the revenue from which are assigned to the States. Under the agreement, the States could
cancel the agreement and impose their independent sales tax on those productswhenever
they so desire. Considering the potential adverse incentives of sharing taxes from
individual sources for the Union, the Constitution was amended based on the
Recommendation of the Tenth Finance Commission that proceeds of all Union taxes
should be paid into a divisible pool which is currently being shared on the ratio of
72.8%:27.2% or as may be determined by the Finance Commission.
4.5. Brazil
Brazil comprises of the Federal Government, three federal territories, 23 States and about
4,000 local governments (muncipio). Brazil started as a politically centralized unitary State
under an imperial regime. In 1834 the Provincial Legislative Assemblies were granted
power to impose taxes necessary to meet municipal and provincial expenses "so long as
these [taxes] do not prejudice the general levies of the State."481 The following year, a
statute was enacted that expressly reserved to the Empire no fewer than fifty-eight separate
revenue sources, thus practically eliminating all possibilities for provincial taxation. After
481
Law No 99 of October 31, 1835. See Novelli, F.B., “Notes on the Brazilian Tax System, in ed, Dolinger
J., & Rosenn K.S,(eds.) (Rio De Janerio: University of Miami North South Centre & Editora Esplanada Ltda,
Rua do Carmo) p.55.
180
enactment of this Act, the Provinces had available to them only residual taxation with no
meaningful contents in view of the sprawling taxing powers of the Federal Government. 482
Brazil did not establish true constitutional apportionment of tax revenues until the 1891
Constitution came into force. This first Republican Constitution, which created a federal
structure with substantial degree of politico-juridical equality and autonomy for member
States, for the first time specifically, allocated certain taxes to the exclusive jurisdiction of
the Federal Government483 or the States.484 It was then up to the States to determine the
part that should go to their respective Counties. The Constitution permitted either the
Federal or State Governments to institute concurrently and even cumulatively, taxes other
than those specifically designated by the constitution. 485
Through this clause the Federal Government imposed the Consumption Tax, Tax on
Industrialized Products (M); the Income Tax;486 Sales Tax487 . The 1934 Constitution
introduced four significant changes in tax assignment. First, it vested the exclusive
jurisdiction the important Sales Tax within the exclusive jurisdiction of the States and this
has remained so up till now. Second, counties were included in the constitutional division
of taxes and granted their own taxing power along with the State and Federal
Governments. Third, double taxation, previously expressly permitted, was prohibited, with
federal taxes given preference over identical state taxes. Fourth, a third form of levy, a
482
Id. p.55.
483
Art. 7 of the Constitution
484
Art 9. Id.
485
Novelli, F.B., p.55. Supra note 140.
486
In 1923,
487
This tax was initially called the “Tax on Commercial Sales” in 1924 when it was introduced.
181
special assessment for public works (contribtiicao de melhoria), was introduced into the
tax which could be levied by any of the State taxing entities. 488
Brazil experienced a military intervention through the so-called 1964 Revolution. Certain far
reaching reforms were introduced under the Military Government. 489 First, all taxes with
identical natures were consolidated into one with proper definition with reference to their
economic bases rather than mere nomenclature. Second, the residual tax jurisdiction (unnamed
taxes) was abolished. This measure eliminated not only the possibility of creating
concurrent taxes (even if not cumulative) but also that of simply creating taxes not
contemplated by name in the definition of the exclusive jurisdiction of any of the political
entities. Third, there was a more rigorous coordination of the central and local
subsystems.490 Fourth, there was the transformation of Sales Tax into Value Added Tax.
Fifth, institution of a true subsystem of revenue sharing designed to make up more
systematically for inequalities and deficiencies arising from the limitations imposed on
taxing powers of the States and local governments. There were some minor reforms in
1965, 1967 and 1969. In 1969, the residual taxing power was reserved solely to the Federal
Government. Furthermore, the Federal Government was permitted to transfer to the States,
488
Novelli, F.B., p.56. Supra note 140.
489
The reform was substantially embodied in Constitutional Amendments No. 18 of 1965 to the 1946
Constitution
490
This was achieved through a transfer to the Federal Government of the power, formerly granted to States
and Counties, to impose taxes on exportation and on ownership of rural land; through limitations imposed
upon the exercise of the taxing power by States and Counties, by their partial submission to federal norms
(complementary laws and resolutions of the Federal Senate); and through granting exclusive power to the
Federal Government, by complementary laws in expressly defined exceptional cases, to institute compulsory
loans (a new type of tax, an extraordinary and refundable tribute). See Novelli, F.B., op. cit., p.59. Novelli
eulogized the reform as an “attempt to alter the tax system profoundly and fundamentally, making it an essentially
rational rather an historical system, using the classifying criteria of Schmolders.”
182
the Federal District and the Counties, the exercise of its respective tax power with respect
any such taxes that might be established. 491
The current Brazilian Constitution is the 1988 Constitution came into force on October 5,
1988. The Constitution adopts a presidential system of federal system. 492 The Brazilian
Constitution recognizes the State Government and municipalities as two separate and
independent sub federal levels of government. 493 While the 1988 Constitution generally
adheres to the spirit of the Tax Reforms of 1965, in its 1967 and 1969 versions, 494 it
however, introduced a measure of fiscal decentralization and autonomy. This was done
partly by transferring certain federal taxes to the States, the Federal District and the
Counties and substantially increasing the system of sharing of tax revenue in their
favour.495 This occurred most notably in respect of income tax, the tax on rural land
ownership and the tax on operations of credit, foreign exchange and insurance (IOF). This
was however not followed by a corresponding transfer of function from the federal to the
other levels of government. The current structure has been criticized on this score:
“….the decision to produce substantial financial decentralization by

changing the division of taxing jurisdiction and increasing the shares of
local governments in federal tax collections was not based on a rational
plan. Rather it was based on political designs and empiricism. This is
evident in the grave incongruence (whose effects are already making
themselves felt) of transferring a considerable sum of resources from the
Federal Government to the States and Counties without also transferring
491
Novelli, F.B.,p58. Supra note 140.
492
Filho, M.G.F., “Fundamental Aspects of the 1988 Constitution” in ed Dolinger J., & Rosenn K.S., A
Panorama of Brazilian Law, (University of Miami: 1992), p.1.
493
The Constitution is however vague about their functions therefore making overlapping of function
inevitable. See Gandi, V.P., p. 332.
494
Novelli was of the view that the current system is inferior to that instituted by the 1965 Reform. Novelli,
F.B., 59. Supra note 140.
495
Id., p.62.
183
the corresponding burdens. Not only did the Constitution maintain the
same burdens upon the Federal Government, but also increased
them.”496
The Constitution basically distinguishes between two classes of tax jurisdiction: joint and
exclusive. The following levies are within the field of exclusive jurisdiction of the Federal
Government on imports, exports, income tax, Value Added Tax, mineral taxation, rural
land tax.497 Furthermore, the Federal Government may impose, other taxes not listed in
Article 153, so long as (i) it adopts, where appropriate, the technique of non-cumulative
incidence and (ii) it uses a taxable event or basis of calculation other than those specified
elsewhere in the Constitution. Where the residual taxing power is exercised twenty per cent
of the proceeds shall go to the States and the Federal District. 498 The Constitution also vest
exclusive jurisdiction to the Federal Government to impose two extraordinary levies, war
taxes and compulsory loans. They are labelled extraordinary because the conditions under
which they may be imposed are exceptional events, such as a foreign war, a public
calamity, or a public investment of urgent character and significant national interest. Their
duration of these levies is naturally limited to the period in which the extraordinary need
persists.499 The income tax is the most important tax in the entire tax system, both in terms
of revenue production and as an instrument of fiscal policy.500
The major type of tax for the State and Federal District is the value added tax (VAT) on
final sales of goods. Article 155 provides that the States and the Federal District have the
496
Novelli, F.B., p. 60. Supra note 140.
497
See Article 153 of the Brazilian Constitution.
498
Art. 157. Id.
499
Novelli, F.B., p. 73. Supra note 140
500
Id.
184
power to impose taxes on: (a) transfers causa mortis and donations of any property or
rights (inheritance and gift tax); (b) transactions relating to circulation of goods and the
performance of services of inter-state and inter-municipal transportation and
communications, even on transactions or services begun abroad; and (c) ownership of
motor vehicles. The States and Federal District also have power to impose a surtax of up to
five per cent of the federal income tax paid by individuals or legal entities domiciled in
their respective territories. There are thus two VATs in Brazil, a federal VAT and a State
VAT. The federal VAT is limited in scope, applying only to imports and to the inter-state
sales at the production stage. The State VAT is wider in scope, applying to the transfer of
goods at all stages of production and distribution.
Article 156 vests Counties with power to levy taxes on: (i) the ownership of urban lands
and buildings; (ii) any type of non-gratuitous inter vivos transfer of real property; (iii) retail
sales of liquid and gaseous fuels, except for diesel oil; and (iv) services of any name not
included within those of interstate and inter-municipal transportation and communication.
The Constitution clearly spells out the taxes whose revenues are to be shared and the
proportions in which these revenues have shared in past had been a function of the
Parliament. For example, part of the proceeds of the collection of the Income Tax and the
Value Added Tax shall be applied in the following manner: (i) twenty-one and one- half
per cent to the States and Federal District; (ii) twenty-two and one-half per cent to the
Counties; (iii) three percent for application in programs to finance productive sectors of
the North, Northeast and Center-West Regions. Furthermore, the County is entitled to the
185
following from the federal revenue (i) 20 percent of the proceeds from the ITR on real
property located within a County; (ii) 50 percent of the proceeds of the collection of tax on
vehicles licensed from within their territory. (iii) 25 percent of the proceeds of collection of
the VAT.
186
CHAPTER FIVE
EVOLUTION OF DIVISION OF TAXING POWERS IN NIGERIA FROM 1954 TO
1999 CONSTITUTION
5.0. Introduction
Nigeria adopted a federal Constitution in 1954. 501 Since then, the country went through a
series of constitutional changes502 under different socio-political milieu before the extant
Constitution of the Federal Republic of Nigeria, 1999.503 The division of taxing powers
usually varies from one constitution to the other depending on the system of government
and the prevailing philosophy of the drafters on the balance of power between the Federal
and State. This chapter chronicles the prevailing socio-political and historical factors that
have impacted on the development of division of taxing powers in Nigeria with a view to
gaining insights into the extent to which the experiences of the past could guide the reform
of the present. Focus will be on the degree of centralization or otherwise under the
different constitutional arrangements with particular emphasis on (i) the extent which the
regions (states) were able to generate their independent tax revenue and (ii) possible
evidence of concurrent use of any particular tax by both the centre (federal) and the
regions, if any. In other words, to what extent were the various systems of division of
taxing powers centralised or decentralised, competitive or anti- competitive ? At what
stage(s) did some of these features begin to manifest in Nigeria fiscal arrangement? The
answers to the above questions will reveal whether or not the founding fathers of Nigeria
501
See the Lyttleton Constitution of 1954.
502
Nigeria has gone through the following Constitutional changes viz: Independence Constitution of 1960,
Republican Constitution of 1963, Constitution of the Federal Republic of Nigeria, 1979 , Constitution of the
Federal Republic of Nigeria, 1999 under civilian administrations. There were also the 1989 Constitution of
Nigeria and 1995 Draft Constitution under the Military Government before the adoption of the extant
Constitution of the Federal Republic, 1999.
503
Cap C23 Laws of the Federation of Nigeria, 2004.
187
desired a fiscally strong states or weaker states from inception and whether the goal has
been consistently pursued.
5.1. Fiscal Arrangement in the Pre-Colonial era
Nigeria comprises of about 250 indigenous ethnic nationalities 504 occupying three main
geographical areas which for convenience are regarded as the Northern, Western and
Eastern Nigeria.505 Prior to the advent of the British colonialists, each community had a
system of mobilising human (mainly) and material resources towards community
development in terms of the provisions of public goods under the customary institutions
and community leaders.506 Therefore, each community depended wholly on the resources
available within its geographical boudary without any form of transfer or mutual assistance
from the other. Also, the tax system507 was designed to suit the peculiarity of each
environment. The system in the North was more developed because of the existence of
strong emirate institution. The earliest forms of taxes in the North were agricultural tax
(kurdin kasa) and cattle tax (jangali). Towards the end of the 19th century, certain
kingdoms in the West headed by the Oba had introduced capitation tax (poll or head tax).
504
Other ethnic groups such as Tiv, Bura, Igbira and Bachama in the area now known as middle belt also did
not have any form of tax system. The political configuration of the East profoundly influenced th e future
development of modern tax system in the area. See “The 250+ Tribes/ethnic Groups In Nigeria”. Available
online at http://www.nairaland.com/nigeria/topic-55383.0.ht ml. Site visited on 25th June, 2010.
505
Due to the natural demarcation between the geographical areas, it was convenient for the British to
later refer to these geographical areas as North, West and East which has stuck up till now. These
geographical areas will hereinafter be referred to as such.
506
Communal work by able-bodied individuals or age grades such as the clearing of roads, building of
community houses, markets, hall and construction of bridges.
507
Some critics have labelled the system of taxation existing in th e West at this time as „extortion‟, „tribute‟,
„bribes‟, and „indeed anything but taxation‟. Such views are now generally regarded as partly due to some
misconceptions about the true nature of taxation and the belief that payment in kind cannot qualify as taxes.
The other often-repeated criticism against the pre-colonial system generally such as arbitrariness, irregularity
and corruption, were deficiencies common to the tax systems of all societies at the early stages of their
evolution. Indeed, the modern form of organized taxation started to take shape in Britain and other western
countries at the beginning of the 19th century. See Due, F., “Income Taxation in Tropical Africa”, British Tax
Review, 1962 p. 22.
188
There is no evidence of the existence of any form of organized taxation in the East due
largely to the absence of a recognised political figure that could exercise the sovereign
power.508
The initial problem which confronted the British Colonial Government was how to
organise the disparate communities under a modern form of government for purpose of
administration. In 1900, the British colonialists had established three protectorates in
Nigeria which were: the Colony and Protectorate of Lagos, the Southern Protectorate and
Northern Protectorate. The Colony and Protectorates of Lagos and the Southern
Protectorate were merged in 1906 to form the Colony and Protectorate of Southern
Nigeria. This was followed with the amalgamation of the Northern and Southern
Protectorates in 1914 to become what is today known as Nigeria. Each Protectorate was
divided into provinces and each province into districts. All the provincial political officers
were indirectly responsible to the Governor through a Lieutenant-Governor.
5.2. Evolution of a modern Tax System – From community Tax to Personal Income
Tax
The establishment of a modern government in Nigeria had financial implications which
outstripped the Grant-in-Aid from Britain. Accordingly, there was the need to source for
sustainable means of financing the administration of the territories locally. The main
508
The east has been described as a “stateless ” community. The weakness of a popular theory that Igbos were
stateless rests on the paucity of historical evidence of pre-colonial Igbo society. There is a huge gap between
the archaeological finds of Igbo Ukwu, which reveal a rich material culture in the heart of the Igbo region in
the 8th century, and the oral traditions of the 20th century. See “History of Nigeria (1500–1800). Available
online at: http://en.wikipedia.org/wiki/History_of_Nigeria_(1500%E2%80%931800). Site visited on 23rd
July 2010.
189
challenge of the British colonial government was how to synchronize the pre-existing
traditional taxes with a view to appropriating them for the use of the colonial government
without at the same time upsetting the apple carte which would have divested the local
chieftains of their economic power and thereby incur their displeasure. 509
5.2.1. Harmonisation of Community Taxes (Direct Taxation)
The British policy was geared towards strengthening the traditional institution in
the North through the indirect rule system. 510 The first comprehensive attempt to establish
a “modern” tax system was through the Land Revenue Proclamation of 1904511 enacted for
the Protectorate of Northern Nigeria. The legislation introduced a community tax based on
the annual value of land and produce in each community. Thus, the tax was based on the
aggregate wealth of the community. The taxes were administered through the Emirate
under the indirect system.512 Ostensibly to create an incentive for local administration, the
Emirs were authorised to retain a portion of the tax revenue while the balance was paid
into the Government treasury.513 Thus, the tax system in the Northern Protectorate began
with legislation by the British Colonial government for the administration of local taxes.
509
See Akanle, O. Nigeria Income Tax Law and Practice (Centre for Business and Investment Studies
Limited, Nigeria, 1991), p.20.
510
Smith, E.W. “Indirect Rule in Nigeria”, Afr Aff (Lond) (1937) XXXVI, pp 371-378.
511
No. 4 of 1904.
512
The law established a framework for the administration of two existing traditional taxes viz: (i) cattle tax
(jangali) and (ii) a head tax (kharaj). The former was a broad based tax with general application while the
latter was levied on the pastoral tribes who possessed no property or wealth other than their live stocks.
which was to become a single all embracing direct tax. There are circumstances where an individual will be
liable to pay both jangali and kharaj. The taxes were administered through the existing Emirate under the
indirect system.
513
Campbell, M.J., Law and Practice of Local Governments in Nigeria , (Lagos, African University Press,
1963), p.2.
190
The emerging tax system in Northern Protectorate was strengthened with the enactment of
two proclamations in 1906. The Native Courts Proclamation of 1906 authorised the
Residents to establish courts (Alkali’s courts) vested with power to impose any
punishments accepted under native law or custom provided that they did not involve
mutilation or cruelty. The Native Revenue Proclamation of 1906 empowered the Residents
to assess each community for its taxable wealth and appoint heads of the community as tax
collectors. The assessments imposed on the community were apportioned by the
community heads among taxable male adults according to individual wealth. 514 The
community tax thus varied from province to province and from district to district
depending on their taxable wealth of each province or district.515
The Native Revenue Proclamation laid down the duties of district and village headmen
involved in tax administration and penalties for infraction of the law. 516 A treasury
department was established for the Native Authority under the supervision of the Emirs
who eventually became a salaried official. 517 The revenue from the tax was shared equally
between the central government and the native authority. The share of the native authority
was used for local administration and payment of the salaries of the Chiefs, district heads,
tax collectors and other officials.518
514
Id.,
515
Lord Lugard, The Dual Mandate in the British Tropical Africa, p.238. Cited in Emiko, infra note 18, at
p.23.
516
Emiko, p.22.
517
Before then, all the traditional taxes were personal perquisites of the chiefs known as Kurdin Sarki
Meaning “money of the Chief” meaning “money of the Chief.” See Campbell, M.J., op. cit., 3.
518
Emiko, G.I., Federal & State Tax Powers in Nigeria (Unpublished Thesis Submitted for the Degree of
Ph.D in the University of London, 1976) p..24.
191
Lord Lugard, the Lieutenant Governor amalgamated the Colony and Southern Protectorate
and the Northern Protectorate in 1914 to become a country known as Nigeria. Following
the amalgamation the Native Revenue Ordinance of 1917 519 was enacted. The 1917
Ordinance repealed the Native Revenue Proclamation of 1906 and vested the Lieutenant
Governor with power to extend the provisions of the Ordinance to the whole or any part of
the Southern Province pursuant to which the Ordinance was gradually extended to certain
divisions520 and provinces521 in the Southern Protectorate. The introduction of taxation in
the South initially sparked off pockets of riots in Abeokuta in 1918, Sapale in 1927 and
Aba in1929.522
5.2.2. Emergence of Personal Income Tax
The earliest and highest concentration of public servants, professionals, wealthy
businessmen in Nigeria were found in the colony of Lagos. The Income Tax (Colony)
Ordinance of 1927523 (income tax) which can be described as the first personal income tax
law in Nigeria in the sense of imposing personal responsibility on an individual to pay tax
(as distinct from a community tax under the Native Revenue Ordinance) was enacted in
1927. The Income Tax which was applicable only in the Colony of Lagos524 and was
imposed on “the gains or profits” of any male person resident in the Colony “from any
trade, business, profession, vocation or employment or on dividends, interests or discounts,
519
No.1 of 1917.
520
by various Orders in Council such as Orders -in-Council Nos.33 of 1818, 11 of 1919 and 7 of 1920
extending the application of the Ordinance to Egba, Ijebu-Ode, Ilaro Ibadan, Oyo, Ife, Ekiti, Owo, Ondo,
Kukuruku and Ibiaja divisions in the South Western parts of the country.
521
Such as Egba, Ijebu-Ode and Ilaro in Abeokuta Province, the divisions of Ibadan, Oyo and Ife in Oyo
Province, the divisions of Benin, Kukuruku and Ubiaja in Benin Province and the divisions of Ekiti, Owo
and Ondo in Ondo Province, See Emiko, G.I., supra note, 18, p.28
522
See Phillipson Report, 1946, at pp.50-54.
523
No 23 of 1927 (Hereinafter referred to as “1927 Ordinance”)
524
Id., section 1.
192
any pension, charge or annuity and rent, royalties, premiums and any other profits arising
from property”.525 The rate of the tax was fairly progressive with the rate of 6 shillings on
income of 30 pounds. The rate gradually increased with rising income up to 1,000 which
attracted a rate of 10 pounds. Every 100 pounds above 1,000 pounds attracted a tax of
N1.526 The tax was administered directly by the Central Government while the revenue
from the tax was paid into the Treasury of the Central Government. 527 Personal income tax
consequently formed the nucleus of the independent revenue of the central government in
Nigeria.
Shortly after the personal income taxation was fairly established in the colony, the Non-
Native Income Tax (Protectorate) Ordinance of 1931528 was enacted which imposed tax on
the income of the non native in the Protectorate including the Cameroons under the British
mandate.529 The tax was similar to that established under the Income Tax (Colony)
Ordinance of 1927 in terms of structure and design (except the scope of application).
However, the administration was undertaken by the District Officers in charge of their
several divisions and paid into the Treasury of the Central Government. 530 In 1937, the
Non Natives Income Tax (Protectorate) Ordinance was enacted531 to tax the income of non
natives in the Protectorate who hitherto were left untaxed.
525
Id., See generally section 3(a)-(d).
526
Id., See Part I of the Schedule to the 1927 Ordinance.
527
Id section 2.
528
No. 21of 1931(Hereinafter referred to as “1931 Ordinance”).
529
Id., Section 1.
530
Id., Section 3.
531
on the 20th day of December 1937
193
Thus, there were in existence three tax statutes in Nigeria with different spatial application
and taxable persons. First, the Natives in the various communities except the Colony were
taxed under the Native Revenue Ordinance of 1917. Second, those who were resident
within the Colony were taxed under the Income Tax (Colony) Ordinance of 1927, as
amended by the Colony Taxation Ordinance of 1937.532 Third, the non-natives outside in
the Protectorates were taxed under the Non-Native Income Tax (Protectorate) Ordinance
of 1937. In 1939, the Companies Income Tax Ordinance533 was enacted for taxation of
gains and profits of incorporated companies.
Two significant consolidating statutes were enacted in 1940 to streamline the legal
framework of the tax system. First, taxation of the Natives through Nigeria except the
Colony was consolidated under the Direct Taxation Ordinance, 1940.534 Second, the
Income Tax Ordinance 1940535 was enacted to consolidate the Colony Taxation Ordinance
536
of 1937 , the Non-Native Income Tax (Protectorate) Ordinance of 1937 and the
Companies Income Tax Ordinance of 1939. 537
The Direct Taxation Ordinance applied to the natives except those who are resident in the
Township of Lagos.538 The tax was levied on three categories of taxpayers. The first
targeted a group of taxpayers in native community in each province. 539 “Community” is
532
No. 4 of 1937.
533
No. 14 of 1939.
534
No 4 of 1940 (Hereinafter referred to as “1940 Ordinance”).
535
No 3 of 1940.
536
No 4 of 1937.
537
No. 14 of 1939.
538
Id., section 1.
539
Id. “Community” is defined as any group of individuals residing, carrying on business or being within any
town, village or settlement or any locality therein and includes a band of nomad herdsmen.
194
defined as any group of individuals residing, carrying on business or being within any
town, village or settlement or any locality therein and includes a band of nomad
herdsmen.540 The tax is administered by the Resident in cooperation with the chiefs or
elders or other persons of influence in each district.541 The Residents shall first estimate or
compute the amount of the annual profits derived from the land, or the amount of annual
profits or gains from any trade, manufacture, office or employment of the native
community or individual, pension, annuity, dividends or interests, and the value of all
livestock owned by earlier individual or community within the province. 542 Where no
estimate or computation of the annual estimate of the tax due has been made, the Resident
may base the assessment of the tax to be paid by any native community upon the most
recent estimate or computation taking into consideration any increase or decrease of
population of such community which may in his opinion justify an increase or decrease in
the amount of the assessment.543
Notwithstanding the liability of the native community to pay tax, the Resident may, with
the approval of the Governor, assess to tax any specified individual native or native
community544
In addition to or in lieu of any assessment of any individual native or native community,
the Resident may assess any individual or each of the individuals of any specified class
based on the number of cattle in his possession provided that no person shall be assessed in
540
Id. section 2
541
Id. section.4(1).
542
Id. section 4 generally.
543
Id., See the proviso to section 6.
544
Id., See section 7.
195
respect of cattle the value of which has been taken into account in assessing a community
tax.545
After the assessment of the community tax by the Resident, the Native Authority or tax
collector acting in cooperation with the village council, shall fix and apportion among the
taxable members of the community as may be just and equitable. 546 The revenue from the
tax is paid into the treasury of the native authority. 547 The native authority shall, thereafter,
pay into the Government Treasury sum representing an amount collected from the
taxpayers of the area an amount calculated at the appropriate rate per head prescribed in
the Schedule to the Ordinance.548 Thus, the revenue from the tax is shared between the
native authority and the Government of Nigeria on a basis prescribed by law.
Income Tax Ordinance 1940 imposed tax on the income of any person, including a body of
persons (company)549 , accruing in, derived from or received in Nigeria from gains or
profits from trade, business, employments, dividends, interests etc. 550 A minimum tax of 5
shillings is payable on income below 50 pounds. Apparently to avoid double taxation, any
person who satisfies the Commissioner that he has paid tax under the Direct Taxation
Ordinance is exempted from the Income Tax Ordinance. 551 There are different rates for
individuals and companies. The rate for individual is progressive starting from 3 pence on
545
Id., See the proviso to section 8.
546
Id., See section 10.
547
Id., See section 17.
548
Id., See section 17A.
549
“Person” includes a body of person. See Id., section 2. Section 23provides that “there shall be levied and
paid upon the chargeable income of every company tax at the rate of two shillings and six pence on every
pound of the chargeable income thereof.
550
Id., Section 5.
551
Id., Section .21(2)
196
an income of 200 pounds with every increment of 200 pounds attracting tax at higher rate.
552
Section 23 provides that “there shall be levied and paid upon the chargeable income of
every company tax at the rate of two shillings and six pence on every pound of the
chargeable income thereof.
The basic distinction between the two statutes is that the Income Tax Ordinance 1940
focuses on the income of individuals and companies from all sources while Direct
Taxation Ordinance is an amalgam of community tax, cattle tax and individual tax
applicable to the native community and individuals throughout Nigeria except Lagos. The
rate under the Direct Taxation Ordinance varies from province to province. The rate of tax
under the latter is proportional while the former is progressive. The Income Tax
Ordinance exempted from tax all the natives resident outside the Township of Lagos who
were already subject to tax under the Direct Taxation Ordinance, 1940.553 In 1943, the
Income Tax Ordinance, 1943554 was enacted to consolidate all the laws relating to the
taxation of the income of individual and companies in the Colony and Protectorate of
Nigeria.
5.2.3. Introduction of Regionalism
In response to the clamour for decentralisation, a new Constitution known as the
Richards Constitution of 1946 was adopted which divided Nigeria into three regions viz:
552
Id., See the First Schedule
553
Id., See section 8(d)
554
No. 29 of 1943.
197
North, West and East. The Constitution established an all-Nigerian Legislative Council555
for the centre and a Regional Council (House of Assembly) for each region. The Northern
Region in addition had a House of Chiefs. 556 The Regional Councils had no legislative
powers and therefore lacked any taxing power. 557 The Regions were entitled under the
Constitution to the revenues from the following sources viz: (i) the regional share of the
direct tax, (ii) other revenues from fees, licences etc and (iii) block allocations from
Central Government. It should be noted that the Regions did not possess any legislative
power over these revenue as they were voted to the Regions by the Central Legislative
Council as lump sum grants.558 The total revenue fell far short of meeting the requirements
of the Regional governments which, among other things, precipitated agitation for
devolution of powers to the Regions and the adoption of a new constitutional framework in
1951.
To address some of these perceived weaknesses of the Richard‟s Constitution, a one man
Sir Sydney Phillipson Commission was set up in 1946 with the responsibility of
recommending ways and means of allocating the revenue collected by the Central
Government as among the centre and the regions. 559 Specifically, the Commission was to
determine, inter alia, alternative sources of regional revenue other than the regional share
of Direct Tax and the basis of allocation of the revenue from the centre. The Commission
recommended criteria which revenue must satisfy before it can be declared regional:
555
See Adebayo, A.G., Embattled Federalism History of Revenue Allocation in Nigeria , 1946-1990.,
(American University Studies Series: Peter Lang, 193), p.21.
556
Id., p.20.
557
Id. p. 43.
558
See Phillipson Report, pp13-15.
559
Akanle, O., supra note 9, p.12.
198
(i) the revenue must be locally collected by regional authorities; and
(ii) it must be the revenue in respect of which no national or important
considerations of policy were likely to arise.560
Based on the foregoing criteria, the Commission recommended that the regional
governments should retain revenue from licences, mining, fees of Court or Office, etc,
water supply undertakings and electricity, earnings of government‟s departments and
revenues from government property and reimbursement for services rendered by regions
on behalf of the Central Government.561
It was recommended that the regional governments should retain their share of direct tax
levied under the Direct Taxation Ordinance, 1940, as amended. However, the allocation of
the proceeds of direct tax between the Government and the native administration by purely
executive action should be discontinued. Rather, the Regional Government‟s share should
be prescribed by law to guarantee a measure of certainty. 562
The possibility of introducing a regional direct tax under central legislation for the
exclusive use of the regional and native administrations was examined. The Commission
noted that while this would have accorded with practice in certain other parts of Africa 563
the dual system was considered premature in Nigeria.564 Thus, the Commission
560
Phillipson‟s Report, op. cit., para 22, p18. and Annexure 2 at p.167.
561
Id., para 22, p18. and Annexure 2, at p.167-168.
562
Id., paras 74 and 79. 5.
563
Native Administration and Political Development in British Tropical Africa, Report by Lord Hailey, at
p.167 Cited by Emiko, G.I., Supra note 18, p.46
564
para 100, p.125.
199
recommended that income tax should continue to be administered by the native authority,
albeit under the supervision of the Regions.565 The Committee noted that the
administration of direct taxation by the Native Authorities beyond the revenue objectives
was politically significant in terms of citizenship participation. According to the
Commission:
“The roles of the native administrations as tax collecting and assessing

authorities were inherent and to deprive them of the functions was to
strike a damaging blow at the Native Authority system and to make it
far less valuable as an instrument in the political education. To give the
Inland Revenue Department power in respect of tax assessment would
be, to some extent, an abrogation of a principle regarded as
fundamental by the author of Nigeria Native Authority system which
principle was then embodied in law”.566
Furthermore, the Commission recommended two principles viz: principle of derivation and
principle of even development as the basis of allocation in Nigeria, with the first as the
dominant principle. These recommendations formed the basis of inter governmental fiscal
relations in Nigeria until 1951. As political agitation for devolution of power continued,
another fiscal Commission called Hicks-Phillipson Commission was appointed with the
task of reviewing the fiscal arrangement towards the introduction of a federal system. 567
5.2.4. Reconsideration of a “dual system”
Apparently in its quest for “new” source of revenue, the Hicks-Phillipson
Commission recommended the adoption of a system of division of taxing power whereby
565
In this regard, the Resident must continue to act in co -operation with the chiefs and elders and in
accordance “with native law and custom”. See para 19, p.109.
566
See Emiko, G.I., Supra note 18, p.52.
567
See The Report of the Technical Committee on Revenue Allocation in the Military Era , (Lagos: Federal
Government Press, 1979) (Hereafter referred to s “Aboyade‟s Panel Report”), p.2.
200
all the three levels of government will be able to use the income tax with maximum limit
prescribed for the lower levels by a federal law. This system which was called “a dual
system” of income taxation was said to be similar to Sweden‟s system. Although this
recommendation was not accepted, it is significant that a dual income tax system was
given a serious thought at the wake of federalism in Nigeria. Due to the importance of the
technique of tax assignment in the theme of this work, I have taken the liberty to quote the
Commission in extensor. According to the Commission:
“In considering a dual system, it was met with the problem of finding an
arrangement by which each level of government would control part of the
tax which suited it best and would get in the way of the other as little as
possible. It found solace in the system adopted in Sweden which seemed
to have worked well (Why Sweden?). In Sweden local authorities are
allowed to impose an income tax, more or less as they like, but with a
maximum limit to the proportion of income which can be taken in local
tax. The few exemptions or reliefs in the local tax would make it possible
to collect asubstantial revenue in spite of its restrictions. The National tax
would have a rather high exemption limit. This means that the poorer
people, whose income tax would be as much as they could be expected to
pay even though they paid no more than the local tax, would be exempted
from the National tax. The existence of a local income tax so restricted in
Nigeria would not prevent the central Government from having an income
tax of its own which could rise to any height thought fit. It would in fact
be a kind of surtax imposed upon the excess of income above a fixed level
– say 600 or 700 pounds a year. This system would have an additional
advantage in Nigeria of being in line with the abortive proposal of 1940.
This would remove the objections to the generalisation of Direct Taxation
and African and non-Africans all over Nigeria would pay the same rate
according to their residence. The Nigerian Income Tax would then be
applicable to African and non-Africans all over Nigeria”.568
The Commission noted that a dual tax system would lead to the attainment of the objective
of integrating taxation in Nigeria so that the Native Administrations and the Inland
Revenue would have the maximum opportunity for cooperation in the assessment of
568
Quoted from Emiko, G.I., supra note 18, p.55
201
incomes. The Commissioner recommended that the proceeds of the tax paid under the
ceiling placed (as may be determined by the federal law) should be shared between the
Regions and the native administrations while the proceeds from the new Nigerian Income
Tax would be for the Central Government to be returned to the Regions under the principle
of derivation.569
The Commission considered and rejected the suggestion that income tax should be
regionalized on three main grounds. First, a local tax authority will be constrained in
effectively administering “income of wealthy merchants and large income from
professional fees”. It will result in salaried employees paying the tax while most of the
businessmen would escape it. It was believed that a local taxation alone will make the
operation of a Nigerian Civil Service, whose operations must extend to the whole of
Nigeria, and those of large companies with interstate operations almost impossible.570
Second, in view of the variation in the rate of tax charged from province to province, the
provinces with large concentration of wealthy taxpayers could afford to charge low rate
compared to other provinces. This could lead to shifting by taxpayer to gain the advantage
of low rates of tax on high incomes in a particular area when the cost of moving would be
considerably lower than the advantage to be gained. 571 Third, a highly progressive tax is
more appropriate for allocation to a level of government which could use it with the
maximum degree of responsibility and effectiveness which was rightly considered to be
the federal government.
569
Hick-Phillipson Report, para 60
570
Id. para 1-24.
571
Id para 62
202
Hicks-Phillipson Commission recommended the introduction of new principles for revenue
allocating between the centre and the regions, namely: the principle of independent
revenue, derivation, need and national interest. The first was to induce regions to make
greater efforts in revenue generation in keeping with the new federalism while the other
three were concerned with how federally derived revenues were to be shared among the
levels of government. The adoption of these principles rather intensified regional frictions
rather than dousing it. The West argued against a de-emphasis of the principle of
derivation; the North criticised the inadequate emphasis on the principle of need; and the
East thought that national interest should have been the most dominant principle. 572
The extent to which Hicks-Phillipson‟s recommendations were accepted by the
government was embodied in the Macpherson Constitution of 1951. It will be noted in
particular that the recommendation on creation of new federal income tax for the central
government was rejected. Rather, item 36 of the Exclusive Legislative List of that
Constitution vested the central government with taxation of income thus:
“36 Taxes on income and profits, except taxes on the income or profits
accruing in or derived from any Region or Southern Cameroon of Africans
residents in any Region or the Southern Cameroon and African
communities in any Region or Southern Cameroon”573
The power of the Regional was still limited to power to collect tax under the Direct
Taxation Ordinance thus dashing the hope of vesting the regions, for the first time with
taxing power on income. However, the Regions were granted additional powers over the
572
See Aboyade Panel‟s Report, supra note 67, p.2.
573
See item 36 of the Exclusive Legislative List of 1951 Constitution.
203
following viz: (i) entertainment (including exhibitions, performances, etc), (ii)
amusements, games and sports to which persons were admitted for payment; (iii) the sale
of motor spirit; and (iv) licence and rents. All powers not vested upon a Region, were
residual to Parliament.574
5.2.5. Chicks Commission, 1953
Macpherson Constitution of 1951 did not significantly enhance the independent
revenue capacity of the regions with respect to independent revenue sources. Hence,
agitation continued to centre on revenue allocation among the regions. The call for greater
Regional autonomy became so intense that by 1953 negotiation for a new Constitutional
arrangement was set in motion.575 At the Constitutional Conference held in London in
July and August 1953, the Colonial Secretary informed the delegates that:
“Her Majesty‟s Government had come to the conclusion that a tight

federation was unsuitable to Nigerian conditions”. The Nigerian
Constitution would have to be re-drawn to provide for greater regional
autonomy and to forbid intervention by the centre in matters that could,
without detriment to other regions, be placed entirely within regional
competence. In order to guarantee that a common economic and defence
requirements of all regions would be met, and to preserve the common
interests of all people in the territory, a central organisation would be
retained”.576
In furtherance of this objective, a Fiscal Commission headed by Louis Chicks was set up
with a specific term of reference of ensuring “that the total revenues available to Nigeria
are allocated in such a way that the principle of derivation is followed to the fullest degree
574
Under the 1951 Constitution, the Federal Legislative subject matters were residual.
575
Akanle, O, Supra note 9, pp.13-14.
576
See the introduction to the Report by the Conference on the Nigerian Constitution held in London in July
and August 1953. Cmd. 8934, London, H.MS.O. 1953, p3.
204
compatible with meeting the reasonable needs of the Centre and each of the Regions”. 577
The Commission, after reviewing the existing arrangement, made specific recommendation
in respect of each of the taxes existing at the time.
It was recommended that income tax should continue to be a federal subject and be
assessed and collected by the Federal Government for the following reasons:
(i) That the largest taxpayers were the companies operating throughout
the country and that taxation under the Income Tax Ordinance was a
matter that would touch them very closely;
(ii) It was desirable that there should be a uniform level of taxation on
personal incomes and profits throughout Nigeria so as not to impede
the free flow of capital and labour.
(iii) Experience in other federations had shown that where the field of
income tax was left to regional governments, the federal
government578 had been compelled to enter it.
(iv) No other taxes have had deeper implications for policy both economic
and otherwise than high income taxes and their control should
therefore be placed where these implications could most readily be
taken into account.579
577
See Chick Report, Cmd. 9026, 1953, p.3. Cited in Emiko, G.I., Supra note 18, at 52.
578
For instance, Canada and Australia.
579
Para 48 Chicks Commission Report.
205
Furthermore, the Commission recommended that the tax assessed under the Direct
Taxation Ordinance should continue to be a Regional matter with “power to secure an
increase in yield” and its share vis-à-vis the Native Administrations.580
The Commission recommended that while custom duties, excise duties and mining
royalties should (continue to) be allocated to the Federal Government, the principle of
derivation should be observed in the distribution of their revenue. Thus, it was
recommended that entire import duty on motor spirit (which was hitherto allocated to the
Federal Government) should be shared among the Regions in accordance with regional
consumption as determined by the returns under the Motor Spirit (Returns) Ordinance,
1952 less any drawbacks, refunds and cost of collection by the Federal Government. 581 50
percent of duties on other goods generally less any drawbacks, refunds and cost of
collection by the Federal Government should be allocated to the Regions in the ratio of
30:30:40 percent for the Northern Region, Eastern Region and Western Region,
respectively being the conservative estimates of the destination of consumption of the
goods.582
It was also recommended that the entire revenue from Excise Duties on manufactured and
unmanufactured tobacco and 50 percent of other locally manufactured goods should be
allocated to the Regions in accordance with regional consumption as determined by the
Tobacco (Licensing and Returns) Ordinance, 1952 less any drawbacks, refunds and cost of
580
Id.
581
Id., pp.53-4
582
Id., p.55.
206
collection by the Federal Government. 583 The entire mining royalties should be allocated
to the Region from which the mineral was extracted. At this time, almost the whole of the
royalties were derived from tin and columbite extracted from the Northern Region. 584 The
Commission was emphatic that the allocation of the revenue from these taxes to the
Regional Governments should be given as provided in the Constitution to ensure that they
become legal entitlements of the Regions.585
5.2.6. 1954 Lyttleton Constitution
The Lyttleton Constitution of 1954 which emerged based on the recommendations
of Louis Chicks Commission was the first federal Constitution in Nigeria. The Central
Government had limited powers under an arrangement which enumerated the legislative
competence of the Federal Government in the exclusive and concurrent legislative lists
while those of the States were residual. 586 Federal Government was vested with power to
make laws with respect to matters on the Exclusive Legislative List. The Federal
Government was expressly vested with power in respect of customs and excise duties,
export duties and “taxes on income and profits, except taxes on the income or profits
accruing in or derived from individuals in any region or Southern Cameroon and African
Communities in any region or Southern Cameroon”. 587
583
Id., pp54-5
584
Id., p.56
585
Id. p.58.
586
See section 51(1) of the 1954 Constitution which provides that “Subject to the provisions of this Order,
the Governor-General may, with the advise and consent of the House of Representatives, make laws for the
peace, order and good government of Nigeria (other than Lagos) or any part thereof with respect to any
matter that is included in the Exclusive legislative List or the Concurrent Legislative List”. .
587
Id. See item 36 of the Exclusive Legislative Lists
207
In view of the limitation of the power of the federal government on income tax, taxation of
income of individuals became a regional matter. Thus, the Direct Taxation Ordinance
became an existing law of the Regions and subject to any modification by the Legislature
of any Region. The Eastern Region was the first to enact a regional Income Tax Law 588 in
1956. This was followed by the Western Region589 in 1957 and the Northern Region in
1962590 thus finally drawing the curtain on the operation of the Direct Taxation Ordinance
in Nigeria.
With the regionalisation of personal income tax (against the normative tenets and practice
in federal countries) and sharing of revenue from federal taxes based on derivation, it was
evident that there can hardly be any further scope for enhancing the tax capacity of the
regions. In effect, the taxing power seemed to have reached its peak as far as the
constitutional framework was concerned while it was then left to the Regions to develop
other types of taxes. Contrary to this expectation, the regional agitation, shifted to
challenging or defending the revenue allocation formula. The derivation formula was
fraught with difficulty on how to accurately assess the tax due to the Regions from customs
and excise on the basis of consumption. Hence, resort was made to estimates which were
arbitrary. Also, the East was badly affected by the new revenue allocation formula and ran
into huge deficits. The East was, therefore, more vocal in its attack of the derivation
formula.
588
No.1 of 1956 which was repealed by the Finance Law, 1962 (E.N. Law No.5 of 1962)
589
Income Tax Law, 1957 Western .Nigeria. Law No.16 of 1956, as amended.
590
Income Tax Law, 1962 (Northern Nigeria Law No.6, 1962)
208
The occasion of another Constitutional Conference in London in 1957 afforded an
opportunity to review the division of taxing powers in Nigeria. The Conference was
concerned with removing the problems caused by the limited range of independent
regional sources and dissatisfaction over regional allocation from customs and excise
duties.591 It was at that Conference, it was agreed that a fiscal Commission be set up to,
inter alia:
“(a) examine the present division of powers to levy taxation in the

Federation of
Nigeria and the present system of allocation of the revenue thereby
derived in the light of:-
(i) experience of the system to date;
(ii) the allocations of functions between the Governments in the
Federation as agreed at the (present) Conference;
(iii) the desirability of securing that the maximum possible
proportion of the income of Regional Governments should be within
the exclusive power of those Governments to levy and collect taking
into accounts considerations of national and inter-Regional
policy”.592
The Commission headed by Sir Jeremy Raisman593 reviewed the appropriateness or
otherwise of allocating income tax to the regions and recommended that income tax should
still be a regional matter, albeit with measures put in place to avoid “over lapping
jurisdictions between the Regions and the Federal Government and the Regions inter
se”.594
In considering whether personal income tax should be allocated to either Federal or
Regional Government, the Commission took into consideration the following salient
591
Aboyade Panel‟s Report, supra note 67 at p.6.
592
See, Nigeria: Report of the Fiscal Commission, CMND. 481, p.1.
593
Appointed in September 1957
594
Report of the Fiscal Commission (London: Her Majesty‟s Stationary Office, 1958) (Hereafter referred to
as “The Raisman Report”, para 78.
209
points: (i) the recent introduction of regional income taxes in the East and the West and the
possible plan to do same in the North; (ii) that regional income taxes had brought about
emerging problem of internal double taxation, (iii) the taxation of income of residents of
Lagos under a federal statute - the Personal Income Tax Law in Lagos and the
simultaneous existence of both federal and Regional statutes on Personal Income
The Commission also considered the pros and cons of wholly vesting the jurisdiction in
respect of personal income taxation on either the Federal or the Regional Government. The
Commission noted three arguments in favour of the States viz: (i) that by long tradition the
levying of personal income tax on Africans had been a regional concern, adapted to the
diversity of local customs, (ii) that the structure of Native Authority in Northern Region
was to a large extent dependent on the existing system of direct taxation and (iii) that the
Regional income tax laws were already operating in the Eastern and Western Regions and
valuable experience had been gained. However, the Commission concluded that a Regional
control of personal income tax will give evasion opportunities to certain individuals,
particularly merchants, traders, and business men and the like”. 595
On the other hand, the Commission agreed that a federal control of personal income tax
would have served as an invaluable instrument of economic control for overall economic
policy of the nation, as a means of influencing both the level of investment and the extent
of personal expenditure. Furthermore, the responsibility of Federal Government for
defence and responding to any unforeseen major emergency the cost of which could not be
met from available revenue had caused the federal government to exercise (complete)
595
Id., paras 78-83.
210
jurisdiction over income tax in other federations. Also, a uniform system of personal
income tax would remove the problems of internal double taxation which were already
evident from the regional control of income tax. Also, there is the potential that higher
income earners would not be assessed with greater accuracy because of movement across
jurisdictions. However, the Committee recognised that a federal jurisdiction over income
tax would need an extensive inspectorate which was far beyond the existing administrative
resources of the federal government.596
The Commission also considered the possibilities of a dual system which would give both
the Federal and Regional Governments power to impose personal income tax. The first
was that income below a certain fixed limit should be left for regional direct taxes while
the income above that limit would be reserved for the federal. The second scheme was a
joint system597 where the unit governments were entitled to levy a limited surcharge on the
basic federal tax, assessed according to a uniform federal law and collected simultaneously
by the Federal Government. The Commission rejected these proposals, inter alia, on the
basis that they will give rise to interjurisdictional friction especially in borderline case
between the Federal and the States. 598 The Commission expressed the view that where
competing and overlapping income tax jurisdictions existed, they had proved to be a
constant source of hardship to the taxpayers and conflict between the governments
concerned.
596
Id., paras 78-83.
597
This type of system was said to be operative in the Federation of Rhodesia and Nyasaland
598
Loc cit., paras 84 and 85.
211
The Commission, in the final analysis recommended that the Region should exercise
complete jurisdiction over the taxation of personal income on the basis that the tax had not
emerged as a potent instrument of economic control. The Commission, however, provided
a caveat that the Federal Government should be empowered in time of war or emergency
to levy a surcharge on income tax for purely federal purposes and retain the whole
proceeds. The precise nature of the emergency which could justify the entry could be laid
down in the Constitution. Where Federal re-entry was necessary, the Regions could be
required to levy an additional measure of taxation to be handed over to the Federal
Government or by temporarily ousting regional jurisdiction in return for compensation. 599
However, in order to overcome the challenges of decentralisation such as double taxation,
it was recommended that a uniform solution should be adopted on the following specific
issues viz: (i) the definition of taxable income and the basis of charge; (ii) the period of
assessment; (iii) the taxation of income remitted to Nigeria from overseas sources; (iv) the
taxation of income accruing in Nigeria to resident overseas; (v) the approval of pension
and provident fund for tax purposes; (vi) the treatment of dividends; (vii) the type of
information to be exchanged between one tax authority and another and (viii) the taxation
of partnerships. However, the Commission recommended that any arrangement put in
place by the Federal Government to address the challenges should not affect the rights of
each Regional Government to prescribe the rates, reliefs, methods of assessment or
administration of their income tax as may be considered appropriate in the individual
599
Id.
212
circumstances. These principles should be embodied in a federal statute called the Income
Tax Management Bill to be passed into law.600
The Commission explored the possibility of establishing a new tax by considering the
appropriate level of government to levy estate duties and recommended that the
jurisdiction should follow that of the personal income tax since such the duties fall on
personal estates.
Although the companies income taxation was just evolving in Nigeria in 1957-8, the
Commission reasoned that it could prove to be a valuable instruments of economic control
in future. Consequently, it was recommended that the tax should be a federal tax because
of its potentials to impact industrial and commercial investments, whether from overseas or
internal sources.601
The Commission recommended that jurisdiction over excise should reside in the Federal
Government for the reasons of (i) its critical importance to the framing of economic policy
and (ii) to provide compensatory revenues in case of reduction of revenue from other taxes,
(Note that certain taxes are better placed with one level of government because of their
inherent relationship (for example, income tax and capital gains tax) and (iii) imposition of
a regional excise on goods for sale or consumption in other Regions would amount to “an
extension of the regional fiscal jurisdiction beyond regional boundaries.
600
Id.
601
Id.
213
Jurisdiction over Sales Tax was given the same treatment as excise. The Commission
recommended that sales tax should be vested on the federal because a Regional sales tax
could be a potential source of competing jurisdiction. However, since vesting the Federal
Government with powers over customs, excise duties and companies income tax would
leave the Regional Governments without any significant source of independent revenues
from indirect taxes, the Commission recommended that produce except tobacco, hides and
skins, motor spirits and diesel oil should be exempted from the federal sales taxing power.
By virtue of the exception, it follows that the regions would be able to impose sales tax on
these limited ranges of commodities.
The Raisman Report was considered and accepted in July 1958 at the resumed Nigerian
Constitutional Conference held in London in September and October, 1958 and formed the
basis of the 1960 Independence Constitution.
5.3. Independence to Military Rule (1960-1966)
The provisions of the 1960 Constitution were offshoot of the Raisman Fiscal Commission
recommendations. The same framework was also adopted wholesale under the 1963
Constitution. The 1960 and 1963 Constitutions602 established a two tier government
consisting of the Federal Government and three Regions. The local governments were
creatures of the Regions and subject to Regional laws. 603 The Federal Government was
vested with power in respect to income of corporate bodies, 604 mining, royalty and rents,605
602
Further reference will be made to the 1963 Constitution.
603
Section 2 of the Constitution of the Federation, 1963 (1963 Constitution) Act No 20, 1963.
604
Id., section 76(1)
605
Id., section 140.
214
customs and excise duties, including export duties,606 general sale taxing power except in
respect of (a) produce; (b) hides and skins; (c) motor spirit; (d) diesel oil for use in road
vehicles and (e) diesel oil for other industrial purposes. 607 50 percent of the proceeds of any
royalty in respect of “minerals” extracted608 and mining rents609 from that Region shall be
paid to each Region. For this purpose, the continental shelf of a Region was deemed to be
part of that Region.610 The balance of 50 percent of the proceeds of royalty and mining
rents shall be paid to the Distributable Pool Account. 611 The 100 percent of excise duties in
respect of tobacco which was distributed to the Regions was shared proportionate to the
quantity consumed in each Region.612 The 100 percent export in respect of produce, hide
and skin were paid by to each Region. The amount in the Distributable Pool Account was
distributed quarterly among the four regions. The Federal Government‟s power in respect
of personal income and estate taxes was only for the purpose of ensuring that any income
or estate does not suffer double taxation under the law of more than one Region. 613 The
Federal Government is thus precluded from enacting any law imposing or prescribing the
rate of estate duties.614
Following the principle of residual power, each Region had power to impose any tax that
was not in the Exclusive List.615 Thus, each Region had its Personal Income Tax Law
enacted within the framework provided by the Income Tax Management Act, 1961
606
Id., item 10 Exclusive legislative List.
607
Id., item 38 of the Exclusive Legislative List.
608
Id., section 140(1)(a)
609
Id., section 140(1)(b)
610
Id., section 140 (6)
611
612
613
Id., section 76(3).
614
Id., section 76(4).
615
Id., section 69(5).
215
(ITMA). The proceeds of personal income tax are fully retained by the Regions for their
respective utilisation. The Regions also had power to impose sales tax on (a) produce
(except tobacco, hides and skins); and (b) motor spirits and diesel oil excluding diesel oil
for industrial purpose.
The power of the Federal Government to make laws in respect of personal income taxation
and estate duties was just for the purpose of securing uniformity. The Regions therefore
have four main access to tax revenue thus: (i) the taxes imposed under their own law,
administered for their own use; (ii) taxes imposed under federal laws but administered by
the Regions, such as Personal Income Tax and (iii) tax revenue from customs, mineral and
rents distributed to the Regions based on derivation and (iv) allocation from the
Distributable Pool Account (DPA). Up till the time of military intervention in 1966 the
formula for allocating the revenue in the DPA was very simple based only on two criteria:
derivation and even progress.616
By limiting the federal power in respect of income tax, estate tax, sales tax and sharing
either wholly or partly the revenue from import, excise duties and mining rents with the
regions based on the principle of derivation, the 1963 Constitution can be said to have
advanced the interest of the Regions mostly in terms of providing independent revenue for
them. The relative balance of power in the fiscal position of the Federal and State
Governments was so favourable to the Regions that they were almost at par with the
Federal Government in terms of revenue generation. Regrettably however, the taxing
power of the federal government had been significantly constrained before this laudable
616
Adedeji, A., Nigerian Federal Finance, (New York: Africana Publishing Co. Inc., 1969), p.70.
216
objective could be achieved. Experience of other federations have shown that “undue”
limitations of the taxing powers of either the federal or state have proved to be
unsuccessful in practice because the exigencies or dynamics of inter governmental fiscal
relations usually lead inexorably to the removal of such limitations. 617
Notwithstanding the significant enhancement of the taxing powers of the regions, inter-
regional rivalry and antagonism soon developed over the usage of derivation principle as
the basis of revenue sharing between the federal and the region because it gave rise to wide
disparity in the fiscal positions of the regions.618 The Western Region became the
wealthiest as a result of significant revenue from imports, exports and excise duties and the
surging price of cocoa in the world market. The Northern Region also earned significant
revenue from its agricultural exports and mining rights. The West and the North were,
therefore, in support of the derivation principle and advocated its continuation. The Eastern
region which benefited less under the arrangement was canvassing for the adoption of
revenue allocation formula based on the need of the regions and national interests. 619
There was a turn of the tide in the fiscal fortunes of the regions after the discovery and
commercial exploitation of petroleum in the Eastern Region. Coincidentally, the revenue
of the Western and Northern Regions gradually diminished as a result of the slump in the
world prices of agricultural products. It is ironic that the Western and Northern Regions
617
Id.
618
For this principle, see Nigeria: Administrative and Financial Pro cedure under the New Constitution:
Financial Relations between the Government of Nigerian and the Native Administrations, (The Phillipson‟s
Report) Lagos, Government Printer, 1946 paras 24 and 25, Report of the Commission on Revenue Allocation
(Hick-Phillipson Report), Lagos Government Printer, 1950, paras 40, 45 and 56; Nigeria: Report of the Fiscal
Commission on the Financial Effects of the Proposed New Constitutional Arrangements, (Chick Report)
London, 1953 (Cmnd.481), paras 17-20, 110 to 117 and 136-141.
619
Adedeji, A.,supra note 115.
217
became strong advocates of de-emphasising the principles to derivation while the Eastern
region advocated its continuation.620 Before any adjustment could be made to address the
situation, there was a coup d’etat on the 16th of January, 1966 which terminated the First
Republic in Nigeria and ushered in military rule which lasted 13 years before the second
Republic under the 1979 Constitution.621 Subsequent developments under the military rule
which affected the arrangement in the context of division of taxing power are examined
below.
5.4. Military Rule and Division of Taxing Powers
Major-General Aguyi Ironsi who assumed leadership of the Federal Military Government
after the January 1966 Coup enacted the infamous Unification Decree of 1966622 which
abolished the federal structure and established a unitary provincial system. This measure
was largely interpreted in ethnic terms and provoked a counter coup in May, 1966 which
brought General Yakubu Gowon to power as the Head of State. Shortly after, there was a
widespread attack against the Ibos in the North which caused them to return in droves to
the Eastern Nigeria. This resulted in a refugee problem for the Regional Government
under the leadership of Col Odumegwu Ojukwu. Developments that followed made
620
Id., pp.252-254.
621
Factors that precipitated the first military coup in Nigeria are commonplace and need not be stated here.
Between 1960 and 1966, a series of fortuitous events including an election crisis in Western Nigeria,
continued agitation by the minority ethnic groups for states of their own, disputed national census, a nation -
wide strike, a controversial federal election, and politically inspired rioting, looting, arson and murder across
the country, doomed the First Nigerian Republic. .They gave the Nigerian Army the grounds to overthrow
the government on January 15, 1966 (Arnold, 1977; xii.). “The First Military Era and the Nigerian Civil
War 1966 – 1979, ”Available at http://www.onlinenigeria.com/military. Visited on 27th November 2008.
622
No. 24
218
Ojukwu demand for a loose federation whereby the Regions can take their destinies in their
hands.623 All attempts to resolve the brewing conflict proved abortive. 624
Ojukwu declared the Eastern Region as the Independent Republic of Biafra on May 27,
1967, this was followed by the enactment of the Revenue Collection Edit mandating that
all the federal revenues collected in the Eastern Region including royalties and rents by all
oil prospecting companies, monies collected by the Customs, Railways, Airways, Post
Office, Port Authority and other Federal Departments to be paid into the account of the
new government.625 The Governor justified his position, inter alia, on the ground that:
“The irreversible shift in population which had resulted in a population

increase of 16 percent in this (East) Region had rendered the present
basis of revenue distribution illogical and untenable. Therefore, there
must be a new basis for arranging our economic and financial
affairs.”626
On the same day, in what was obviously a pre-emptive move against secession by the East,
the Federal Government enacted Decree No. 15 of 1967 which divided the existing four
regions into twelve States.627 The component units in Nigeria therefore became and still
are still known as States, thus ending regionalism in Nigeria. The Eastern Region was
divided into three States two out which belonged to minority non-Igbos within the Region.
One was Rivers State where Nigeria derived almost 70 percent of its onshore oil and had
623
Ikein, A.A. & Briggs-Anigbo, C., Oil and Fiscal Federalism in Nigeria, (Vermont, USA: Ashgate
Publishing Company, 1998) p..126.
624
Including the intervention of the famous Pan Africanist, Kwame Nkurumah, the then President of Ghana,
See Id.
625
Croje, S., The World and Nigeria: The Diplomatic History of Biafra War, 1967 -1970 (London:Sidgwick
& Jackson Ltd., 1972), p.20.
626
Id., p.131.
627
Ikein, A.A. & Briggs-Anigbo, C., supra note 122, p.130.
219
its refineries and second largest seaport.628 Following a chain of events, the Federal troops
invaded the Eastern Region on the 6 th July, 1967 signalling the commencement of the
Nigerian civil war which lasted for almost three years.
The military ruled through Decrees and Edicts which prohibited any courts from
questioning the validity of any Decree or Edicts and their actions. 629 There was a judicial
attempt to curtail the sweeping legislative power of the military in Lakanmi v A.G. for
Western State,630 where the Supreme Court of Nigeria held that the Military take-over of
the government of Nigeria in June 1966 did not amount to a revolution, as such military
Decrees could not override the provisions of the Constitution. In a unanimous judgment
delivered by Ademola, C.J.N., the Court stated:
“..It is clear that the Federal Military Government decided to govern

the country by means of the Constitution and Decrees. The necessity
must arise before a Decree is passed ousting any portion of the
Constitution. In effect, the Constitution still remains the law of the
country and all laws are subject to the Constitution excepting so far as
by the necessity the Constitution is amended by a Decree”. 631
In order to reverse the legal effect of this decisions, the Federal Military Government
enacted Decree No. 28 of 1970 which chronicled the events of January 1966 a
“revolutionary legality” and invalidated all court decisions, whether made before or after
628
Id.
629
S.6 of Decree No.1 of 1966.
630
[1971] 1 UILR, 201
631
Id., p. 225.
220
the commencement of the Decree, which purported or shall purport to declare any Decree
or Edict invalid.632
5.3.1. Dina’s Committee
The newly created States started with no tax law and tax authorities of their own.
While the tax laws of the region from which they were created became applicable in the
new States as existing laws subject to necessary modifications, this was not so for the civil
service including the tax authority. In fact, in most cases the basic amenities such as offices
for the civil service for the new States to take off and generate their own revenues were
lacking. Although the States had no revenue, they continued to incur recurrent
expenditures in terms of salaries and pensions arrears. The exigencies of the creation of
new States, therefore, required that the States be wholly financed through federal allocation
thus introducing an era of federal financing of the states into the anal of Nigeria‟s history.
The prevailing political climate in the country, especially the civil war and the creation of
new States, necessitated a readjustment of the existing fiscal structure. 633 In 1968, the
Military Government set up an eight-member Committee under the Chairmanship of Dina
to look into and suggest any change in the existing revenue allocation scheme as a whole
and recommend new revenue resources for the Federal and State Governments. The
634
Committee (which was the first all-Nigerian fiscal Commissions since 1946) was
632
The judgment in Lakanmi v A.G. for Western State was delivered on 24th April, 1970 and Decree 28 of
1970 was passed on 9th May, 1970.
633
Agbonika, J.A.M., Federalism and Military Rule in Nigeria, (Thesis: (Ph.D) University of London 1991)
p.468.
634
Oyovbaire, S.E, Federalism in Nigeria: A Study in the Development of the Nigerian State (London :
Macmillan, 1985.) p.184.
221
propelled by post civil war “new spirit of unity” in Nigeria and the perceived need to have
a strong federal government that could withstand the vagaries of challenges that may face
an emerging nation. Accordingly, the Committee observed very strongly:
“We believe that fiscal arrangements in this country should reflect the new
spirit of unity to which the nation is dedicated. No more evidence of this is
necessary than the present war to preserve this unity at the costs of human
lives, national resources and the radical change in this country‟s structure.
It is in the spirit of this new-found unity that we have viewed all the
sources of revenue of this country as the common fund of the country to
be used for executing the kinds of programme which can maintain this
unity.”635
The Dina Committee made a number of far-reaching recommendations which altered the
fiscal arrangements in favour the Federal Government including increasing the functions of
the Federal Government, reduction and stoppage of revenue sharing from import, export
and custom duties, adoption of a uniform income tax system, reduction of mining rents and
royalty in respect of in-shore operations, establishment of a special Federal Government,
State Derivation and State Joint Account to replace the DPA which will be distributed in
accordance with new set of principles.636
The Dina Committee submitted its report in January 1969. 637 The Commissioners of
Finance at their Conference in April, 1969 considered and rejected the Dina Committee‟s
Report on the basis that it will significantly deprive the States of virtually all its fiscal
635
See Dina Report, p.27.
636
namely, „basic need or nominal budget gap, minimum national standards and balanced development‟. See
Chapter 8 of the Dina Report for details about these principles and their application.
637
There was in fact no formal government‟s statement on the Dina‟s Report, and although published, it was
not publicly circulated or sold. See Oyovbaire, S.E.,supra note134, p.199,
222
powers in favour of the Federal Government. 638 As a result, the Federal Military
Government was sensitive enough not to act immediately on the recommendations but
rather chose to implement them in stages through a number of Decrees. Going by the
exigencies of the civil war, there were little or no resistance from the States and the
generality of Nigerians.
The Constitution (Distributable Pool Account) Decree of 1970 639 introduced five major
changes with regards to the DPA. First, it amended section 137 of the 1963 Constitution,
by providing that only a quarter of the import duties on petroleum products shall be
credited into the DPA. Second, the payment of the entire proceeds from excise duties on
tobacco to the Regions under section 138 of the Constitution was abolished. Section 2 of
the Decree provides that 50 percent of the proceeds from excise duties on tobacco shall be
credited to the DPA.640 Third, where the export duty on hide and skin is increased, 60
percent of the increase shall be paid to the State of origin while the remaining 40 percent
shall be paid to the DPA.641 Fourth, unlike the former practice whereby mining rents and
royalties were allocated in the ratio of 50 per cent to the State of derivation, 35 per cent to
the DPA and 15 per cent to the Federal Government, proceeds from mining royalties and
rents were shared 45 per cent, 50 per cent and 5 per cent respectively for the states, the
DPA and the Federal Government.642 Fifth, 50 percent of the revenue in the DPA shall be
638
The Finance Commissioner‟s rejection was leaked to the press on 12 th April 1969. See the Daily Time of
that date. See Oyovbaire, S.E., supra note 134, p. 199 FN 35. exceeded its powers and in many respects and
ignored its terms of reference‟.
639
No. 13
640
See section 2 of the 1963 Constitution which amended section 138 of the 1963 Constit ution.
641
Id., section. 3 which amended s,139 of the 1963 Constitution.
642
Id., section See section 4 which amended section 140 of the 1963 Constitution
223
distributed equally among the States while the remaining half shall be distributed
proportionately among the States on the basis of population. 643
More radical changes were introduced by the Off-Shore Oil Revenue Decree644 of 1971. At
this time, petroleum was becoming the mainstay of Nigeria‟s economy which propelled the
Federal Military Government establish its total control over the ownership and
management of oil and oil revenue streams.645 The Off-Shore Oil Revenue Decree
amended section 140(6) of the 1963 Constitution deemed the continental shelf to be part of
the Region for the purpose of derivation entitlement646 by vesting the ownership of
territorial waters and continental shelf and right to all royalties, rents and other revenues
from or relating to the exploration or prospecting of petroleum products in the Federal
Government.647 This meant lesser revenue for the oil producing states.
Also in June 1973, the Federal Military Government restricted the rate of produce sales tax
which the State Government could impose on scheduled commodities to a maximum of 10
percent. The following year in 1974, the produce sales tax and 100 percent export taxes to
the States were abolished vide Marketing Board (Reform) (Amendment) Decree, 1974 as
part of its major reform of the marketing board system and export crop taxation. 648
643
Id., section See section 5 which amended sections 141 and 164 of the 1963 Constitution.
644
No. 9 of 1971
645
Agbonika, J.A.M , supra note 132, p.472.
646
140(6) of the 1963 Constitution provides that “for the purpose of this section (s.140) the continental shelf
of a Region shall be deemed to be part of that Region”.
647
See s.1(1)(2)(a)(b).
648
For a good treatment of the strategic importance of the Marketing Board to the fiscal health of the Regions
and the scope of the proposed Reform see, Oyovbaire, S.E., supra note 134, pp.168-69.
224
Notwithstanding the reduction of the percentage of the revenue derivation entitlement of
the mineral producing States from 50 to 45 percent, the non-mineral producing States‟
significant revenue still accrued to them as a result of the phenomenal increase in the
international prices of crude. The estimates of statutory allocation during the 1975/76
financial year649 quickly drew the attention of the elites in other regions to the huge
disparity in the allocation of the oil producing States in comparison with those of the non-
oil producing States. That year two States (Rivers and Mid-West) with a combined
population of 4.1 million was allocated N241 million compared to N102.3 million
allocated to four States (West, East Central, North-West and North-East, with a combined
population of 30.2 million.650 The elites of the oil-producing States also rose to the
defence of the system of derivation and argued that derivation in respect off-shore
production should be restored on the basis that the off-shore can only be accessed through
the regions, thereby resulting in the destruction of their crops and land.
In April 1975, the Federal Military Government promulgated the Constitution (Financial
Provisions, etc.) Decree651 which amended section 136-141 of the 1963 Constitution on
the distribution of revenue from import, excise duties, export duties, mining royalties and
rents and the DPA. 35 percent of the revenue from import on any commodity other than
motor spirit, diesel oil, tobacco, wine, portable spirit shall be paid into the DPA while the
balance is retained by the Federal Government. 652 Second, the entire proceeds of import on
649
Which was published on 1st April 1974 by the Federal Military Government.
650
Adebayo, A.G., Supra note 55, pp142-3.
651
No.6 of 1975.
652
See s.1. which amended s.136 of the 1963 Constitution.
225
motor spirit, diesel oil, tobacco, wine, portable spirit shall be paid into the DPA. 653 Third,
50 percent of the revenue from excise shall be paid into the DPA while the remaining 50
percent shall form part of the CRF of the Federal Government.654 Fourth, the entire
655
revenue from export on produce, hides or skins shall be paid into the DPA. Fifth, the 45
percent mining rents and royalties paid to the States in whose territories minerals were
produced on the basis of derivation were reduced to 20 percent while the balance of 80
percent was paid into the DPA.
656
The Income Tax Management (Uniform Taxation) Decree of 1975 directly encroached
on the taxing jurisdiction of the States on income tax by fixing lower uniform personal
income tax rates and granting more generous reliefs throughout the federation. 657 The
Federal Government also abolished the cattle tax (jangali), the traditional source of
revenue for the Native authority in the North. 658 The States were, however, still allowed to
continue with the administration of their respective Personal Income Tax Laws subject to
the provisions of the Income Tax Management Act, as amended.
In sum, the changes introduced by the Federal Military Government were geared towards
increasing the financial strength of the Federal Government vis-a-vis the States; reducing
the fiscal disparities among the states on the basis of revenue derivation principle,
653
654
655
656
No. 7 of 1975.
657
The object of the tax this reform was to “facilitate the mobility of high level manpower and other
productive forces in the federation as another important step towards social and economic integration .
Oyovbaire, S.E., supra note 134, p.171.
658
In order to “bring some relief to the cattle owner on his capital and encourage him to keep his cattle within
the country. See text of 1975/6 Budget broadcast (Lagos: Federal Ministry of Information)
226
increasing the amount of revenue accruing to the DPA and therefore enchasing its capacity
to achieve a greater measure of fiscal equalization among the States. Against the
background of the relative balance of fiscal power in favour of the Federal Government in
terms of access to and control over important revenue sources, the Federal Military
Government decided to take over some of the State‟s responsibilities in education, 659
housing660 and social development, youth and sports.661 The Federal Government‟s action
was apparently motivated by the desire to bring about massive social development across
the country. Aboyade noted it his Committee‟s report thus:
“By virtue of the oil boom, the economy was experiencing a temporary
period of surplus in investible resources and the Federal Military
Government was making maximum effort to create rapidly the economic
and social infrastructures necessary for self-sustaining growth in the long
run when resources scarcity could surely recur.”662
While it may be argued that the „usurpation‟ of State‟s function by the centre was a
financial relief to the States, but the political implication was profound. Such an
arrangement robbed the States of policy choices and voice in the determination and
execution of functions that were allocated to them under the Constitution. 663 It is
remarkable, that within a decade of military incursion into politics the State Governments
659
Between 1974 and 1976, the Federal Government introduced and financed Universal Primary Education
(UPE) and took over all existing State universities and barred the States from establishing new ones. Alewo,
J, Federalism and Military Rule in Nigeria, Supra note 32, p.477.
660
In 1973, a political decision was also taken at the centre for the Federal Government to take part in
Housing on a massive scale by building 200,000 units throughout the federation at a cost of 2.0 billion naira.
The culmination of this proposed gigantic Federal investment in housing was the creation of a new Ministry
of Housing, Urban Development and Environment in 1975. See Aboyade Panel Report, supra note 67, p.14.
661
A Ministry of Social Development, Youth and Sports was established thus brin ging the Federal Military
Government into areas which principles of federalism as establishing in chapter 3 dictate should be left
generally to the second or third tier of government. Id, p14.
662
Id, pp.11-12.
663
Alewo J, Supra note 32, p. 477.
227
had become largely dependent upon federally collected taxes. In short we had a federal
structure which was federal by name unitary in substance.
5.4.2. Mohammed/Obasanjo Military Government
There was a change of government of General Yakubu Gowon664 in 1975 through a
counter coup which brought General Murtala Muhammed into power as the new Head of
State. Apart from charges of corruption and inefficiency, the former administration became
largely discredited for reneging on its promise to hand over power to a civilian
administration. Therefore, the most urgent challenge which faced the new administration
was the conduct of a successful transition from military to civilian rule. Meanwhile, the
administration equally considered it important to first address the growing demand for
creation of more states before the transition on the ground that it may be more volatile for a
nascent civilian administration to handle. Consequently, the existing twelve States were
further sub divided into nineteen States.665
Whatever may be the political merits in the creation of more States, it further weakened the
States in their fiscal relations with the Federal Government as more States, and especially
the newly created ones were virtually wholly financed through federal allocation. The
States had become so dependent on the federal allocation that question of autonomy and
664
Ruled for 9 years from 1966-1975.
665
based on the recommendations of Justice Ayo Irikefe. On August 7, 1975, Justice Irikefe was called on to
help the new Murtala administration to review the 1967 state creation framework as head of a panel on state
creation. The panel in its report adduced that state creation movements are mostly made vibrant by the view
held by the agitators that new states leads to increased development of the areas agitating for it; and the
political importance of the movements and the potential for diffusion of political and economic power were
important reasons for state creation during the period. The panel recommended various suggestions many of
which were approved by the Murtala administration leading to the re-organization of Nigeria from 12 states
to 19 states on February 3, 1976. See “Ayo Irikefe”, available online at
http://nigerianwiki.com/wiki/Ayo_Irikefe. Site visited on 23 August, 2010.
228
coordinate status, and financial viability did not arise in 1976. All that concerned the
agitators (for more States) was that “more scholarships, more employment, and more
social and welfare amenities would be available for distribution, especially among the
elites.”666
A six-man Technical Committee under the Chairmanship of Prof. Ojetunji Aboyade was
set up in June 1977 to make recommendations on a new fiscal system for the incoming
civilian government which they hoped would change the unitary status of the political
system to a federal one.667 The Committee‟s terms of reference charged it to take into
consideration the need to ensure that each government of the federation has adequate
revenue to enable it discharge its responsibilities and to examine the existing allocation
formula with a view to determining its adequacy. This was the first time a fiscal review
commission or Committee would be mandated specifically to correlate constitutional
functions with resource allocations.668
The Aboyade Panel consisted of four economists, one political scientist, and the Managing
Director of one of the leading daily newspapers. The Chairman was a former Head of
Economics Department at the University of Ibadan and one time Vice Chancellor of the
University of Ife. Given the politicised nature of revenue allocation, the Military
Government believed that gathering a group of such highly skilled, ostensibly apolitical
666
Adebayo, G.A., op.cit., p. 146
667
Ikein, A.A. & Briggs-Anigbo, C, supra note 122, p.144.
668
Adedeji, A., supra note 115, pp10-12.
229
experts into a „technical committee‟ would depoliticise the issue and appeal to the public at
large.669
In addressing the issue of allocation of functions, the Panel noted that many of the
functions which the Federal Government had taken over from the States could be cheaply
executed and more adequately supervised at the local government level. 670 The Committee
frowned at the Federal Government‟s seemingly inexorable march to centralism. It
recommended that the Federal Government should transfer to the States and local
governments‟ functions such as agriculture, housing, education while the States should
transfer some of its functions to the local governments. 671 Ostensibly to strengthen the
local governments‟ administration, it was recommended that local government‟s existence,
powers and functions should be derived from the Constitution, just as the Federal and
States”.672
The Panel noted that while each level of government should have a minimum source of
independent revenue for executing its constitutional functions, a tax may be collected by a
level of government on behalf of another on the ground of economy and efficiency.673 The
Panel recommended that the Federal Government should have exclusive jurisdiction over
import duties, excise duties, export duties, mining rents and royalties, petroleum profits tax
while tenement rate should be assigned exclusively to the local government. In seeking
669
Oyeleye, O & Olagunju, O., “The Military and the Politics of Revenue Allocation”, in Oyediran, O., ed,,
Nigeria Government and Politics Under Military Rule, 1966-79 (New York: Saint Martins Press, 1979),
p..204
670
Aboyade Committee Report, supra note 67, p.79.
671
Id., p.88.
672
Id.,.p.108.
673
Id.,.p.82.
230
independent revenue sources for each level of government, the Panel took cognisance of
the fact that a level of government may delegate the collection of certain taxes to another
level of government on the ground of the efficiency of collection. Thus, it was
recommended that the Federal Government should provide the legal basis for the personal
income tax, sales tax, companies income tax and capital gains tax while the administration
should be left to the States. In addition, the States should have power to impose stamp
duties, estate and gift tax, football pools and other betting taxes, entertainment taxes and
land tax (other than agricultural land) and road tolls. The Local Governments on their part
should have jurisdiction over the property tax, market and trading licences and fees;
motors park dues, entertainment tax, motor vehicle tax and driver licence fees, land
registration fees, license fees on televisions and wireless radio.
The Panel frowned at the existence of a separate account for import duty on specified
products, excise duty, Petroleum Profits Tax and Corporate Tax and a DPA for import duty
on tobacco, petroleum products, export duty, 50 percent excise duty, all mining rents and
royalties and personal income tax of all Armed Forces and External Affairs for reason of
lack of consistent principle for determining which revenue sources should be retained in
part or in a whole either by the Federal Government or by the States. The Panel was of the
view that all levels of government should benefit from the proceeds of taxes the conditions
for which they have helped to create. It was recommended that “all federally-collected
revenue (except the personal income tax by Armed Forces, External Affairs Officers and
231
the Federal Capital Territory) should be consolidated into one account to be shared by the
Federal, State and Local Governments.”674
While the Committee noted and deplored the growing imbalance in the respective
functions and revenue between the Federal and State Governments, it nevertheless
underscored the “need to maintain the pre-eminent financial position of the Federal
Government as the “ultimate guarantor of the economic and political stability of the whole
federation”. Apart from being able to come to the assistance of needy States and Local
Governments, a financially strong Federal Government, would be in a better position to
enforce planned priorities and discipline as well as absorb the shocks of various financial
uncertainties. Thus, the Federal Government should possess adequate resources to
discharge these (onerous) economic and political functions. 675 The Panel recommended
that the total revenue collected by the Federal Government should be shared in the ratio of
57:30:10 percent for the Federal, State and Local Governments respectively while the
remaining 3 percent is allocated for special grants. In addition to the 10 percent from the
federal allocation, the Panel recommended that each State should share 10 percent of its
(State‟s) total revenue among its constituent Local Governments. 676
In making recommendation on how the 30% state allocation should be shared between the
19 States, the Panel carried out a systematic analysis of past and present principle of
revenue allocation in Nigeria; and (like the Dina Committee, on which Professor Aboyade
674
Id., p.85.
675
A financially strong Federal Government, apart from being able to come to the assistance of needy States
and Local Governments, would also be in a better position to enforce planned priorities and discipline as well
as absorb the shocks of various financial uncertainties. Id., pp 84-5.
676
Id.,.p..87.
232
served) rejected all of them on account of one major defect or the other. According to the
Panel, the various underlying principles for allocating revenue in the past seemed to be
unsuitable in the new circumstances at that time. With the nineteen state‟s structure and the
dominant influence of petroleum, there was the need for search for “logical and
fundamental principles” of allocation designed to minimise conflicts and rivalry among the
States in the Federation.677 Against this background, the Panel recommended the adoption
of five new set of principles using the different weight assigned to them based on their
degree of perceived importance thus:
(i) Equality of access to development opportunities: 0.25;
(ii) National minimum standards for national integration: 0.22;
(iii) Absorptive capacity: 0.20;
(iv) Independent Revenue and minimum Tax Effort: 0.18;
(v) Fiscal Efficiency: 0.15.
1.00
The recommendations of Aboyade Panel were approved by the Federal Military
Government with minor alterations. In particular, the weights allotted to the new principles
of allocation were rejected on the ground that it was a “political decision.”678 The Report of
the Panel was thereafter sent to the Constituent Assembly which was inaugurated at the
time to prepare a draft Constitution for the incoming civilian administration.
At the Constituent Assembly, the discussion on the new criteria for distributing revenue
among the States overshadowed other recommendations of the Panel. The formula was
677
Id.,.pp. 48-9.
678
See Government Views on the Report of the Technical Committee on Revenue Allocation (Lagos: Federal
Government Press See, 1978), p.7.
233
criticised “as too technical, too academic and cannot be easily understood by the ordinary
man and even the elites”.679 . The Panel was said to have over stepped its bounds by
rejecting some of the old principles. Shehu Shagari remarked thus:
“I would liken this Committee to an arrogant architect who has been

commissioned to design a house but would not accept the instructions or
wishes of the owner of the house, because he considers them either
outdated, out of fashion, not good enough, or not original. So the
architect brings his own idea.”680
5.5. The provisions of the 1979 constitution
Notwithstanding the furore generated by recommendations of Aboyade Panel on the
formula for revenue allocation, its recommendations largely formed the basis of the
provisions of the Constitution of the Federal Republic of Nigeria, 1979. The 1979
Constitution established a two tier government, albeit with provisions which mandate the
States to ensure the existence of a democratically elected local government vested with a
minimum functions including collection of tenement. The Constitution exclusively vested
the Federal Government with power on customs duties, excise duties, export duties,
companies income tax, capital Gains and Stamp Duties (contrary to the recommendation),
mining rents and royalties, petroleum profits tax on the Federal Government. Contrary to
the recommendation of the Panel that the Federal Government should simply provide the
legal basis for collection of the personal income tax, sales tax, companies income tax and
679
See the Proceedings of the Constituent Assembly, Monday, May 26, 1978, (Lagos: Fed eral Government
Press, 1978), p.5466.
680
Id., p 5501.
234
capital gains tax by the States, the Constitution simply authorised the Federal Government
to delegate the collection of the personal income tax, capital gains and stamp duties to the
States on such terms which the National Assembly may prescribe.
Although the Aboyade Panel‟s recommended that the Federal Government should provide
the legal basis for taxation of sales tax while the administration is left to the States, the
1979 Report of the Constitution Drafting Committee listed sales tax as a State tax without
any qualification.681 Thus, sales tax was not included in either the exclusive or concurrent
legislative lists to the 1979 constitution. The main controversy that occurred during the
operation of the 1979 Constitution on division of taxing power centred on the extent of the
constitutional power of States to impose sales tax. It is useful to examine the background
for the controversy.
Since the coming into force of the 1979 Constitution, the States had assumed more
responsibilities which required funding as a result of the new structure for allocation of
functions. Yet the allocation from the Federation Account proved to be insufficient as a
result of global reduction in the price of crude oil. This resulted in a serious cash crisis in
the economy such that some States could no longer embark on capital projects and pay
workers' salaries on regular basis.682 In their bid to survive, the States had to turn to Sales
Tax. Lagos State was the first to impose sales tax on a number of goods and services. This
was followed by other States like like Ogun, Oyo, Ondo, Bendel, Cross Rivers, Benue,
Kano, Kaduna, Anambra, inter alia, between 1980 and 1983. The introduction of sales tax
681
See 1978 Report of the Constitution Drafting Committee, p.134.
682
Akanle, O, “Financing the States: The Constitutionality of Sales Tax Laws, (Lagos: Nigerian Institute of
Advanced Legal Studies, 1983), p.3.
235
was greeted with opposition from the Productivity Prices and Incomes Board (PPIB) 683 and
the manufacturers under the aegis of Manufacturer Association of Nigeria (MAN). The
argument was that the tax would increase the prices of essential commodities regulated
under the Price Control Act.
The Ogun Sales Tax Law was challenged in the case of Attorney General of Ogun State v.
Alh. Ayinke Aberuagba.684 As the appeal raised very important constitutional issues
concerning the Federal and State taxing powers, the Supreme Court invited all the
Attorneys General in the federation as amici curiae to file briefs of argument on the issues
and to appear for oral argument at the hearing. The Attorney-General of the Federation and
the Attorneys General of ten States responded to the invitation. In the line-up for the legal
battle, nine Attorneys-General or their representatives namely of Benue, Cross River,
Gongola, Kaduna, Lagos, Ondo, Kwara, Plateau and Rivers State joined issues on the side
of the appellant. The Attorney General of the Federation and the Attorney General of Oyo
State pitched tent on the side of the respondents. 685
The respondent submitted that the omission of the words “sale and purchase” from the
Exclusive Legislative List did not ipso facto make sales tax residual. Rather, the subject
matter of sales tax is impliedly covered by item 15 (on excise) and/or 61 (on trade and
commerce) of the Exclusive Legislative List in the 1979 Constitution. It was argued that
the sales tax is incidental to the power of the National Assembly to regulate trade and
commerce. The appellant on the other hand submitted that the effect of the omission of
683
An advisory body set up by the Productivity, Prices and Incomes Board Act, No. 30 of 1977.
684
(1984) S.C. 20, [1985] 1 N.W.L.R., (Pt.3) 395, (1997) NRLR, Part 1, p. 64.
685
See (1997) NRLR, Part 1, p. 64.
236
sales tax in the Exclusive List of the 1979 Constitution makes it a residual matter on which
States can legislate. Furthermore, it was argued that trade and commerce power of the
Federal government was not at large, but rather limited to the matters set out in sub-items
60(a) to (f) of the Exclusive Legislative List. Consequently, the trade and commerce
power of the Federal does not extend to matters within the State‟s territory.
The Supreme Court rejected the extreme argument of both parties and held that both the
Federal and State Governments have powers to impose sales tax on any saleable matters
within their respective legislative competence. According to Bello JSC (as he then was):
“It is axiomatic that in the absence of any constitutional provision, express or

implied, to the contrary, the respective taxing power of the Federation and of a State
includes sales taxing power. Accordingly, the Federation is entitled to levy sales tax
on any saleable matters within its competence. It must, however, be emphasized
that it is not within the competence of a State:
(1) to make sales tax law affecting any of the matters in the Exclusive
Legislative List, or
(2) to make any sales tax law in any matter in the Concurrent List which is
inconsistent with any law validly made by the Federation; or
(3) to make any sales tax law on any matter in the Concurrent
Legislative
List where any law validly made by the Federation has covered the
field686
Having decided that both the States and Federal Government have power to impose sales
tax within the scope of their jurisdiction, the Court then examined the constitutionality of
the Ogun State Tax Law which was in issue. The Court held that the law was valid in so
far as it imposed tax on transaction within the States. However, section 3(1) and 3(4)(ii)
were held to be ultra vires the appellant and unconstitutional because the law imposes tax
686
Id., at p. 68.
237
on products brought into the Ogun State which is a matter of inter State trade and
commerce.
5.6. The Military Rule from 1983 -1999.
The civilian regime under the 1979 constitution was short lived. A military government
seized political power in a coup detat on 31st December 1983. The change of government
profoundly altered the existing legal order by suspending some portions of the 1979
Constitution and subjected the validity of the unsuspended part to the provisions of
Decrees. Thus, the framework for division of taxing power under the 1979 Constitution
became subject to the power of the Federal Military Government to make any law for the
peace, order and good government of the federation or any part thereof.
Although the case of Aberuagba was commenced in the Ogun States High Court in 1982
during the civilian regime, Nigeria was under a military regime by the time the case was
finally determined by the Supreme Court. As noted above, while the court affirmed the
competence of the State Governments to enact sales tax, it was however held that some
specific provisions of the Sales Tax Law of Ogun State exceeded the powers of the Ogun
State House of Assembly. This problem was common to the Sales Tax of other States. Not
only that, it was observed that there were significant divergence between the taxable goods
and services and the rates under the different Sales Tax Law.
5.6.1. The Emergence of the Sales Tax Act
238
The Sales Tax Decree of 1986687 was enacted by the Federal Military Government
to provide a uniform legal basis for the administration of sales tax in Nigeria. The Decree
imposed tax on a range of taxable goods and services. 688 Section 3 established a
Committee known as the Sales Tax Committee comprising of the Chairman of the Joint
Tax Board as the Chairman, all members of the Joint Tax Board, one representative of the
Productivity, Prices and Income Board, one representative of the Department of Customs
and Excise, one representative of the Ministry charged with the responsibility for matters
relating to commerce and the Legal Adviser to the Federal Board of Inland Revenue. 689
The functions of the committee included making recommendation for the amendment or
variation of taxable goods and services and the applicable rates subject to the approval of
690
the National Council of States Thus, a State lacked the power to independently
determine the taxable goods and the applicable rates within its jurisdiction. However,
section 7 of the Decree vested the day-to-day administration of the tax in the States Board
of Internal Revenue, albeit, subject to any direction that may be given by the Joint Tax
Board. The revenue from the tax accrued to each State and formed part of its consolidated
fund. Hence, to all intent and purposes, notwithstanding that sales tax was imposed under a
Federal statute, it was a purely a state tax.
5.6.2. Era of Study Group
687
Decree No 7.of 1986.
688
Id., see the First Schedule to the Sales Tax Decree, 1986.
689
Id. see section 3.
690
Id. see section 4(2)
239
In 1990 a Study Group under the chairmanship of Prof. Edozien was set up to review
the Nigerian tax system. The Committee recommended the introduction of a federally
administered VAT in Nigeria to replace state administered sales tax. Also, the Group
recommended the enactment of a uniform legislation for the administration of personal
income tax law by the States. Another Study Group led by Dr. Sylvester U. Ugoh was set up
later in the year 1991 with the responsibility to study the feasibility of introducing VAT in
Nigeria. The Ugoh Study Group recommended in November 1991 that VAT should be
introduced in Nigeria after two years of preparatory work. As a follow up, the Ijewere-led
Modified Value Added Tax (MVAT) Committee was set up in 1992 to undertake preliminary
work for the introduction of the new tax. The Committee handed over to the Federal Inland
Revenue Services (FIRS) who eventually took over the administration of the tax. 691
In furtherance of the military policy of harmonisation, the Federal Military Government
enacted three tax laws viz: The Personal Income Tax Decree, the Value Added Tax Decree
and The Education Tax Decree. The Personal Income Tax Act692 of 1993 provides a legal
basis for the taxation of income of individuals. Unlike ITMA which gave the States the
power to impose personal income tax and determine rates of taxes reliefs and allowances,
computation, collection, appeal recovery etc under their respective law, the PITA provides
a single income tax statute for the whole of Nigeria. Hence, the PITA expressly repealed
ITMA.693
691
See. J.K. Naiyeju, Value-Added Tax. The facts of a positive Tax in Nigeria, Kupag Public Affairs (1996) p. 35.
692
No. 104 of 1993.
693
See s.99 Income Tax Management Act, 1961.
240
The Federal Military Government also enacted the Education Tax Decree 694 of 1993 which
imposes tax at the rate of 2% on the “assessable profits” of a company registered in
Nigeria”.695 The tax is administered by the Federal Inland Revenue Service. All the taxes
collected under the Education Tax Decree are required to be paid into an Education
Fund696 and distributed between the various levels of education in the following ratio of
50:40:10 to higher, primary and secondary education respectively.697
The Value Added Tax Decree698 of 1993 repealed the Sales Tax Act.699 VAT is imposed
on the supply of goods and services at a flat rate of 5 percent and administered by the
Federal Inland Revenue Service. The revenue from the tax was initially distributed
between the Federal and States in the ratio of 20:80 percent, respectively. However, the
distribution formula was later altered in favour of the Federal Government and also
extended to the local government councils in the ratio of 50, 25 and 25 per cents to the
federal, state and local governments respectively. Due to protests by State Governments,
the distribution formula has been reviewed on several occasions 700 in favour of the States
and Local Government to arrive at the present formula which is 15, 50 and 35 percents to
the Federal, States and Local Governments, respectively.701
694
No 7, 1993
695
See section 1 of Education Tax Act (ETA)
696
In the manner specified in section 3(1) of the Education Tax Act.
697
Section 5(3) Education Tax Act, Cap E4, LFN, 2004.
698
No 102 of 1993, Cap V1, LFN, 2004.
699
The idea of introducing VAT in Nigeria came from the report of the study group set up by the Federal
Government in 1991 to review the tax system of the federation. VAT was proposed as a replacement of the
existing sales tax that has been in operation as a state tax administered under a federal enactment. The
rationale behind replacing sales tax with vat is informed by a number of factors and considerations, notably
the narrow base of sales tax, its weak and inefficient administration resulting in poor revenue yield to the
statesFor a detailed discussion of the reasons see M.T. Abdulrazaq, “Value Added Tax” in CITN Nigerian
Tax Guide and Statutes, CITN, 2002, p.540.
700
The formula has been changed six times in 1994, 1995, 1996, 1997, 1998 &1999
701
See section 40
241
There was a sustained clamour by some States (with Lagos State as the most vocal) for a
review of the formula for sharing VAT proceeds among the States. The argument is that
some States are getting a far more disproportionate share of the aggregate revenue relative
to the amount of VAT being collected within their territories, to the detriment of other
States where the bulk of VAT is being collected.
It is significant that all the taxes introduced during the military rule followed the pattern of
divesting the States of their power to establish independent legal framework for taxes
within the scope of their power and determine their rates. Thus, the legal basis for Personal
Income Tax, Capital Gains Tax, Stamp Duties which are administered mainly by the States
in respect of individuals who are resident within each State are determined under federal
statute. The Value Added Tax is not only established under federal statute but administered
by the Federal Inland Revenue Service (FIRS). These arrangements which subsist up till
now have resulted into avoidable tension in inter governmental fiscal relations in Nigeria
which will be discussed in Chapter six. It suffices to say that as altruistic as the federal
interventions might seem, they significantly constrain the States in the exercise of their
policy preferences in the law and administration of these taxes. The States, under this
arrangement, are not in a position to determine the rate and the administrative agency of
collection. Not only that, they are bereft of any legal power to amend the law as they may
consider desirable from time to time. A better approach would have been for the Federal
Government to provide a model sales tax in order to guide the states in enacting their own
laws.
242
CHAPTER SIX
FRAMEWORK FOR DIVISION OF TAXING POWERS UNDER THE 1999
CONSTITUTION
6.0. Introduction
Arrangements for the division of taxing powers differ from one constitution to another
depending on the prevailing socio-political and economic realities that gave rise to each
Constitution.702 Having considered the evolution of taxing powers in Nigeria from the pre-
colonial era up to the commencement703 of the Constitution of the Federal Republic of
Nigeria, 1999704 (1999 Constitution), the thrust of this chapter is to clearly set out the
legal framework of division of taxing powers under the Constitution and analyse the major
issues arising therefrom. In doing this, the divergence between the current and previous
framework and that of the other federations will also be highlighted. More specifically, the
chapter will analyse the extent which the system either cohere or depart with well
established principles of federalism.
This chapter is divided into seven sections. Section One introduces the chapter. Section
two discusses the problems in determining the relevant provisions of the 1999 Constitution
on division of taxing powers. Section three, four and five are devoted to the discussion of
the taxing powers of the Federal Government, State Government and Local Government
702
Emiko, G.I. “An Analysis of Federal/State Taxing Powers” in Tax Law and Tax Administration in
Nigeria, (Lagos: Nigerian Institute of Advanced Legal Studies, 1991), ed., Ajomo, M.A., p.12.
703
The 1999 Constitution commenced on the 29th May 1999. See section 1(2) of the Constitution of the
Federal Republic of Nigeria (Promulgation) Act, No. 24, 1999 Cap C23, Laws of Federation of Nigeria,
(“LFN”) 2004.
704
Id., See the Schedule The 1999 Constitution commenced on the 29th May 1999. See section 1(2) of the
Constitution of the Federal Republic of Nigeria (Promulgation) Act , No. 24, 1999 Cap C23, Laws of
Federation of Nigeria, (“LFN”) 2004.
243
Councils respectively. In section six, the writer examines the extent or otherwise to which
the arrangement of division of taxing powers conforms to the basic principles of
federalism. The chapter is concluded in section seven on the note that the system of
division of taxing powers is heavily skewed in favour of the Federal Government and in
dire need of decentralisation in order to make the federalism functional.
6.1. Constitutional Framework
Division of taxing powers is a basic constitutional matter in a federal system. In a unitary
system, the question of division of taxing powers does not arise. The central government
can impose any tax that pleases its fancy without being subject to constitutional
constraints. The position is however different in a federal system. According to Akanle:
“... in a federal set up, because of the inherent conflict situation always
existing between the central and the constituent governments (which
conflict probably gave rise to the federal set-up in the first instance) it is
essential that powers are allocated and defined in the fundamental laws
of the system. Thus, such fundamental law usually (the Constitution)
delimits the extent to which each level of government can go. Beyond
this limits, its action is regarded as being ultra vires and
unconstitutional”.705
Thus a search for the legal basis of division of taxing power inexorably leads us to the
fundamental laws of the land which is the Constitution.
Unlike the Constitution of the United States706 and Canada707 which contain substantive
provisions on the taxing powers of the Federal and States, the 1999 Constitution lacks a
705
Akanle, O, “The Government, the Constitution and the Taxpayer” in Ajomo, M.A., (ed.) Tax Law and Tax
Administration in Nigeria, (Lagos: Nigerian Institute of Advanced Legal Studies, 1991), p. 8.
706
See Chapter Five infra
707
Id.
244
direct substantive provision on taxing powers. Rather, the technique adopted by the
drafters of the Constitution is to subsume taxing powers under legislative powers by
itemising some taxes or tax bases in the Exclusive Legislative List of the Federal
Government. Hence, a determination of the extent of the taxing powers of a level of
government has to begin with the determination of its legislative power. In other words, a
consideration of taxing powers under the Constitution necessarily requires an examination
of the scope of division of legislative powers in section 4 of the Constitution in a manner
reminiscent of the Isrealite journey.708 Okorodudu was apt when she posited that “a
discussion of federal/state taxing power cannot be effectively discussed without first
discussing briefly the division of Legislative Powers under it.”709
To some extent, this arrangement seems to have affected the quality of analysis of the
taxing powers in the existing literature as some provisions which are not relevant to taxing
powers have been erroneously considered as incidental to taxing powers. The problem is
discernible from the lack of unanimity among writers on this issue. For example, in
considering the taxing powers of the Federal Government, Okorodudu included items 31,
37, 61 and 65 on “incorporations”, “regulation of companies”, “mines and minerals”,
“trade and commerce”, “wireless, broadcasting and television”. 710 Nwabueze also posited
that the Federal Government can impose (sales) tax pursuant to its “trade and commerce”
clause power under item 61 of the Constitution. 711 Nwabueze‟s view which received the
708
The Book of Exodus in the Holy Bible gives an account of How Israelites spent by wandering in the
wilderness for forty years for a journey that should take only forty days. Ibid., p.24.
709
Okorodudu, M.T., “Analysis of Federal and State Taxing Powers”, in Ajomo, M.A, supra note 1 at pp.62-
3.
710
Emiko,G.I., supra note 1 at p.12.
711
Nwabueze, B.O, Federalism in Nigeria under the Presidential Constitution (London: Sweet & Maxwell,
1983) p.241.
245
judicial support of the Supreme Court in the celebrated case of Attorney General, Ogun
State v Alhaja Ayinke Aberuagba 712 is being called to question in the ongoing case of
Attorney General of Lagos State v Attorney General of the Federation and 35 Ors.713 The
facts and the issues arising from this case are treated in section three of this Chapter.
In our view, item 32 of the Exclusive Legislative List on “Incorporation, regulation and
winding up of bodies corporate, other than co-operative societies, local government
councils and bodies corporate established directly by any Law enacted by a House of
Assembly of a State” has nothing to do with taxing powers. Blacks Law Dictionary defines
incorporation as “the formation of a legal corporation”714 while regulation is defined as
“the process of controlling by rule or restriction”. 715 “Winding up” means “the process of
settling accounts and liquidating assets in anticipation of a partnership‟s or a corporation‟s
dissolution.716 All the components of item 32, in our view relate more to the promotion,
formation, registration, management and dissolution of companies rather than taxation of
corporate entities. If the argument that taxing powers are inferable from item 37 is
sustained, it will inexorably lead to the erroneous conclusion that the Federal Government
has exclusive power to impose tax corporate entities in all ramifications.
In our view item 39 of the Exclusive Legislative List on “Mines and minerals, including oil
fields, oil mining, geological surveys and natural gas” is also unrelated to taxing powers.
712
1984 S.C. 20, (1997) NRLR (Pt.1)., p 51.
713
Suit No. SC/ 20/2008.
714
Black‟s Law Dictionary, Bryan A.G., (ed), (St. Paul, Minnn: West Group, 8th ed, 2004) P.781 (Hereinafter
referred to as Black‟s Law Dictionary) .
715
Id., p.1311.
716
Id., p.1631
246
“Mines” means “underground excavations used to obtain minerals, ores, or other
substances, mineral deposits, places containing mineral deposit”. 717 While “minerals”
means “any natural inorganic matter that has a definite chemical composition and specific
physical properties that give it value”.718 It is also submitted that item 62 on the trade and
commerce is independent of taxing power. “Trade” refers to the “activities of buying,
selling, or exchanging goods or services between people, firms or countries”. 719
“Commerce” is also defined as the “buying and selling of goods and services”. 720 If the
clause had included taxing powers on all trade and commerce including international trade,
there would have been no need to expressly provide for “customs and excise duties” in
item 16 of the Exclusive Legislative List.
It is submitted that each of the items 31, 37, 61 and 65 of the Exclusive Legislative List is
substantive in its own right and independent of taxing powers. If the intention of the
legislature had been to make them amenable to taxing powers they would have prefaced
them with “taxes” or “duties” or “taxation” as they have done with regard to “customs and
excise”, “export duties”, stamp duties” and “ income, capital gains and stamp duties in
items 16, 25, 58 and 59 of the Exclusive legislative List respectively.
Based on the foregoing analysis, the relevant provisions of the 1999 Constitutions on
taxing powers in the context of this work are: sections 4, 7(5) & item 1(j) of the Fourth
Schedule, 120(1), 162((1), 163, 165 which are highlighted below:
717
Id.,p.1015.
718
Id., p.1015.
719
Oxford Advanced Learner’s Dictionary, S. Wehmeir, (ed.) (Oxford University Press, 6th edn. 2001) p.
1270.
720
Id., p.223.
247
(i) Section 4 vests legislative power on the National Assembly and the State
House of Assembly to make laws for the peace, order and good
government of the Federation and States respectively including tax laws to
the extent provided in the Exclusive Legislative List (ELL) and
Concurrent Legislative List (CLL);
(ii) Section 7(5) provides that each House of Assembly shall confer on its
local government councils certain minimum functions including
“assessment of privately owned houses or tenements for the purpose of
levying such rates”;
(iii) Section 120(1) provides that all revenues or other moneys raised or
received by a State except otherwise prescribed by the Constitution shall
be paid into the Consolidated Revenue Fund of the State;
(iv) Section 162((1) mandates that all revenues collected by the Government
of the Federation shall be paid into the Federation Account except the
proceeds from personal income tax of the personnel of the Armed Forces
of the Federation, the Nigerian Police Force, the Ministry or Department
of Government charged with the responsibilities for Foreign Affairs and
the residents of the Federal Capital Territory;
(v) Section 163 mandates the Federal Government to distribute to the States
the net proceeds of the personal income tax, capital gains tax and stamp
duties collected by the Federal Government on the basis of derivation;
and
248
(vi) Section 165 mandates each State to pay the Federal Government the
expenditure incurred by it for the purpose of collecting taxes or duties
which are wholly or partly payable to the State in each financial year.
Our focus will therefore be on these provisions in the discussion that follow.
6.2. Federal Taxing Powers
As stated earlier, the legal framework of taxing power under the 1999 Constitution is
inextricably interwoven with the division of legislative power such that one cannot
effectively discuss the extent of taxing powers without a consideration of the framework
for division of legislative powers. According to Emiko, “the analysis of the Federal/State
Taxing Powers in Nigeria under the 1979 Constitution cannot be effectively discussed
721
without first discussion briefly the division of Legislative Powers under it”. This
therefore leads us to the consideration of the scheme of division of legislative powers of
the Federal Government. In this regard, section 4 (1)-(5) of the 1999 Constitution provide:
4. (1) The legislative powers of the Federal Republic of Nigeria shall be

vested in the National Assembly of the Federation, which shall
consist of a Senate and a House of Representatives.
(2) The National Assembly shall have power to make laws for the peace,
order and good government of the Federation or any part thereof
with respect to any matter included in the Exclusive Legislative List
set out in Part I of the Second Schedule to this Constitution.
(3) The power of the National Assembly to make laws for the peace,
order and good government of the Federation with respect to any
matter included in the Exclusive Legislative List shall, save as
otherwise provided in this Constitution, be to the exclusion of the
Houses of Assembly of States.
721
Emiko, G.I., supra note 1 at p.12.
249
(4) In addition and without prejudice to the powers conferred by
subsection (2) of this section, the National Assembly shall have
power to make laws with respect to the following matters, that is to
say:
(a) any matter in the Concurrent Legislative List set out in the
first column of Part II of the Second Schedule to this
Constitution to the extent prescribed in the second column
opposite thereto; and
(b) any other matter with respect to which it is empowered to
make laws in accordance with the provisions of this
Constitution.
(5) If any law enacted by the House of Assembly of a State is
inconsistent with any law validly made by the National Assembly, the
law made by the National Assembly shall prevail, and that other law
shall, to the extent of the inconsistency, be void”.
A community reading of the foregoing provisions with the Part 1 of the Second Schedule
would show that the National Assembly has powers to impose all the taxes on the
Exclusive Legislative List. A perusal of the 68 items on the List will reveal that four taxes
are specifically mentioned by name in items 16, 722 43723 and 58724 while item 59 refers to
the tax bases of “incomes, profits and capital gains.”20 In pursuance of its powers, the
Federal Government had imposed Customs duty, 725 Excise Duties,726 Personal Income
Tax,727 Companies Income Tax,728 Petroleum Profits Tax,729 Education Tax,730 Technology
Tax,731 Capital Gains Tax,732 and Stamp Duties.733
722
Customs and excise duties.
723
Export duties
724
Stamp duties.
725
See Customs and Excise Management Act, Cap C4 LFN, 2004.
726
See Customs and Excise Management Act, Cap C4 LFN, 2004.
727
See Personal Income Tax Act, Cap P8, LFN 2004
728
See Companies Income Tax Act, Cap C21, LFN 2004.
729
See Petroleum Profits Tax, Cap P 13, LFN 2004.
730
See Education Tax, Cap E4, LFN 2004.
731
See National Information Technology Development Tax Act, No – 1997.
732
See Capital Gains Tax Act, Cap C1 LFN 2004.
733
See Stamp Duties Act, Cap S8 LFN 2004.
250
6.2.1. Implied grant
Our consideration of the tax contents of the Exclusive Legislative List and the
existing federal tax statutes has so far revealed the existence of a few federal taxes
highlighted in the last paragraph of section 6.2 above. There are some taxes that are
commonly imposed by Federal Governments in some other federations (either exclusively
or concurrently) with States which are not contained in the Exclusive Legislative List such
as sales tax, value added tax, road/fuel tax, inheritance taxes or estate and gift taxes are
examples of such taxes. It is, therefore, pertinent to ask whether the taxing powers of the
Federal Government under the 1999 Constitution is limited to the taxes specifically
mentioned either by name or by reference to the tax bases. In view of the scheme of
division of taxing power under the 1999 Constitution, does the Federal Government have
power to impose sales tax, value added tax, road/fuel tax, inheritance taxes or estate and
gift taxes being taxes not expressly mentioned in the Exclusive Legislative List? This
question arose with regards to sales tax under the 1979 Constitution in the case of Attorney
General, Ogun State v Alhaja Ayinke Aberuagba. 734 It suffices to say that the Supreme
Court‟s decision on the issues is under attack in the ongoing case of Attorney General,
Lagos State v Attorney General, Federation & 35 Ors. 735
In view of the specific allocation of certain taxes by name and reference to the tax base to
the Federal Government, it might be argued that all other taxes are residual to the States
based on the principle of expressio unius est exclusio alterius.736 This point of view is
734
Supra note 11, at p 51.
735
Supra note 12
736
The expression of one thing is the exclusion of another. See Black’s Law Dictionary, 8th edn, ed Bryan
A.G., (West Group, St. Paul, Minn., 2004), p.1717.
251
reinforced by the well established notion of a Federal Government as a government of
enumerated powers.737 However, Akanle holds the view that the Federal Government is
not limited to the taxes specifically enumerated in the Exclusive Legislative List on the
basis that taxing powers are inherent powers of government which can only be curtailed by
express constitutional limitation. He contends:
“However, if the view is accepted that the power of taxation is an exercise

of sovereignty inherent to any government, it may be argued therefore that
the mere listing of some taxing powers in the exclusive legislative list has
not exhausted all the taxing powers of the federation. In other words, what
the exclusive legislative list has done is to specify those taxes that are
exclusive to the federation or those which the States are precluded from
imposing.”738
Nwabueze is also of the view that the Federal Government can impose sales tax pursuant
to its power to regulate trade and commerce under item 61 of the Exclusive Legislative
List despite the fact that sales tax was not specifically allocated to the Federal Government
in the Exclusive Legislative List. According to the learned writer:
“ Trade and commerce may be regulated by the imposition of taxes on

the carrying on of certain commercial activities e.g. selling of goods, and
to say that that form of regulating the subject is excluded by reasons of the
grant of power over specific items of taxation which would ordinarily be
also embraced in the regulation of trade and commerce is to put an
unwarranted restriction on the power thus granted.”739
This view has received the judicial support of the Supreme Court in the case of Attorney
General, Ogun State v Alhaja Ayinke Aberuagba.740 As a result of the importance of the
737
Akanle, O, The Power to Tax and Federalism in Nigeria - Legal and Constitutional Perspectives on the
Sources of Government Revenue, (Lagos: Centre for Business and Investment Studies) 1988, p.24.
738
Id., p.27.
739
Nwabueze, B O., supra note 10 , p221.
740
Supra note 11.
252
case to our discussion, it is considered important to provide the background of the case
before stating the facts.
In 1979, a new Constitution, the Constitution of the Federal Republic of Nigeria, 1979
ushered in the Second Republic. Unlike the 1960 and 1963 Constitutions, the Exclusive
Legislative List in the 1979 Constitution conspicuously omitted the item dealing with
sales/purchase tax. Taking this as an indication that sales/purchase tax was a residual
matter, the defunct House of Assembly of Ogun State and other States 741 enacted their
respective Sales Tax Law. The Ogun State Sales Tax Law, 1982 imposed tax on petrol,
diesel oil, petroleum products other than petrol and diesel, drinks (beer and alcoholic
spirits), tobacco and paints.742 Section 3(1) of the Law imposed tax on the “goods brought
into Ogun State” and imposed obligations on the wholesalers and innkeepers to collect the
tax from their consumers.743 The wholesalers and innkeepers were obliged to register with
the Ogun State Board of Internal Revenue, keep and maintain proper books and accounts
of all transaction by them on taxable products or services and render monthly account of
their tax collections.
The plaintiffs/respondents, who were wholesale purchasers of beer in Ogun State
challenged the constitutionality of the Ogun State Sales Tax Law on the basis that it was
ultra vires. They submitted that the Sales Tax Law of Ogun State was unconstitutional and
741
Mostly the States under the control of the Unity Party of Nigeria (UPN) such as Lagos, Ondo, Bendel and
Oyo States.
742
See the First Schedule to the Sales Tax Law of Ogun State, 1982.
743
Wholesaler is defined in section 2 of the Sales Tax Law of Ogun State as “any person in the State whether
he is a manufacturer or not of the goods who sells a taxable product to a person who carries on a business of
selling goods of that class again”.
253
void on the basis that it infringed upon the federal trade and commerce clause in item 61(a)
of the Exclusive Legislative List. The Federal Government having been given power to
regulate inter-State trade and commerce by item 61(a), any State law having the possibility
of interfering with trade and commerce between the States is null and void.
The defendant/appellant on its part submitted that item 61 did not vest all aspects of trade
and commerce exclusively on the Federal Government and that the “federal trade and
commerce” power under the item was limited to the matters set out in sub-items (a) to (f).
Consequently, it was argued that a State had an appreciable measure of control over trade
and commerce within its territory. It was argued that a State is entitled to regulate any
business or trade within its territory or even, if it thinks fit, prohibits particular trades such
as the sale and consumption of alcohol. And since the Constitution made no specific
reference to sales taxing power, it was intended to be a residual matter within the
competence of a State.
The Supreme Court rejected the arguments of both parties and held that both the Federal
and State Governments had powers to impose sales tax on any saleable matters within their
respective legislative competence. According to Bello J.S.C. (as he then was):
“It is axiomatic that in the absence of any constitutional provision,

express or implied, to the contrary, the respective taxing power of
the Federation and of a State includes sales taxing power.
Accordingly, the Federation is entitled to levy Sales tax on any
saleable matters within its competence. It must, however, he
emphasized that it is not within the competence of a State:
(1) to make sales tax law affecting any of the matters in the
Exclusive Legislative List, or
254
(2) to make any sales tax law in any matter in the Concurrent
List which is inconsistent with any law validly made by the
Federation; or
(3) to make any sales tax law on any matter in the Concurrent
Legislative List where any law validly made by the Federation
has covered the field.”744
Following the principle established in the case of Aberuagba, it could be argued that the
Federal Government could impose tax in pursuance of any of the items under the
Exclusive Legislative List apart from those directly related to taxes. To give the case of
Aberuagba such an effect would be to regard the taxing powers as synonymous or co-
extensive with legislative powers. It is doubtful, in our view if it could have been the
intention of the drafters of the Constitution to allow the possibility, no matter how remote,
of the having 78 federal taxes? In the event (though unlikely) that the Federal Government
establishes as much as 78 taxes, then what would be left for the States under the residual
powers?
A closer look at the provisions of the section 4(2) and the Exclusive Legislative List of the
1999 Constitution will reveal that there is a distinction between general legislative power
and taxing power of the Federal Government. Legislative power is the power to make laws
and to alter them.745 It is the power of a government to make laws generally on all the
subject matters within its competence. Therefore, the Federal Government has legislative
power to make laws on aviation, police, currency, immigration and other subject matters
on the Exclusive Legislative List including the few items that are directly tax related.
Taxing power is, therefore, a subset of the general legislative power of the Federal
Government since taxation power is exercised through legislative power. A random
744
Id., at p.68.
745
Id., at p.919.
255
selection of some of the items on the Exclusive Legislative List reinforces the view that all
the items on the list are not amenable to taxation. Item 1 relates to “Accounts of the
Government of the Federation and offices, courts, and authorities thereof, including audit
of those accounts”. What taxing power can be exercised or can arise from this? Can the
Federal Government impose a tax, be it sales tax or VAT on its own accounts? 746 Items 4
relates to “Award of national titles of honour, decorations and other dignities”, items 5
relates to “bankruptcy and insolvency”, items 14 relates to “creation of States”, Items 23
relates to “Evidence”, Items 27 relates to “Meteorology”, Items 51 relates to „Nuclear
Energy”. What taxing power can be exercised or can arise from any of these items? The
same thing can be said of Items 8, 17, 18, 22, 24, 31, 47, 50, 51, 54 and 61. 747 It is
submitted that the basic test in determining the constitutionality of a federal tax is whether
the tax or tax base in included in the Exclusive Legislative List set out in Part 1 of the
Second Schedule to the Constitution. Therefore, within the context of taxing powers, the
phrase “any matter” in the provisions of section 4(2) of the Constitution should be read to
mean “any tax or tax base”.
6.2.1. Limitations of the Federal Taxing Powers
The 1999 Constitution does not contain any express limitation to the taxing powers
of the Federal Government or any tier of government. Therefore, one is left to imply the
limits of the taxing powers of the Federal Government (and other levels of government)
from the general provisions on division of taxing powers and the principles of federalism.
746
See the Plaintiff‟s Brief in Attorney General of Lagos v. Attorney General of Federation & 35 Ors, supra
note 12 p. 28.
747
Id.
256
Following the principle that taxation is statutory,748 the Federal Government is destitute of
power to impose tax on any subject matter outside the scope of its legislative powers. The
first test therefore is to examine whether the Federal Government has power to make law
on a subject matter before considering whether it has power to impose tax on the thing. For
example, the Federal Government cannot impose a tax which has been expressly reserved
for another level of government such as tenement rate. Apart from the fact no such tax is
included in the Exclusive Legislative List, the tax had been expressly reserved for the local
government council in section 7(5) paragraph 1(j) of the Fourth Schedule to the 1999
Constitution. To allow the Federal Government to impose a tenement rate will wreck
double taxation on the taxpayers.
6.3.3. Scope of and Contentious Issues arising from Federal Taxes
6.3.3.1. Customs Duties
“Customs duties” comprises of taxes on imported and exported goods otherwise
called import duties and export duties. Custom duties are inherently international by nature
and administered by a federal agency, the Nigerian Customs Services (NSC). Customs
duties are said to be the oldest modern tax in Nigeria and date back to the 1860s. 749
Customs duty are imposed as a percentage of the value of the import and export (i.e, the ad
valorem method) or as a fixed amount related to quantity. In the last three decades, the ad
valorem methods has predominated. Customs duties currently range between 2% and
100%, the lower rate being generally applicable to import required for the economic
748
See Cape Brandy Syndicate v. IRC ([1921] K.B. 64.), S.A v. Regional Tax Board (1970) 1 ALR Comm.
68) and Aderawos Timbers Trading Company Ltd. v. FBIR. (1969) 1 All NLR 247
749
See "'Nigerian Tax Reform in 2003 and Beyond", Main Report of the Nigerian Tax System (July, 2003)
("Study Group Report"), p.232.
257
development of Nigeria, while the upper rates apply generally to final consumers and non
essential goods.750 Until the introduction of the Value Added Tax in 1993, 751 custom duties
were the highest yielding indirect or expenditure tax in Nigeria. The entire proceeds from
the taxes are paid into the Federation Account established under section 162(1) of the 1999
Constitution.
Although the 1999 Constitution does not contain any express prohibition on States from
imposing Customs duties as it is the case under the United States 752 or Canadian
Constitutions,753 the Constitution secures a common market through Nigeria by vesting
international and inter-State trade and commerce power exclusively on the Federal
Government in item 62(a) of the Exclusive Legislative List which provides thus:
“Trade and commerce, and in particular –

(a) trade and commerce between Nigeria and other countries including
import of commodities into and export of commodities from
Nigeria, and the trade and commerce between the States.”
An attempt by Ogun State to impose a discriminatory tax on goods being brought into the
State or goods being taken out of the State754 was declared ultra vires and null and void in
Aberuagba v Attorney General of Ogun State.755
While no State has directly sought to impose tax on imported and exported goods, there
has been agitation by Lagos State that the proceeds of customs duty should be distributed
750
Id.
751
See the Value Added Tax Act No. 102, 1993 now Cap V1, Laws of Federation of Nigeria, 2004.
752
See Chapter Four section 4.1.
753
Id. Section 4.2.
754
See section 3(1) and 3(4)(ii) of the
755
Supra note 11.
258
based on derivation.756 To reinforce its argument, reference is usually made to the
arrangement under the 1960 and 1963 Constitutions whereby the revenue from imported
goods were distributed to the Regions where the goods were consumed. 757 The argument
of Lagos State is further based on the premise that the location of the major ports in the
State do exert enormous pressure on its infrastructures. In Attorney General of the
Federation v. Attorney General of Abia & 35 Ors (No. 2) 758 the Supreme Court rejected
the argument of Lagos State that ports qualified as natural resources for the purpose of
distribution of revenue in the Federation Account based on derivation in pursuance of the
proviso to section 162(2) of the 1999 Constitution. 759
In furtherance of its drive to earn additional revenue from goods being imported into
Nigeria through the Lagos Ports, Lagos State Government recently introduced a Wharf
Landing Fee760 chargeable upon any consignment of goods imported through Lagos Ports.
The fees are payable by the person in possession of consignment “at the point of entry”
whether he is the owner, shipper, transporters or agent to officials or duly authorised

756
The principle of derivation requires that all revenue which can be identified as accruing from or attributed
to a particular state should be allocated in part or in full to such a state, irrespective of the fis cal jurisdiction
involved or the machinery for their collection. So defined, the principle is closely related to the benefit
principle of taxation. Its main attraction is that it gives the State of origin of any particular revenue, the
satisfaction that it stands to receive more than any other state from revenue accruing from within its
administrative boundaries. See The Report of Technical Committee on Revenue Allocation in the Military Era
(Lagos: Federal Government Press, 1979) (Hereafter called the “Aboyade‟s Report”) p24.
757
Section 162 (2) of the 1999 Constitution provides “The President, upon the receipt of advic e from the
Revenue Mobilisation Allocation and Fiscal Commission, shall table before the National Assembly proposals
for revenue allocation from the Federation Account, and in determining the formula, the National Assembly
shall take into account, the allocation principles especially those of population, equality of States, internal
revenue generation, land mass, terrain as well as population density; Provided that the principle of derivation
shall be constantly reflected in any approved formula as being no t less than thirteen per cent of the revenue
accruing to the Federation Account directly from any natural resources.
758
Attorney General of Abia State Attorney General Federation (No.2)[2006] 16 NWLR (Pt.1005) at 380.
759
Id at p.415,
760
The Law which was signed into Law on March 16, 2009 was not assigned any number.
259
agents of the Local Government. Although Section 1(2) of the Law requires payment “at
the port of entry” section 4 empowers the Local Government officials to stop vehicles,
demand and issue receipts.
It is our view that the administration of this Law will inexorably create avenues for local
government officials to establish “check points” on federal roads. While the attempt by the
Lagos State to boost the revenue of the local governments in the port areas is
commendable, there is inherent danger of conflict with the trade and commerce clause 761
unless the collection is restricted to the Port in which case the cooperation of the Federal
Government is required. This is because a vehicle may pass through several local
government councils and areas within Lagos State before getting to its destination. 762
There is no gainsaying the fact that Port cities usually witness flurry of commercial
activities which may overstretch their infrastructure. When ships berth at the Port and the
consignments are transported to various destinations across the country, the port areas and
their environs are faced with immense challenges. For example, the roads (main and access
roads) will witness greater rate of deterioration and require frequent repairs, crime waves
may be more prevalent, traffic congestion, etc. Ordinarily, due to externalities created by
port activities, federal interventions are usually required because it is unfair to shift all the
burden of financing the infrastructures on the locality just as it will also be unfair for the
locality to seek to impose taxes on out-of-state users of the Port. This is perhaps one of the
reasons why ports are usually designated federal matters in federation, including ours.
761
Item 62(a) of the Exclusive Legislative List of the 1999 Constitution.
762
For example, a vehicle going to Apapa from Ikorodu will pass through Apapa, Surulere, Kosofe and
Ikorodu local government areas.
260
Some may argue that port location also confer some unique opportunities such as heavy
federal presence, high population density, location and localisation of industries which
may positively impact on the revenue of the locality. While this point is valid, it still does
not detract from the need for federal assistance in order to alleviate the extra fiscal burden
that beset port areas and thereby discourage any tendency on their part to exact their pound
of flesh on out of state users of the ports. Lagos State is advised to intensify its campaign
for special grants for Lagos State as a former federal capital territory rather than resort to
irresponsible fiscal behaviour.
It is quite predictable that the Wharf Landing Fee Law of Lagos State will in the course of
time spin off litigation and stand the risks of being successfully challenged on the basis
that it violates the trade and commerce clause provisions of the Constitution. It is
advocated that taxpayers should be proactive by pre testing the validity of this law in the
law court.
From the foregoing, it seems that the assignment of customs duty to the Federal
Government is quite appropriate and in line with the principles of allocation of taxing
powers and best practices around the world. The fact that the revenue from customs duties
goes into the Federation Account and later shared together with other revenues among all
the levels of government makes the current arrangement more favourable to the States than
the arrangement in some other federations. Therefore, custom duties have been eliminated
as inappropriate for decentralisation.
261
6.3.3.2. Excise Duties
“Excise” or “Excise duty” has different meanings in different jurisdictions. In the
United Kingdom, en excise includes entertainment tax, betting, gaming and gambling taxes
and fiscal licences.763 In Australia the meaning of excise duties is wide enough to include
sales tax. If the broad definitions of excise duties in these countries were to be adopted in
Nigeria, it would lead to the erosion some of the taxes that are presently within the
jurisdiction of the States. In Aberuagba v Attorney General of Ogun State764 the Supreme
Court has defined excise tax as a “tax on goods manufactured or produced in Nigeria”. 765
The Court rejected the argument that the tax imposed under the Ogun State Sales Tax Law,
1882 amounted to an excise tax simply because the obligation to collect the tax was
imposed on the wholesaler.
There is also no uniform approach to the allocation of excise duties among the federations.
In the United States and Canada the federal/Dominion and the States/Provinces have
concurrent powers to impose excise duties. 766 The power over excise was residual to the
central government under the 1951 Constitution. 767 However, excise was vested on the
Federal Government under the 1954 Constitution768 and has remained a federal tax in
769
subsequent Constitutions up till the extant one.
763
Emiko,G.I., supra note 1 at p. 16.
764
Supra note 11.
765
At p. 65.
766
Under Section 92(9) of the BNA each Province has power to raise excise or fiscal licences whether or not
direct in respect of shops, saloons, tarven, auctioneer and other licen ces”
767
See section 6,7 & 9 of the Order in Council, S.1 1951, No. 2127.
768
See item 14 of the 1954 Constitution which provides thus: “Customs and excise duties, including export
duties”
769
See item 16 of the Exclusive Legislative List of the 1999 Constitution.
262
There seems to be no agitation for the decentralisation of excise taxing power in Nigeria.
However, considering that production of goods takes place in a geographically bound
locality, there is no reason why excise tax cannot be wholly vested on the States or
concurrently between the Federal and State Governments. The production of goods
undoubtedly creates opportunities and challenges for its immediate locality which justifies
some form of compensation to enable the State Government to improve and maintain the
infrastructure in the locality from time to time. The fact that companies pays excise and
other taxes to the Federal Government often create ready excuses for the States when
called upon to improve the infrastructures in the industrial part of the States.
While the prospect of decentralising excise may benefit a few States with high
concentration of industries like Lagos, Rivers, Kaduna, Kano and Cross Rivers States, it is
not likely to receive the support of others States with little or no industrial base who seem
to be better of under the current arrangement of pooling and sharing revenues in the
Federation Account. This should not stop the few industrialised States from developing,
popularising and sustaining the argument in favour of decentralisation. In the course of
time, consensus may be formed on its desirability and modus operandi. If we draw from
the VAT experience, Lagos State was initially a lone ranger in clamouring for a review of
the formulae for sharing VAT revenue. The position taken by the various States in the
ongoing case of Attorney General of Lagos v Attorney General of the Federation & 35 Ors
more States have aligned with the position of Lagos.
263
6.3.3.2. Income/Profits Tax
Income tax is one of the most important and oldest taxes in the world. 770 Virtually
all the countries that are members of the IMF have some forms of income tax with the
exception of a few small countries.771 The precise definition of income has been the subject
of considerable controversy among accountants772 and economists773 as each profession
has its concept of income. However, legislators and tax administrators in practice usually
adopt a hybrid definition of income which is consistent with neither the economic nor the
accounting concepts.774
While the phrase “income tax” is wide enough to cover earnings from employment,
investment, trade and business the term „profits tax‟ is usually used for income from trade
or business. However, the two terms are often used interchangeably in practice. The basic
principle of income tax is that the taxpayer‟s income from either all sources or a particular
source775 are aggregated after which certain deductions and exemptions are taken to arrive
770
Thuronyi, V., Comparative Tax Law, op. cit., pp. 57-58. See also Musgrave and Musgrave where they
remarked that the individual income tax in U.S. “the individual income tax is by far the most important single
tax and the kingpin of the federal, if not the entire United States tax structure.” See Musgrave R.A. &
Musgrave P.B., Public Finance in Theory and Practice, (Mc-Graw –Hill Book Company, 1984), p. 323.
771
So far Bahamas and Vanatu are the two IMF countries that do not have an income tax. Several countries
have an income tax of only limited application. Maldives has a tax on bank profits only. St Kits and Nevis
impose income tax on corporations, but not on individuals. Paraguay taxes businesses only. The United Arab
Emirates Oman, Qatar have corporate taxes, but these apply only to oil companies and financial institutions.
See 29 Tax Laws of the World 96, 110 (1987). Thuronyi, V, ibid, p.230.
772
The accounting concept of income stresses the external reporting of financial information and the internal
control of a business. See Herber, B.P., op.cit., p. 151.
773
The definition that seems to have gained general acceptance among economists is that of Haig who
defined income as “the money-value of the net accretion to economic power between two poin ts of time‟.
This definition takes account of total accretion, that is the accrual of wealth. This includes as income an
individual‟s spending in a given period, plus any changes in his net wealth. For example, if an individual
spent N2,500 in one year, and the real value of his assets increased by N500, his income by this definition
would be N3,000 in that year. Viewed in this sense, the definition of income will include accretion through
inheritances, gifts, winnings from gambling and any windfall gains. See Simons James & Christopher Nobes,
op.cit., 176
774
Herber, B.P., op.cit., 151.
775
(under a scheduler system)
264
at chargeable income.776 Besides revenue generation, a well designed and administered
income tax has the greatest potentials for providing redistribution of income and economic
stabilisation.777
Income tax is a relatively complex tax which requires a strong and efficient administration.
Framing an income tax structure that will maximize the attainment of the goals of the tax
system is a highly complex task, one that presents numerous problems for which there are
no simple, obvious solutions consistent with all desired goals. 778 The complexity in the law
and administration of income tax is captured thus:
“It is well known that the determination of taxable income is often an

arduous process, and that success demands the intelligent and hearty co-
operation of the tax officials and the taxpayers. Of the modern taxes the
income tax is often regarded as the most equitable, but also the most
complicated. The services of accountants, economists, attorneys, and other
tax experts, as well as of the courts, may be required to reach a reasonably
satisfactory determination of taxable income. Moreover, because the tax
rates are high and many millions of taxpayers are involved, the game of
tax-dodging has become more popular, and in certain respects tax ad-
ministration has become more difficult”.779
Perhaps due to its complex nature, income tax did not become a “mass tax” until after the
Second World War when the Pay as You Earn System was developed. Due to this
development and the eventual evolution of the withholding tax system the administration
of income tax has become much simpler and relatively more cost effective. In some
776
Musgrave & Musgrave, op. cit., p. 324.
777
Tax Law Design & Drafting, ed, Thuronyi, Victor, p.480Thuronyi, CTLA, P.328. &.
778
Due J.F, Government Finance: An economic analysis, (Illinois: Irwin Publishing Inc., 1954) p.389.
779
Laser, J.K., “How to Improve Tax Administration,” Annals of the American Academy of Political and
Social Science, Vol. 266, (Nov., 1949) pp.121-127.
265
countries,780 the income of individuals and that of corporations are governed by the same
statute while in some others they are separated. 781 Nigeria adopts the latter approach.
6.3.3.3. Personal Income Tax
The Personal Income Tax is a tax on the income of individuals and group of
individuals other than a corporate body. Where an individual earns all his income within a
jurisdiction where he is resident, the question of determining the taxing authority poses no
difficulty. This is, however, not the case for a relatively mobile individual earning income
from more than one jurisdiction. In the absence of voluntary disclosure, such individual
may move from jurisdiction to jurisdiction or claim to be resident in another jurisdiction in
order to evade tax. If power to tax personal income tax is vested exclusively on the place of
residence, taxpayers will be able to evade tax especially in the absence of cooperation and
exchange of information between the States. On the other hand, vesting the federal with
jurisdiction will deprive the place of residence its fairs share of the income which would
have compensated for the services being enjoyed by him. Another hrns of dilemma is that
vesting both the State and Federal with plenary power to tax personal income will
inexorably lead to overburdening the taxpayers. Because of this dilemma, the Conventional
theories prescribes that progressive income tax should be vested in the Federal
Government where it can be best utilised in furtherance of the economic objectives of
government. The States and the local authorities on their part are not to be deprived of the
use of income tax but should be limited to the use of non-progressive rates. The Rational
Choice Theorists on their part posit that in an economy where important functions are
780
For instance United States.
781
For instance, Nigeria.
266
vested on the States, they could also be allowed to use progressive personal income tax.
The prevalent practice, however conform to the conventional model.
The taxation of income including personal income is vested in the Federal Government
under item 59 of the Exclusive Legislative List. However, the Constitution permits the
Federal Government to delegate the administration of the tax to the State on such
conditions as the National Assembly may prescribe provided that where the administration
is delegated to the States the National Assembly shall regulate the liability of persons to
the tax in such manner as to ensure that a person is not subject to tax by more than one
State.782 While States are vested with power to administer personal income tax in respect
of individuals resident within their territories in pursuance of section 2 (2) of PITA, the
following the categories of persons listed in section 2(1)(b) of PITA. The revenue
collected by the States Forms part of their Consolidated Revenue Fund while the net
proceeds collected by the FIRS from the PIT is are mandated to be distributed among the
states on the basis of derivation pursuant to section 163 of the 1999 Constitution.
Although income tax is mainly administered by the States for their benefit, the
administration is done in pursuance of a federal legislation, the Personal Income Tax Act
which establishes a uniform framework throughout Nigeria. From our study of the theory
and practice of division of taxing powers, the States in Nigeria seems to be better off than
their counterparts in other federations where the taxation and administration of personal
income tax is vested on the Federal Government while the States are restricted to the use of
non progressive personal income tax. The downscale however is that the States are
782
See item D8 of the CLL.
267
deprived of the opportunity to determine the structure and the rate of their personal income
tax under their own laws. Since the power to administer the personal income tax is granted
to the States by the National Assembly and not directly by the Constitution, it is arguable
that the States run some risks that the power might be withdrawn in future, for example, in
the event of an emergency or war.
Personal Income Tax is a significant source of revenues to the States in Nigeria. Apart
from revenue allocation from the Federation Account it represents the second highest
source of revenue for most of the States. However, it is regrettable that the administration
of the personal income tax in Nigeria is generally mainly focused on those who are in
employments while the high net businessmen and women are able to escape payment. Due
to reliable data base of tax payers in the informal sector and those who are in employments
coupled with lack of information exchange among the tax authorities, States are unable to
make efficient use personal income tax administration.
A recent tax introduced by Rivers State clearly shows the lack of appreciation or utility of
the Personal Income Tax by the States in Nigeria. In furtherance of its objective to
generate more revenue for the improvement of social services, the Rivers State recently
enacted „Rivers State Social Service Contribution Law, 2010. impose “a social services
levy” on individuals at the rate of 3% of Annual Basic Salary for persons in employment,
N5, 000 per annum on traders and artisans, N25, 000 on professional below 10 years, N50,
000 on professionals above 10 years, N50, 000 on persons involved in large scale business
(See s.1 and Schedule 1). the levy is payable by monthly deduction in case of those in
268
employment and quarterly in the case of self employed – s. 2(2). The revenue from the tax
is earmarked for the financing of the free education programme of the government in
primary and secondary schools, scholarships, improvement and provision of medical
facilities and services and other allied services, Obligation is imposed on corporate persons
to deduct and remit the levy from the salary of those in their employment. The levy is to be
administered by the Rivers State Board of Internal Revenue.
There was overwhelming opposition by a wide spectrum of the stakeholders at the Public
Hearing organized by the Ad Hoc Committee of the House of Assembly on 30 th July, 2010
on the following ground, inter alia, that the levy amounts to double taxation especially of
those who are in employment and that it is unconstitutional to the extent that it seeks to tax
personal income which is on the Exclusive Legislative List of the Constitution of the
Federal Republic of Nigeria, 1999.
While the Law manages to sail through the Legislature after several attempts, one is left to
wonder about a number of issues. First, since a State is already vested with power to
administer (progressive) income tax in respect with a marginal rate of 25 per cent, the logic
of imposing this special levy is unclear. This is more so when the administration of the
new tax is vested on the State Board of Internal Revenue. If the State Board has the
capacities to administer the new tax then it should not be difficult for it to also administer
the Personal Income Tax Act. And unless the States Board is re-engineered the
administration of the new tax will most likely fall on those who are already within the
PAYE scheme.
269
In view of the lack of efficient use of the personal income tax by the States, it is
recommended that the administration should be decentralised and co utilised by all the
three levels of government under a new arrangements whereby local government councils
will adopt be entitled to imposed a flat rate per head in form of the poll tax say at the rate
of between N200-N1000 per head/annum. The States on their part should be entitled to
impose a flat rate of say between 2 to 5 per cent of the gross receipt or income of taxpayers
without any deduction while the power to tax the progressive rate resides in the Federal
Government.
There are likely to be two main fears with regards to this proposal which are that it will
result in double taxation and loss of taxing powers of the States. The first fear will be
allayed through the adoption of a structure that allows the taxes paid at the local level to be
fully credited against the taxes due at higher levels. It is expected that this arrangement, if
well administered, will lead to expansion of the scope of administration of the Personal
Income Tax since this will provide a sort of incentives for the local and States governments
to transfer the burden of their taxpayers within their territories to the Federal Government,
6.3.3.4. Companies Income Tax
The incomes or profits of corporate entities, except those engaged in petroleum
operations, are taxed in Nigeria under the Companies Income Tax Act.783 Unlike under the
1960 and 1963 Constitutions where taxation of corporate bodies was expressly reserved for
783
Cap C21, LFN, 2004. Companies Income Tax is otherwise known as corporate tax in other jurisdictions
such as Britain, United State of America etc.
270
the Federal Government, there is no such express mention or reference to the tax under the
1999 Constitution. Rather, the Constitutional framework is subsumed under the rubric of
item 59 of the Exclusive Legislative List which provides “Taxation of incomes, profits and
capital gains except as otherwise prescribed by this Constitution”
Companies Income Tax is imposed on the net global profits of the Nigerian companies
after the deductions of certain expenditures and reliefs while foreign companies are liable
to pay tax to the extent that their profits are attributable to their operations in Nigeria. The
Companies Income Tax is administered by the Federal Inland Revenue Service. The
revenue from the tax is paid into the Federation Account and distributed among the three
levels of government.784
Some States with large concentration of industries such as Lagos, Rivers, Kaduna and
Kano have criticised the arrangement whereby taxation of companies income is exclusive
to the Federal Government. The argument is that since the States are generally responsible
for the provisions of infrastructures that support the business operations/activities of
companies, it is unfair not for the taxes to be paid to the Federal Government. The concern
of the States is reinforced by the fact that no weight is given to derivation on the basis of
location or localisation of industries in the distribution in which case States with the largest
presence of corporate bodies would have gotten more on that account.
Perhaps in response to the concern of the States, the 2003 Tax Study Group had
recommended that “the income taxation of companies whose turnover is less than N50m
784
See section 162(2) of the 1999 Constitution.
271
(Fifty Million Naira Only) in the year of assessment should pay their tax at the State level
at the rate of 2 percent of turnover, or 20 percent of total (i.e., chargeable) profit,
whichever is lower”.785 The basis of the recommendation is provided as follows:
“We also belief that in order to enhance the simplicity of the tax system,
exploit the advantages of decentralisation, develop the fiscal capacities of
the States, and compensate the States for the additional government
expenditure caused by the operations of companies, the income taxation of
small companies should henceforth be handled by the States”. (Emphasis
mine)
The following deductions can be made from the above recommendation. First, there is a
conscious effort by the Tax Study Group to promote promoted equity and efficiency in the
allocation of powers to tax corporate income. Second, it is believed that the proposed
changes of concurrent use of companies income tax by Federal and State will simplify the
system, Third, it is believed that the arrangement ultimately help in developing the fiscal
capacity of the States compared to an alternative policy choice of recommending an
increment in the allocation of revenue based, say based on derivation. (Use in conclusion)
Fourth, the use of the word “handled” implies the delegation of the administration of the
Companies Income Tax and not the imposition.
If the above recommendation had been accepted and well executed, it would have ushered
in a regime of concurrent use of companies income taxation by the Federal and State
Governments and the States in a manner that might meaningful attenuate the problems of
multiplicity of taxes. Regrettably, the recommendation was rejected by the Federal
Government.
785
See Report of the Tax Study Group, 2003, Supra note 48 at p. 207
272
The recommendation of the Study Group in this regard is reinforced by the prevailing
practice among other federations. In the United States, the States have been imposing
corporate income tax for as long as corporations have been in existence. 786 Similarly in
Canada, the provinces had always had the power to impose tax on corporate income within
their territories since inception. In fact there was no federal corporate income tax until the
outbreak of the First World War787 when the exigencies of the period dictated that the
Provinces should give up their independent taxation of corporations in favour of grants
under Tax Rental Agreements, a feature which exist till today while a few provinces had
chosen to stay out of the agreement while they imposing heir independent corporate
income tax. In Australia, prior to 1942, income tax was concurrently imposed by the
Commonwealth and the States. However, in 1942, the Commonwealth enacted the Income
Tax Act which set a high rate for the Commonwealth and gave primacy to the
Commonwealth tax by expressly stating that individuals had to pay the commonwealth tax
first prior to State tax. A carrot was dangled to States by providing for States
compensation for loss of independent revenue under the States Grant (Income Tax
Reimbursement) Act where a State does not impose its income tax.
The foregoing discussion has revealed that the allocation of corporate income tax is not
uniform among the federations. What is however clear is that there even in jurisdictions
786
Wisconsin took the lead in 1911 by enacting its Corporate Income Tax, and over the ensuing two decades
15 more states followed suit. Today nearly all the States have adopted a general co rporate income tax, except
Nevada, South Dakota, Washington and Wyoming.See Bank, Steven, A., “The Shareholders -Based Origins
of the Corporate Income Tax” (2001) (unpublished) Cited in Stark, Kirk, J., “The Quiet Revolution in u.s.
Sub national Corporate Income Taxation”, International Bureau of Fiscal Documentation (IBFD) Bulleting
September, 2001p.524. See also, See generally, Stark, Kirk, J., op. cit., 524.
787
See Thirsk, W.R., op.cit., p.237.
273
where independent corporate income taxation were allowed at the State level, there had
been gravitation towards a unified arrangement under a cooperative arrangement in order
to minimise interference to businesses. For example, in United States where the States
retained their power to impose corporation tax, as far as 1957, Uniform Division of Income
for Tax Purpose Act (UDIPTA)788 has been enacted by the National Conference of
Commissioners on Uniform States Laws. Although States are mandated to adhere to the
UDITPA framework; since its initial promulgation; however, many States have
incorporated its provisions into their tax laws. 789
The trend in other federations has shown a measure of dynamism in addressing problems
associated with the concurrent use of corporate income tax base by both the Federal and
State Government. In fashioning out a solution the approach is not to deny the States their
taxing power to work out an arrangement that seem fairly (even if not entirely
satisfactorily) compensate the State for revenue loss. The Nigeria models where the
revenue from the Companies Income Tax is pooled together with all other revenue of the
federation and shared on the basis that does not give weight to the fiscal capacity of the
States on any particular tax. To that extent, the Nigerian model falls short of the best
practice. In our view, the sensible recommendation of the Tax Stud Group would have
provided a starting point to work out the problems of inequities in this regard which can
eventually be improved upon.
788
UDIPTA is designed to remedy the problem of inconsistent st ate statutes concerning the problems of
multistate corporations. In Polaroid Corp v. Offerman, 507 S.E. 2d 284, 349 N.C. 290 (1998) at p. 304 the
North Carolina Supreme Court rationalized the basis of the UDIPTA thus: “UDIPTA was needed because the
divergence in State tax law unfairly subjected multistate corporations to tax liability on greater than 100% of
their income and debilitated their profits margins by increasing their compliance costs. UDIPTA was drafted
to reduce this diversity and to therefore eliminate the accompanying over taxation and high compliance cost
associated with it.”
789
Stark, Kirk, J., op. cit., p. 525.
274
6.3.3.5. Petroleum Profits Tax
Taxation of Petroleum or minerals is not expressly mentioned in the 1999 Constitution.
The power of the Federal Government to impose tax on petroleum profits is traceable to
item 59 of the Exclusive Legislative List of the 1999 Constitution. It should be noted that
Petroleum Profits Tax is a tax on the profits of companies engaged in petroleum operations
otherwise known as exploration and prospecting companies. Not all the companies in the
oil industry are taxable under the PPTA. Only companies that are engaged in petroleum
operation as defined in the Act are subject to PPT. Petroleum operation is defined in
section 2 of PPTA as:
“Petroleum operation” means winning or obtaining and transportation of

petroleum or chargeable oil in Nigeria or by on behalf of a company for its
own account by any drilling, mining, extracting or other like operations or
process, not including refining at a refinery in the course of business
carried on by the company engaged in such operations, and all operations
incidental thereto and any sale of or any disposal of chargeable oil by or
on behalf of the company”.790
From the above provision, it is clear that for a company to be taxed under the PPTA it
must “win and obtain oil” and must do so in its own account. A mere act of transportation
or marketing of petroleum is not sufficient to constitute „petroleum operation‟ for the
purposes of the PPTA. Hence, the profits of oil marketing companies and various oil
servicing companies are taxed under CITA. If a company is engaged in petroleum
operation and at the same time carry on marketing activities of refined petroleum products,
the profits from the petroleum operations will be subject to PPTA while those from the
790
See section 2 PPTA
275
marketing activities will be subject to CITA. The definition of petroleum operations also
clearly exclude companies engaged in refining. In effect, the PPTA is a special statute
applicable to few companies engaged in petroleum operations while the Companies
Income Tax is a general statute applicable to companies generally. The Petroleum Profits
Tax is administered by the FIRS while the revenue from the tax is paid into the Federation
Account.791
There has been a growing agitation by the oil producing States that the profits of
companies engaged in petroleum operations should be paid to the States. The argument is
that since the States are bearing the brunt of the externalities being created by the oil
producing companies, they should be granted access to more revenue. There has also a
sustained agitation by the oil producing States that the percentage of the revenue being
paid to them based on derivation in pursuance of section 162(1) of the 1999 Constitution
should be increased to 50% obtainable under the 1960 and 1963 Constitutions. The
agitation has never received meaningful intervention in terms of increasing the revenue the
percentage of revenue based on derivation. To a large extent, it was convenient for the
Nigerian Government to minimise the just claim of the oil producing areas for a fairer
treatment in terms of revenue allocation because they are minorities and unable on their
own to effect the necessary changes. When all the peaceful means of getting a resolution
of the issues sees to have failed, some elements from the oil producing areas resorted to
violence which has drastically reduced the revenue from oil and to a large extent even
threatens the continued existence of Nigeria as a country.
791
Pursuant to section 162(1) and (2) of the 1999 Constitution.
276
It is remarkable, that the 2003 Tax Study Group on the Reform of the Nigerian Tax system
did not make any recommendation on how to address the concerns of the oil producing
areas in terms a fairer fiscal arrangement. This, therefore, compels us to probe what
possible measure could be adopted in this regard. First, to what extent does the demand of
the oil producing areas accord with best practice in federal countries? Second, to what
extent is it practicable in the Nigerian context to accede to the agitation for resource
control?
A major feature concerning the exploitation of natural resources has to be borne in mind in
assessing assignment of taxing powers. The most important characteristic is the frequent,
huge geographic concentration of production which is pure geographical hazard. 792
Assignment of the right to the states governments tends to generated rivalries between the
constituents units of the same nations- between the central and local levels, and also across
local governments. Non-petroleum provinces in Canada have traditionally adhered to the
principle that Canada is a single nation and a single community. If so, natural resources
belong to the federal government and should be shared among all provinces, and or used
for country-building purposes. On the other hand, Petroleum producing provinces held the
opposite view, stressing the primacy of provincial/communities‟ right and that the national
majorities are not entitled to take natural resources away from where they are produced. 793
This is typical of virtually all oil/mineral producing federations.
792
Petroleum production in Columbia is predominant in only two provinces; the Siberian Oblast of Tyumen
produces almost two-thirds of total Russian petroleum. In Argentina a single province, Nequen, produces
more than one-third of the total. The province of Katanga in the Democratic Republic of Congo possess most
of the mineral wealth of the country. This has fostered secessionist tendencies since the independence of the
country (with strong external interferences). See FN 14 in Brosio, G op.cit.
793
In Ahmad, E & Brosio, G. (ed,) Handbook of Fiscal Federalism (Edward Elgar: Cheltenham, UK,
Northampton, MA, USA, 2006) p.431.
277
However, the ownership of natural resources is not given the same treatment across the
world as ownership may be vested in the federal or state governments. In a few countries
such as United States private ownership is recognised. The owner, private individual or
government, has the right to decide on the use of the resource; for example, it can lease a
forest to a firm that will exploit it. In each case, the government aims to collect the
maximum possible rent from the resource. A variety of instruments, which can be grouped
into two categories: ex ante and ex post. With ex ante instruments, the rent is collected by
the government before the start of the exploration and the exploitation of the resource.
Typical ex ante instruments are auctioning of rights, and payment of fixed fee for
exploration and development. Ex post instruments are taxes and royalties, free acquisition
of equity and production sharing agreements. In other words, ex ante instruments are
targeted to collect expected rent, while ex post instruments will collect realised, actual,
rent. Ideally, all rent collecting instruments are available to any level of government.
A writer advanced three reasons against the allocation of taxing rights to the states. First, if
a tax is collected by a more efficient government, its net revenue will be higher. Usually,
the central government has more personnel and better organisation. This can be
particularly true for developing countries, where professional skill and organisation
resources are generally scarce. Also, tax authorities at the subnational levels generally do
not have the sophisticated tax administration required for dealing with big petroleum, or
mineral international companies, while the size and variability of potential revenue
presents additional problems. The second reason advanced against local taxation of natural
278
resources is delay and variability in revenue. This is a burden which state administration
may find difficult to bear. The third reason is that most of the taxes on natural resources
are exported. Fourth, the tax rate setting and tax based determination are better left to the
central government, considering the national and even international dimension of most
natural resource extraction policies. For these reasons and more, the taxation of mineral are
usually assigned to the federal government in accordance to the with the principles for
Division of Taxing Power.
The need for a central administration of oil taxation revenue in Nigeria is particularly more
compelling when it recalled that the upstream oil and gas dominated the economy,
accounting for about 60% of the Nigeria‟s Gross Domestic Product, over 70% of the
budget revenues for al the three tiers of government and over 95% of the foreign exchange
earnings.794 Therefore, Nigeria‟s degree of dependence on petroleum is clearly higher than
in most major producing countries.795 Against this background, it will be wrong, in our
view to recommend the adoption of the United States where the revenue from petroleum is
relatively insignificant compared to other sources of income. As a compromise, it is
recommended the entire royalty should be paid to the oil producing States while the
percentage of the revenue accruing to them on the basis of derivation is increased from the
current 13 percent to between 20-25 percent. While, these may not approximate the dream
of resource control, they may meaningful assuage the pervading feelings of injustice
among the rank and file of the people in the oil producing area. It must however be
794
According to the 2003 Tax Study Group Report “If we were able to identify the impact of upstream
petroleum on its suppliers and direct linkages, these percentages would even be hig her.. See the Report of the
2003 Tax Study Group, op.cit., p. 139.
795
See the Report of the 2003 Tax Study Group, op.cit., p. 139.
279
acknowledged that what could diffuse the existing tension in the oil producing area is to
convoke a National Conference to openly debate all the issue and arrive at a consensus. 796
6.3.3.6. Education Tax
Taxation of Petroleum or minerals is not expressly mentioned in the 1999
Constitution. The power of the Federal Government to impose tax on petroleum profits is
traceable to item 59 of the Exclusive Legislative List of the 1999 Constitution being a tax
on assessable income of Nigerian companies. The Education Tax was introduced in 1993
by the Federal Military Government vide the Education Tax Act No. 7 of 1993. 797 The Act
imposes an education tax of 2 percent on the assessable profits of all companies registered
in Nigeria (including companies engaged in petroleum operations). The revenue from the
tax is earmarked for the rehabilitation, restoration and consolidation of education at all
levels in Nigeria. The Education Tax is administered by the Federal Board of Inland
Revenue. The tax is payable within 60 days after the Board of has served the notice of
assessment on a company failing which it will attract interest. The revenue collected under
the ETA is required to be paid by the FIRS into an Education Fund in the manner specified
in section 3(1) ETA.798
From the foregoing, it is crystal clear that there is a thin line between the companies
income tax and petroleum profits tax on one hand and the education tax on the other hand.
796
See Osipitan, TAI “An Authochonous Constitution for Nigeria: Myth or Reality? (Lagos: University of
Lagos Press Inaugural Series, 2004) pp. 91-93.
797
No. 7, 1993, Cap E4, LFN, 2004.
798
Work centers and prototype development; staff development and conference attendance; library system at
the different levels of education; research equipment procurement and maintenance; higher Education Book
Development Fund; redressing any imbalance in enrolment mix as between the higher educational
institutions; and execution of the 9-year compulsory educational programme.Section 5(1) ETA
280
The similarity is reinforced by the fact section 1(3) of the ETA defines the “assessable
profits‟ which is the base of the tax in terms of the provisions of CITA thus “The
assessable profits shall be ascertained in manner specified in the Companies Income Tax or
the Petroleum Profits Tax Act as the case may be.”
It is pertinent to probe the appropriateness of the ETF in view of the existence of a separate
tax – companies income tax on the income of companies. Could the drafters of the 1999
Constitution have envisaged that a CIT and ET will be imposed simultaneously on the “net
income” and “assessable profits” of the same company by the Federal Government?
Although the legality or otherwise of the ETA cannot be impeached in view of item 59 of
the Exclusive Legislative List, the tax amounts to double taxation and symptomatic of bad
tax policy.
The Tax Study Group, 2003 noted that the emergence of special taxes in other sectors of
the economy such as police tax, sport tax, road tax etc and recommended the abolition of
Education Tax and other special taxes. Nevertheless, in view of the “great importance” of
the education sector, it was recommended that the Education Tax Fund should be renamed
the Education Trust Fund which will be financed through yearly votes of at least N10
billion in the annual Appropriation Act and funds from other sources within and outside
Nigeria. An executive Bill was accordingly presented to the National Assembly towards
this end. The Bill was, however, eventually withdrawn for inexplicable reason.
281
6.3.3.7. Technology Tax
The technology tax was introduced by the National Information Technology
Development Agency (NITDA) Act799 of 2007. The Act imposes a one per cent tax on the
“gross profit” of digital mobile operators and all telecommunication companies, pension
managers, internet service providers, cyber companies and all financial institutions,
including insurance companies whose income is above one hundred million naira
(N100m). The Federal Inland Revenue Service (FIRS) is charged with the due
administration of the tax. The FIRS, while assessing a taxable company for either company
tax or petroleum profits tax, is required to simultaneously assess the company for the
technology tax. The tax is payable not later than 60 days of a company being served with
the notice of assessment. The proceeds of the tax would be paid into a special fund known
as National Information Technology Development Fund. NITDA was established in 2001
with the objective of accelerating the development of information technology in the
country.
6.3.3.8. Capital Gains Tax
Capital Gains Tax is expressly assigned to the Federal Government in item 59 of
the Exclusive Legislative List. Like taxation of individuals, items D-7 & 8 of the Exclusive
Legislative List provide a framework for the Federal Government to delegate the
administration of the tax to the States on the condition to be prescribed by the National
Assembly. Pursuant to the provisions, Section 43 (1) of Capital Gains Tax Act (CGTA)
adopts the administrative framework of the Personal Income Tax Act. The administration
799
See the National Information Technology Development Agency Act of 2007. The Act is not assigned any
number.
282
of CGT is split between the federal and States on the same basis as that of the Personal
Income Tax. The States are responsible for the collection of the Capital Gains Tax of
individuals resident in their States while the Federal Government is responsible for the
administration of those residents and other categories of taxpayers referred to in section
2(1)(b) of the Personal Income Tax Act.
The revenue collected by the States from the CGT form part of their Consolidated Revenue
Fund pursuant to section 163(a) of the 1999 Constitution. On the other hand, net proceeds
collected by the FIRS from CGT are mandated to be distributed among the States on the
basis of derivation pursuant to section 163 of the 1999 Constitution. Although this
arrangement has been in place since the introduction of the 1999 Constitution, the National
Assembly is yet to enact a Law that will provide for the distribution of the revenue from
CGT, PITA and SD to the States on the basis of derivation. In Attorney General of the
Federation v. Attorney General of Abia State & Ors (No 2),800 the Attorney-General of
Delta State counter claimed, inter alia, that the Federal Government had refuse to pay to it
the revenue derived by the Federal Government from capital gains, incomes or profits of
persons other than companies and stamp duties and therefore should be compelled to do so.
The Supreme Court held as follows:
“Item D Part II of the Second Schedule makes provisions for the imposition,
by the National Assembly of such tax or duty as the capital gains tax,
incomes or profits of persons other than companies and stamp duties. By
section 163 of the 1999 Constitution, the net revenue collected from these
taxes and duties is distributed among the States on the basis of derivation. It
follows that what net revenue is collected from any State by the Government
of the Federation is paid back to that State. There can be no justification
800
[2002] 6 NWLR (Pt 764) 542.
283
therefore for refusing to pay the 10th defendant in this case its share of such
revenue.”
This important lacuna in the legislative framework for inter governmental fiscal relations
having been identified by the Supreme Court, one would have expected a timely
intervention from the National Assembly by enacting the requisite law. Unfortunately, The
National Assembly is yet to enact the requisite Act six years after. This development is
symptomatic of a lukewarm attitude of the political class to tax bills. Since this is a
prescription by the Constitution which the legislators have sworn to uphold, it is advocated
that the Federal Executive should assume the responsibility of sponsoring an executive Bill
to that effect. Alternatively, the States on their part should build alliances to ensure that the
Bill is passed by their representatives in the National Assembly.
6.3.3.9. Stamp Duty
Stamp Duty is a tax on documents otherwise called instruments ranging from
conveyance and other documents relating to land, bonds, debentures, covenants and
warrants among others.801 Although no reference was made to Stamp Duties under the
1960 and 1963 Constitutions a Stamp Duties Act existed simultaneously with Regional
Stamp Duties Law.802 The Stamp Duties Act applied to instruments within the exclusive
jurisdiction of the National Assembly such as Bills of Exchange, promissory notes, control
of capital issues, currency, coinage and legal tenders, designation of securities in which
trust fund may be invested, exchange control, incorporation and winding up of bodies
corporate, insurance, passports and visas, etc. The Regional Stamp Duties on their part
801
Report of the 2003 Tax Study Group, op.cit., p.276.
802
Emiko, G.I, Supra note 1 at p.32.
284
applied to conveyances or transfers or sale of any property, mortgages, bonds, covenants,
agreements and money lending receipts.
However, unlike the 1960 and 1963 Constitutions, item 57 of the Exclusive Legislative
List of the 1979 Constitution expressly grants to the National Assembly the power to
impose stamp Duties. It will be recalled that items D7 and D8 of the Concurrent
Legislative List provided a constitutional framework for the National Assembly to delegate
the collection of personal income tax, capital gains tax and Stamp Duties to the States on
such conditions as may be prescribed by the National Assembly. Pursuant to this
provisions under the 1979 Constitution, the administration of Stamp Duties was split
between the Federal and States in such a way that administration of Stamp Duties was is
handled by the FIRS nationwide in respect of companies while State Boards of Internal
Revenue administer the tax in respect of individuals. The administrators of stamp duties at
both the federal and state levels are called “Commissioner of Stamp Duties”. 803 The
statutory framework for this division of administration of stamp duties is contained in
section 4(1) of the Stamp Duties Act
thus:
4(1) “The Federal Government shall be the only competent authority to

impose, charge and collect duties upon instruments specified in the
Schedule to this Act if such instruments relate to matters executed
between a company and an individual, group or body of individuals”.
The revenue collected by the States from the CGT form part of their Consolidated Revenue
Fund pursuant to section 163(a) of the 1999 Constitution. On the other hand, net proceeds
803
Report of the 2003 Tax Study Group, op.cit, p.276.
285
collected by the FIRS from CGT are mandated to be distributed among the states on the
basis of derivation pursuant to section 163 of the 1999 Constitution.
A number of fiscal federalism issues have arisen since the joint administration of stamp
duties by the Federal and States. Being dissatisfied with the vesting of Stamp duties in
respect of companies on the Federal Government, Some State Governments have always
insistent on collecting stamp duties on lands located within their territories in
contravention of a clear provisions of the Stamp Duties Act. This development had given
rise to some cases.804
The law and administration of Stamp Duties in Nigeria have been bedevilled with myriads
of constitutional and administrative controversies and problems so much that the Study
Group on Review of the Nigerian Tax System recently recommended the abolition of stamp
805
duty in Nigeria. According to the Study Group:
“We received representations calling for the abolition of Stamp Duties,

having regard to the fact that court cases have largely eroded the
legality that this tax is supposed to confer on stamped documents. The
discontinuation of … the Federal Government should take steps to
discontinue this tax in the not too distant future.”806
804
Union Trust Limited v. A.G. Fed., & A.G. Ogun State, FHCLR 1990 p.45 and Savannah Bank Nigeria
Limited v. D.G. Ministry of Land, Survey and Town Planning and A.G. of Plateau State ( Unreported.
Decided by the Federal High Court. Jos Division on 20th September 1989).
805
Hereinafter referred to as “the Study Group”. The Study Group headed by Prof. Dotun Phillips was
inaugurated by the Minister of Finance, Mallam Adamu Chiroma on August 6, 2002 with a mandate to inter
alia, review all aspects of the Nigerian Tax System and recommend improvements therein. Say something
more about the Study Group. The Group had since concluded its assignments and submitted a report titled
Nigerian Tax Reform in 2003 and Beyond in July 2003.
806
See Main Report of the Study Group, p. 278.
286
This recommendation as simple as it may seem portent far reaching implications for the
revenue of the States and inter governmental fiscal relations in Nigeria. 807 There is really
nothing in the nature of stamp duties which makes it most suitable for a particular level of
government than the other. Therefore, in virtually all other federations, Stamp Duties is
concurrently administered by both the federal and state government in respect of the
subject matter which fall within their jurisdiction. It is therefore advocated that the 1999
Constitution should be amended in such a way that will allow Stamp Duties to be imposed
by both the Federal and State under their respective statutes. While the federal government
could continue to administer stamp duties in respect of companies, exception should be
made with regards to landed properties and documents relating to matters within their
States.
6.3.3.10. Value Added Tax
The Value Added Tax was introduced in Nigeria the Value Added Tax Decree,
1993. The Value Added Tax (VAT) is payable “on the supply of all goods and services
other than those goods and services listed in the Schedule to the Act”. The tax is
administered by the Federal Inland Revenue Services (FIRS). Ostensibly to preserve a
centralised structure, Section 41 of the VATA repealed the Sales Tax Act of 1986 which
hitherto vested the States with the power to administer and keep the proceeds of Sales Tax
within their respective jurisdictions. The revenue from VAT is distributed among the
Federal, State and Local Governments in the ratio of 15%:50% and 35% respectively. The
revenue from VAT was paid into a special account which was initially distributed between
807
Although Stamp Duties is imposed by a federal statute, the administration of the tax with regard to
individual resident outside the Federal Capital Territories and non -corporate bodies are left for the States.
Therefore, abolishing the tax will have a negative impact on the revenue of the States.
287
the Federal and State Government in the ratio 20:80 in favour of the State.808 The 20
percent allocated to the Federal Government was meant to cover its cost of collection.
VAT had quite an impressive outing in Nigeria right from its inception in terms of meeting
its revenue potentials which eventually motivated the Federal Military Government to
thinker with the sharing formula in its favour from 20:80. Furthermore, sharing formula
was amended to include the local government councils which not only further shrink the
revenue accruing to the States but introduced some elements of inequity in the distribution
as the States with more local government councils were able to collect more taxes. The
sharing formula was reviewed on a number of occasions and stood at 15%:50&;35% for
the Federal, State and Local Government Councils before the commencement of the 1999
Constitution.809 Despite the fundamental restructuring to the revenue sharing and its
implication for inter governmental relations, the States, especially those at the receiving
could not protest under the Military regime.
However, the enthronement of a civilian rule under the 1999 Constitution injected a dose
of dynamism in inter governmental fiscal relations. The Lagos State Government was the
first to openly engage the share sharing formula of VAT on the ground that the State was
receiving far less from the amount being collected by the FIRS from Lagos State. The
State therefore called for a review of the sharing formula in such a way that will take
808
Id., section 36
809
Id., section 36.
288
account of derivation principle. The failure of the Federal Government to address the
concern of Lagos State eventually led the state to re-introduce its Sales Tax Law.810
Following the reintroduction of Sales Tax in Lagos, a number of aggrieved taxpayers
instituted actions against the Lagos State Government in the Lagos High Court challenging
the constitutionality of the Sales Tax Law. In Manufacturers’ Association of Nigeria v. The
Attorney-General of Lagos State & Anor,811 being the first case to be determined, Falase J.
upheld the constitutionality of the Lagos State Sales Tax and declared VAT as ultra vires the
Federal Government and unconstitutional. Relying on the case of Aberuagba, Sales Tax was
held to be residual not being one of the taxes enumerated in the ELL as federal taxes.
According to the learned Judge:
“In the two case referred to above, the appellant courts having held that it
is the State legislature that can legislate on intra state trade and commerce,
I have no difficulty in holding that VAT Decree No. 102 to the extent that
it purports to usurp the residual powers of the State as provided under Item
9 of the concurrent list is null and void and of no effect……. To the extent
that the VAT Decree goes beyond the exclusive and concurrent list same is
void and of no effect and can only continue to be valid to the extent that it
does not purport to regulate intra state commerce.”812
This decision sealed in effect the fate of other pending and subsequent cases as the Lagos
High Court consistently upheld the constitutionality of Sales Tax Law of Lagos State.
Following this development, some taxpayers decided to institute their actions in the
Federal High Court against the Lagos State and the FIRS. 813 In Eko Hotels Ltd. v.
810
See Sales Tax (Schedule Amendment) Order 2000 of Lagos State (Sales Tax Law)
811
Suit No. ID/105M/2001.
812
Id. See Unreported judgment delivered by Hon Justice O.M. Falase on 14 th November, 2003.at p. 19.
813
Mama Cass Restaurants Ltd & 2 Ors (Suing for and on behalf of the members of the Fast Food and Allied
Operators Association of Nigeria (FALLON) v. Federal Board of Inland Revenue & Attorney General of
Lagos State.Unreported Suit No. FHC/L/CS/826/ 04.
289
Attorney-General, Lagos State & FIRS814 the taxpayers took out interpleaders summons
against both the Lagos State Government and FIRS paying the court for a determination of
which of the two authorities was entitled to received the 5 percent (tax) VAT collected by
it before the introduction of Sales Tax.815 The applicants argued that the introduction of
Sales Tax amounted to double taxation and it was not under obligation to pay the same tax
twice to the two authorities. The Federal High Court upheld the constitutionality of VAT
Act and declared the Sales Tax Law of Lagos State null and void and directed the applicant
to pay to the FIRS.
The plaintiff had appealed unsuccessfully to the Court of Appeal in Attorney-General,
Lagos State v. Eko Hotels816 which affirmed the decision of the Federal High Court that
Sales Tax Law of Lagos State was null and void. Following this decision, the continued
administration of the Sales Tax Law of Lagos State ran into legal troubled waters, a
development which caused Lagos State to invoke the original jurisdiction of the Supreme
Court in the case of Attorney General Lagos v. Attorney General Federation & 35 Ors817
vide an Originating Summons issued on 25 th February 2008 seeking the determination of
the constitutionality of VATA as a federal statute.
The argument of the plaintiff is that VAT is a replacement of Sales Tax and to the extent
that VAT is imposed on supply of goods and services within a State, the VAT Act has
transgressed the boundaries of the powers of the Federal Government to impose VAT
814
Suit No. FHC/L/CS/205/2004
815
The same approach was adopted by the applicants in Mama Cass & Ors. v. Attorney-General, Lagos State
& FIRS. Supra note 92.
816
Supra note 93.
817
Suit No SC/20/2008.
290
under the 1999 Constitution. Relying on the case of Aberuagba, the plaintiff argues that a
combination of sections 2,3,5,6 & 7 of VAT Act infringe on its legislative power and
should be declared null and void. According to the plaintiff:
“…as submitted, section 2,3,6 and 7 are unconstitutional and ought to be

nullified. The said provisions are however the key provisions of the tax
and once they are nullified the remaining parts of the VAT would
become meaningless and unworkable. Accordingly, the “blue pencil”
rule cannot be applied here and therefore, plaintiff submits that the entire
Act ought to be nullified.”818
The Federal Government, in its defence, argued that it was erroneous to equate VAT with
Sales Tax and that the case of Aberuagba Case which Lagos State heavily relies upon
applied to Sales Tax and not VAT. VAT is said to be a new invention, a new tax which is
governed by different set of principles. VAT is a multi stage tax which is paid and
collected at all the chains of production shifted forward to the final consumer through input
and output mechanism. The VAT system is essentially a national and international tax
compared to Sales tax which is a one stage local tax.
Without prejudging the decision of the Supreme Court on the constitutionality or otherwise
of VAT, the case is likely to be turned on the approach taken by the majority of the seven
justices that are hearing this appeal. If the majority are centrists in their view, they will find
a way to salvage VAT whose revenue has become very important to the three arms of
government and leave the legislators to address the issue of fairness or otherwise through
legislative intervention. The position is likely to be based on the reasoning that VAT and
818
See Para 4.4.19 p.26 of the Plaintiff‟s brief.
291
sales tax are not the same. If the VAT Act were to be declared null and void, the
implication will be that VAT will cease to operate throughout the federation except in the
Federal Capital Territory.
It is remarkable to note that suggestions had been made to The Raisman Fiscal
Commission819 to adopt a system of concurrent use of personal income tax base. 820 Also,
Adedeji had opined as far back as 1961 that jurisdiction over general sales tax should
become concurrent. According to him:
“At present it is now exclusively federal. Because of the rather buoyant

revenue position of the federal government in the past, no use had been
made of this tax. Had jurisdiction over it been concurrent, there is no
doubt that some of the regions, particularly those whose revenue
positions have deteriorated during the years, might have imposed a
general sales tax to obtain additional revenue.”821
Although the above recommendations relate to Sales Tax, the underpinning logic is equally
applicable to VAT, the latter being an improvement of the former. It is regrettable that this
819
The Commission headed by Sir Jeremy Raisman was established in September 1957 sequel to the 1957
Constitutional Conference in London to address, inter alia, the problems caused by the limited range of
independent regional sources of revenue. The Commission recommended, inter alia, that the Regions should
exercise complete jurisdiction over the taxation of personal income. In order to overcome the disadvantages
of overlapping jurisdictions between the Regions and the Federal Government on one hand and the Regions
inter se on the other hand, it was recommended that the Personal Income Tax Management Act should be
enacted as a Model Regional Income Tax law to address the problem of internal double taxation in the
interests of both taxpayers and Governments. See C.N. Ugwu, “Decentralising Ownership of Resources and
Assets: An imperative for Peace and True Federalism in Nigeria”. Available online at
http://ipn.lexi.net/images/uploaded/-3facc53546f62--chris_ugwu_september2002.pdf. Visited on 17th July
2008.
820
Two possibilities of a joint scheme which would give both the Federal and Regional Governments an
interest in personal income tax were suggested to the Commission. The first was that the field below a certain
fixed limit would be left to regional direct taxes and the portion of income above that limit would be reserved
to the federal jurisdiction. The second scheme was a joint system as had been introduced in the Federation of
Rhodesia and Nyasaland where the unit governments were entitled to levy a limited surcharge on the basic
federal tax, assessed according to a uniform federal law and collected simultaneously by the Federal
Government.
821
Adedeji, A, op.cit., p. 67.
292
recommendation has not been considered by subsequent writers on the subject.822 This is
perhaps attributable to the general lukewarm attitude of the country towards tax drive soon
after Nigeria struck oil in commercial quantitative.
6.4. States Taxing Powers
Nigeria is a federation consisting of States and Federal Capital Territories. To what extent
is the taxing powers of the States clearly spelt out in the Constitution? This will be
considered under the sub headings of express and implied powers.
6.4.1. Express State Taxing Powers
The 1999 Constitution does not expressly vest the States with power to impose any
particular tax.823 A cursory look at the provisions of the Constitution might give the
impression that the States have no taxing powers of their own except to the extent provided
in the Federal statute. Omoigui has echoed this view thus:
“Strictly speaking and sentiments aside, the Constitution would appear to

recognize in most instances that fiscal authorities for taxes lie with the
Federal and Local Government tiers of Government only. State involvement
would appear to be restricted to the administration of Federal Taxes as
defined in the Constitution as may be delegated through the National
Assembly. Clearly, this is one area that will elicit debate which I would
encourage not just now but in our various States. It is also an area for public
discourse as most of the taxes and charges that the taxpayer are bearing at
the State and Local government levels, are strictly speaking unconstitutional
if not backed by proper laws. The debate on this topic would enhance our
822
For example, the proposal was rejected on the basis that “a federal superstructure over a regional direct
tax might give rise to the problems on the assessment of incomes near the borderline between the two taxes,
and very close co-operation between the five governments concerned would be necessary.” But from the
discussion of the different approaches toward alleviating the concerns of decentralization of taxing power, it
would be seen that this argument is not strong enough to prevent a concurrent use of tax base.
823
It will be recalled that item D-7&8 are not express grant of taxing power to the States but merely provide
a basis for the National Assembly to delegate the administration of the taxes.
293
understanding of our current Constitution but also assist us as we seek to
improve on the Constitution”.824
With due respect, the above statement does not represent the correct position of the law.
While it is conceded that the extent of the taxing powers of the States would have been
clearer if certain taxes have been expressly allocated to them in the Constitution, 825 the
failure to do so is, however, not sufficient to conclude that the States are bereft of any
taxing powers. The correct approach to the identification of the scope of the taxing powers
of the States is to also view it through the prism of their legislative powers as we have
done in the case of the Federal Government. This takes us to the consideration of the
implied taxing powers of the States under the 1999 Constitution.
6.4.2. Implied Taxing Powers of the States
The taxing powers of the States under the 1999 Constitution can be gleaned from the
combined provisions of section 4(7), Item D – 9 & 10 of the Concurrent Legislative List
and Section 7(5) paragraph 1(j) of the Fourth Schedule. Section 4(7) of the 1999
Constitution provides as follows:
4(7).-“The House of Assembly of a State shall have power to make laws

for the peace, order and good government of the State or any part thereof
with respect to the following matters, that is to say –
(a) any matter not included in the Exclusive Legislative List set
out in Part 1 of the Second Schedule to this Constitution;
(b) any matter included in the Concurrent Legislative list set out
in the First Column of Part II of the Second Schedule in this
824
Mrs Ifueko Omoigui-Okauru, Executive Chairman, Federal Inland revenue Services, in a paper titled
“Building a Viable State: Deepening/Widening Internally Generated revenue for Effective Capital
Financing”, delivered at the Governor‟s Forum, Abuja 26th October, 2007
825
This is the approach adopted under the US and Canadian Constitutions. See Chapter five supra..
294
Constitution to the extent prescribed in the second column
opposite thereto;
(c) any other matter with respect to which it is empowered to
make laws in accordance with the provisions of this
Constitution.
These provisions set out the general legislative powers of the States in which the taxing
powers are also embedded. Following the principle that taxation is statutory, for a State to
impose tax on any subject matter whatsoever, the 3-way test provided in section 4(7) must
be satisfied, that is,
(i) ensure that the subject matter is not on the Exclusive List;
(ii) ensure that the mater is on the Concurrent Legislative List and
(iii) ensure that it is empowered by any other specific provision in the
Constitution to make law on the subject matter.
These tests will be treated one after the other in order to clearly identify the extent of the
taxing powers of the States.
6.4.2.1. The subject matter must not be on the Exclusive List
This test has a negative or filtering effect on the extent of the taxing powers of the
States in the sense that a State is precluded from imposing a tax on any subject matter in
the Exclusive Legislative List. The Exclusive Legislative List contains 67 subject matters
and an incidental or supplementary power clause as the 68 th item. A State House of
Assembly lacks competence to make law on any of the 67 subject matters on the Exclusive
Legislative List. Thus, a State House of Assembly cannot make law on arms, ammunition
295
and explosives,826 aviation, including airports, safety of aircraft and carriage of passengers
and goods by air,827 bankruptcy and insolvency,828 banks, banking, bills of exchange and
promissory notes,829 commercial and industrial monopolies, combines and trusts,830
construction, maintenance and alteration of federal roads, 831 control of capital issues,832
Insofar as the State House of Assembly is bereft of any legislative power on these subject
matters it equally lacks the power to impose tax on them.
6.4.2.2. Whether the subject matter is on the Concurrent Legislative List
The legislative power of the State House of Assembly extends to the subject
matters on the Concurrent Legislative List subject to the principle of inconsistency with the
federal law on the same subject matter. It follows that the State House of Assembly has
legislative power to make laws on all the 30 subject matters covering allocation of revenue,
antiquities and monuments, archives, collection of taxes, electoral laws, electric powers,
exhibition of cinematography films, industrial, commercial or agricultural development,
scientific and technological research, statistics, trigonometrical cadastral and topographical
surveys, university, technological and post primary education.
Items D7 and 8 on “tax collection” require a closer consideration and are hereby
reproduced for ease of reference:
826
Item 2 Exclusive Legislative List to the 1999 Constitution.
827
Id. item 3.
828
Id. item 5.
829
Id. item 6.
830
Id. item 10.
831
Id. item 11.
832
Id. item 12.
296
“7. In the exercise of its power to impose any tax or duty on-
(a) capital gains, incomes or profits of persons other than companies

and
(b) documents or transactions by way of stamp duties,
the National Assembly may subject to such conditions as it may
prescribe, provide that the collection of any such tax or duty or the
administration of the law imposing it shall be carried out by the
Government of a State or other authority of a State
8. Where an Act of the National Assembly provides for the collection of

tax, or duty on capital gains, incomes or profits or the administration of
any law by an authority of a State in accordance with paragraph 7
hereof, it shall regulate the liability of persons to such tax or duty in
such manner as to ensure that such tax, fee or rate is not levied on the
same person in respect of the same liability by more than one State”.
Items D9 & 10 of the Concurrent Legislative List will be discussed when considering State
and Local Government fiscal relations in section 6.4.
It is important to note that items D-7 and D-8 of the Concurrent Legislative List do not vest
any concurrent power on the Federal and States to impose PIT, CGT and SD. It is clear
from the opening phrase in item D-7 “In the exercise of its power to impose” that the
powers to impose the three taxes and establish the framework for their administration are
vested in the National Assembly Items D-7 & D-8 do not grant taxing powers to the States
but merely provide a basis for the National Assembly to delegate the administration of PIT,
CGT and SD to them on the such conditions as the National Assembly may prescribe. In
the absence of any such delegation in the provisions of PITA, CGTA and SDA, it would
have been ultra vires the States to administer these taxes. Any suggestion that item items
D-7 and D-8 vests the States with concurrent power to impose PIT, CGT and SD has no
basis in law. Rather, it merely vests power on the National Assembly to delegate the
297
collection of the taxes to the State subject to such conditions as it may prescribe. The
provisions therefore have nothing at all to do with imposition of PIT, CGT and SD or any
taxes whatsoever by the States.
Commenting on a similar provision in the 1979 Constitution, Okorodudu rightly opined as
follows:
“Now it is very important to grasp the full import of this aspect of the
distribution of legislative taxing powers. Item D paragraphs 7 and 8 merely
empower the Federal Government to delegate to the State Governments the
exercise of an executive function of the collection of the taxes specified
therein. It does not envisage the delegation of any form of concurrent
legislative function to the State. The express wordings of the 1979
Constitution demonstrate clearly that only the Federal Government can
legislate with regards to the imposition, levy, collection, and administration
of any tax or duty envisaged under item D paragraphs 7 and 8, and all that
the State Governments are assigned thereby, are the responsibilities for the
collection and administration of any tax or duty so imposed by an Act or
Decree of the Federal Government. A penetrating study of item D- on the
Concurrent Legislative List in conjunction with section 4(4)(a) of the 1979
Constitution (now suspended and replaced by S.2(1) of the Decree No.1,
1984) makes it abundantly clear that there are, strictly speaking no areas or
scope of concurrent exercise of legislative functions in this connection.
What we have is merely a stipulation of special exclusive legislative powers
and executive functions of the Federal Government and State governments,
respectively”.833
However, the drafters of the Personal Income Tax Act and the Stamp Duties Act
apparaently failed to bear this important point in mind when establishing the statutory
framework for the delegation of the collection of these taxes to the States in their
respective laws. Otherwise, they should have avoided the use of the word “impose” in
section 2(2) PITA and Section 4(2) of SDA as they have done thus giving a false
833
See supra note 9 p.64.
298
impression that the State Governments can impose personal income tax and stamp duties.
It is pertinent to reproduce section 2(2) PITA:
“2(2) In the case of an individual other than an itinerant worker and

persons covered under paragraph (b) of subsection (1) of this Section,
tax for any year of assessment may be imposed only by the State in
which the individual is deemed to be resident for that year under the
provisions of the First Schedule and in the case of persons referred to in
subsection (1)(b) of this Section tax shall be imposed by the Federal
Board of Inland Revenue. (Emphasis supplied)
Section 4(2) of the Stamp Duties Act provides thus:
“4(2) The State Government shall collect duties in respect of instruments

executed between persons or individuals at such rates to be imposed or
charged as may be agreed with the Federal Government.” (Emphasis
Supplied)
A careful reading of the provisions of section 2(2) of the PITA will reveal that the object is
to identify the relevant tax authority in respect of the income of a taxable person and avoid
undue conflict of jurisdiction between the tax authorities of two or more States over the
same income. This view is reinforced by the last line of section 2(2) which provides inter
alia that “tax shall be imposed by the Federal Board of Inland Revenue”. It is a notorious
fact that the Federal Board of Inland Revenue (now FIRS) 834 is devoid of any power to
impose tax being an agency of the Federal Government for tax administration. To the
extent that the provisions of section 2(2) of the PITA and section 4(2) of the Stamp Duties
Act may suggest that States have power to impose PIT and CGT, it is submitted that they
are inconsistent with items 57 and 59 of the Exclusive Legislative List and therefore null
and void to the extent of their inconsistencies.
834
See the Federal Inland Revenue Services (Establishment) Act No. 13 of 2007
299
It is also noteworthy that the National Assembly is free to prescribe any condition for the
collection of PIT, CGT and SD pursuant to its power under item D-7 of the CLL. The word
“condition” is defined as “the circumstances affecting the functioning or existence of
something, a state of affairs that must exist before something else is possible.”835 It is
submitted that as far as the administration of these taxes is concerned, the National
Assembly has the prerogative to prescribe the circumstances in which the taxes could be
collected by the State including the prescription of certain conditions which must be met.
The National Assembly has thus enacted the legislative framework for the administration
of PITA, CGTA and SDA by the States in their respective statutes on the basis of liability
to tax, assessment, rates, appeals, objections, offences, penalties, enforcement, etc. 836 It is
thus the responsibility of the National Assembly to address any loophole in the laws from
time to time. For example, when the practice of delegating the functions of the States
Board of Internal Revenue to private tax consultants became prevalent, the Federal
Government had to intervene by prescribing that taxes shall be collected only by the
Relevant Tax Authority of the States, meaning the State Board of Internal Revenue. 837
Furthermore, the National Assembly thus have plenary powers on PIT, CGT and SD. The
National Assembly is at liberty to either delegate the collection of these taxes or collect
them by itself. However, where the National Assembly chose to delegate the collection of
these taxes to the States, it has a responsibility to ensure that a person is not liable to pay
tax to two or more States in respect of the same income or thing. Although the phrase
835
Concise Oxford Dictionary, 10th edn., ed, Pearsall, j., p..297.
836
See generally PITA
837
See Taxes and Levies (Approved List For collection) Act No. 21 of 1998, Cap T2 LFN, 2004.
300
“double taxation” is not employed by the provisions of item D-8, it clearly shows that the
1999 Constitution does not envisage a situation whereby more than one State would collect
PIT, CGT and SD on the same person or thing within the same period. The Federal
Government thus has a responsibility of ensuring that these taxes are administered in a
manner that does not result in double taxation.
6.4.2.3. Any other specific provision in the Constitution?
Our analysis of the Concurrent Legislative List for the purpose of determining the
scope of the taxing powers of the States has so far not revealed the allocation of any tax to
the State jointly with the National Assembly as the word “concurrent” may ordinarily
suggest. We are, therefore, forced to conduct a search for any possible provisions of the
Constitution which empowers the State House of Assembly to impose a tax. The first
indication of a specific taxing power of a State in the Constitution is in respect of tenement
rate in Section 7(5) and item 1(j) of the Fourth Schedule to the 1999 Constitution which
mandate States to confer, by Law, upon Local Government Councils certain powers
including “the assessment of privately owned houses or tenements for the purpose of
levying such rates as may be prescribed by the House of Assembly of a State”. Issues
relating to tenement will be addressed under the taxing powers of the local government. 838
6.4.4. Residual Taxing power of the State
Based on the scheme of division of legislative power in section 4(7) of the1999
Constitution, the State Governments have power to impose residual taxes. Residual taxes
838
See Paragragh1(j) of the 4th Schedule to the 1999 Constitution and S.7 of the same Constitution
301
are taxes that are neither on the Exclusive Legislative List nor on the Concurrent Legislative
List. In the case of Aberuagba839 case Bello J.S.C. (as he then was) said:
“A careful perusal and proper construction of section 4 would reveal that the
residual legislative powers of Government were vested in the States. By
“residual legislative powers” within the context of section 4, is meant what
was left after matters in the Exclusive and concurrent Legislative Lists and
those matters which the Constitution expressly empowered the Federation
and the States to legislate upon had been subtracted from the totality of
inherent and unlimited powers of a sovereign legislature. The Federation had
no powers to make laws on residual matters”840
In Attorney General Abia State v. Attorney General Federation 841 Tobi, J.S.C. (as he then
was) has this to say:
“The Constitution of the Federal Republic of Nigeria, 1999, like most

Constitutions, does not provide for a residual list. And that is what makes the
list residual. The expression emanates largely from the judiciary, that is, it is a
coinage of the judiciary to enable it exercise its interpretative jurisdiction, as it
relates to the Constitution. Etymologically, residual merely means that which
remains. In legislative and parliamentary language, residual matters are those
that are neither in the exclusive or concurrent legislative list, that is what
remains or is not covered by the exclusive and concurrent legislative lists”.
The implication of the technique of division of legislative powers between the Federal
Government and the States is that while one can readily pinpoint the taxes within the
power of the Federal Government from the Constitution, this is not the same with State
taxes. Thus, the State Government is basically a government of residual and un-
enumerated taxing power.
839
Supra note 39
840
Id. p.405 paras C-D.
841
[2006] 16 NWLR (Pt. 1005) 265 at 380.
302
In determining the extent to which a particular State has exercised its (residual) taxing
powers one will have to turn to the relevant State laws imposing taxes. The extent to which
each State has exercised its taxing power will be determined on the basis of the number of
tax laws which exist in the State Laws. Thus, contrary to the erroneous impression that all
the States in the federation have the same taxes, one will have to peep into the Laws of
each State to determine the extent to which the State has exercised it taxing powers. For
example, Lagos State has imposed taxes such as Betting duties, 842, Casino tax,,843
Entertainment tax,844 Lotteries and pool betting,845 Merriment tax,846, Sales tax,847 Personal
income tax,848, tenement rates,849 Land Use Charge,850 Hotel Occupancy and Restaurant
Consumption Tax,851 Wharf Landing Fees,852 inter alia. It suffices to say however that
while the taxing powers of the States may seem to be open-ended and looms quite large,
except for Sales Tax/Hotel Occupancy Tax, others taxes are less important taxes with
minimum revenue potentials. Considering that most of the vital taxes are within the
exclusive use of the Federal Government the attempt by the States to raise substantial
revenue through the residual taxes have proved to be an uphill task.
842
Cap B1 Laws of Lagos State, 2003.
843
Id. Cap C4.
844
Id. Cap E4.
845
Id. Cap L76
846
Id. Cap M5
847
Id. Cap S3
848
Id Cap P4.
849
Id Cap T 2
850
Id Cap L61
851
Of 2009,
852
Of 2009
303
The scope of these taxes and some of the issues arising from their administration will
briefly be examined and analyse the main legal issues arising from the taxes in the context
of inter governmental fiscal relations.
6.4.3.1. Betting Duty Law
Betting Duty is imposed under the Betting Duty Law 853 of Lagos State. A duty is
imposed on every bet made on any totalisator854 run by a recognized race club at an
approved race meeting855 at the rate of ten per cent of the amount of the stake. 856 Also, a
duty of ten per cent is charged on the amount paid or contributed on every lottery ticket
sold.857 The law imposes obligation on the Secretary, Treasurer and the Management of a
race club with the responsibility for the payment of the duty. 858 The Law is administered in
accordance with the Regulations made by the State Commissioner for Finance. 859 This tax
is not a general tax which applies to a wide spectrum of the taxpayers. Betting is not
pervasive yet even in a City of Lagos compared to the developed countries. Therefore,
betting duty is not a significant source of revenue to the States.
853
No 26 of 1968, Cap. B1 Laws of Lagos State, 2003.
854
A totalisator means and includes the instrument, machine, or contrivance, commonly known as the
totalisator, and any other instrument, machine, or contrivance of a like nature, or any scheme for enabling
any number of persons to make bet with one another on the like principles. See id., section 2
855
See section 3 of the Betting Duty Law Cap. B1 Laws of Lagos State.
856
A recognized club means a raced club recognized by the Government. See - .
857
Ibid section 4
858
Ibid section 6
859
Id., section 7.
304
6.4.3.2. Pool Betting Tax
The Pool Betting Tax Law 860 imposes a pool betting business tax on all money
placed as stakes with the proprietor of the pool betting business. 861 The tax rate is ten per
cent of the money placed at stake while any other kind of pool betting is taxed at the rate of
twenty per cent. The tax is paid by the proprietor of the pool betting business. 862 This law
is similar to the Betting Duty Law the only difference being that while the Betting Duty
Law imposes duty on stakes or bets and lottery tickets sold in a recognized race club at an
approved race meeting, the Pool Betting Tax Law focuses on stakes or bets by way of pool
betting business. Therefore our comment on the revenue potential of betting duty applies to
Pool betting mutatis mutandis.
6.4.3.3. Education Development Levy Law
The Education Development Levy Law 863 imposes an education development levy on
every pupil within Lagos State for the purpose of developing public primary and secondary
schools and enhancing the standard of education in the State. 864 Every pupil in the public
primary and secondary schools shall pay a levy of N50 and N100 for each term
respectively865 . The head of school shall have the duty to collect the levy and issue receipt
as may be prescribed by the Commissioner for Education. 866 It is an offence punishable
upon conviction with a fine of N5,000 or six months imprisonment or both for any person
860
No 7 of 1969. Cap. P 10 Laws of Lagos State, 2003.
861
Pool betting business means any business involving the receiving or negotiating of bets made by way of
pool betting. See 1(4)
862
See section 1(1) of the Pool Betting Tax Law Cap. P 10 Laws of Lagos State
863
Of 1995, Cap E2 Laws of Lagos State. The no. of the Law is not indicated.
864
See section I of the Education Development Levy Law Cap.E 2 Laws of Lagos State
865
Ibid section 2
866
Ibid section 3
305
who having collected the levy fails to pay same into the Education Fund established for
that purpose.867 Since the commencement of the Third Republic on 29 th May, 1999,
education is free in public primary and secondary schools which therefore render the tax
applicable to private schools. The appropriateness of an educational levy on students of
private schools is doubtful ion the basis that government is supposed to be giving private
schools grants since they are complementing the efforts of the government in providing
education.868
6.4.3.4. Entertainment Tax
Entertainment Tax is established under the Entertainment Tax Law869 of Lagos
State. The tax is imposed on payment made for admission into any place of
entertainment.870 A “place of entertainment” is defined as “any building or land to which
the public resort in fact though not necessarily as of right, whether or not such a place is
register as for the purpose, or licensed for the sale of intoxicating liquor, under any
enactment, and includes a casino and a night club. 871 The tax is levied at the rate of 1k
where the amount of payment does not exceed 5k 872 and 10 percent of gross proceeds
867
Ibid section 8
868
Section 18 of the 1999 Constitution provides that “18. (1) Government shall direct its policy towards
ensuring that there are equal and adequate educational opport unities at all levels. (2) Government shall
promote science and technology (3) Government shall strive to eradicate illiteracy; and to this end
Government shall as and when practicable provide (a) free, compulsory and universal primary education; (b)
free secondary education; (c) free university education; and d) free adult literacy programme.
869
No 66 of 1966, Cap E4 Laws of Lagos State, 2003.
870
See section 1
871
Se section 12. Other examples given in the Schedule include cinematograph exhibitions, night clu bs and
casino, horse-racing.
872
It is not clear whether 1k is a flat rate irrespective of the amount. Therefore it is not clear what the rate
will be where the payment is N500.
306
received for admission into a race course. 873 Entry to a place of entertainment shall be
refused by or in the name of the proprietor unless the tax is paid. 874 Person shall not be
admitted into a place of entertainment except on production of numbered ticket or receipt
as evidence of payment of the appropriate charge and of the prescribe tax, or through a
turnstile or other mechanical contrivance which automatically registers the number of
persons entering by that means.875 The tax is also exigible where admission to a place of
entertainment is by payment of a lump sum such as subscription, donation or contribution
to any club, association or society, or for a season ticket, or for a series of entertainments
or entertainment during a certain period. 876 Apart from stadium and night clubs places of
entertainment in Nigeria are few and far in between. Until recently, cinema houses have
become moribund while night life is being threatened by growing insecurity in the country.
6.4.3.5. Special Development Levy
A Special Development Levy Law 877 imposes a yearly levy on and payable by “every
taxable person in Lagos State” for the purpose of stimulating the growth and development
of the State.878 All establishments operating Pay As You Earn System (PAYE) system in
both public and private sectors are authorized to deduct the levy at source from the salaries
and wages of the employee.879 The Governor has the power to review the levy by
873
See the Schedule to the Law. In respect of cinematograph Exhibitions, Night Clubs and Casino, horse-
racing the rate is expressed as 1K where the amount does not exceed 5K, and in respect of horse -racing 1k
for the first 5k and n1k for every n5k of the gross proceeds received from payments for admission to a race
course.
874
See Section 1(1)
875
Section 1(2)
876
Section 2.
877
No. 4 of 1989, Cap S 8 Laws of Lagos State, 2003.
878
See section 1 of the Special Development Levy Law Cap. S 8 Laws of Lagos State
879
Ibid sections 3 and 4
307
increasing or reducing it as it may deem fit to him. 880 Every Ministry, Department or
parastatal organization or a Local Government institution or establishment within the
Federal or State public service in the State with who any person has any dealing in respect
of certain transactions listed in section 8(2) shall demand evidence of payment of the levy
from such a person.881
The levy is remarkable in a number of ways. Although the levy is said to be imposed to
stimulate the growth and development of the State, it quite clear that the main thrust is to
raise revenue. This is especially so when the revenue from the levy is not earmarked for
any specific project. The statement of the objective of the levy is unnecessary considering
that the essence of taxation including the Personal Income Tax, Value Added Tax, Stamp
Duties Act generally is to provide social services from the general fund. A special tax does
not have to be imposed for these to be provided.
The Law also does not define the phrase “taxable person”. 882 It is however not far to seek
that the drafters must have had in mind the taxable individual under the Personal Income
Tax. The question is whether the levy does not amount to a double taxation. The meaning
of “income tax” is not defined by the Personal Income Tax Act. All income tax systems
generally seek to impose tax on a net income or profit by allowing certain deductions from
the gross revenue receipts. The net income of a taxable individual under the Personal Income
Tax Act is taxable at the rate prescribed in the Sixth Schedule to the Act which provides for a
880
Ibid section 6
881
Id section 8(1).
882
In Ven den Burghs Ltd. v Clark, [1937] 13 T.C. 390 it was said of the British income tax that: “The
Income Tax Act nowhere defines income. They discreetly refrain from saying. Consequently, it is to the
decided cases one must go in search of answer.
308
rate of 25 percent of any taxable income above N160,000.00. If a State is empowered to
collect as much from a taxable person what then is the justification for an additional token of
N50?
6.4.3.6. Trade Cattle Control and Tax
The Trade Cattle Control and Tax Law 883 imposes a trade cattle tax on every owner
of cattle or his agent in charge of cattle within Lagos State. 884 Although the Law employs
the title “cattle” it applies to Bull, Cow, Heifer, Ox, Sheep, Goat and Swine.885 The rate of
the tax varies with the type of animal in question. For instance, while a levy of N100 is
paid in respect of each bull, cow, ox and heifer a sum of N10 is paid on each sheep and
goat.886 The Law establishes various cattle control posts where the owner of cattle or any
person in charge of the charge is required to take the trade cattle to inspection and payment
of the tax. It is an offence punishable upon conviction with a fine of N1,000 or 3 years
imprisonment or both for the cattle owner to refuse to pay the tax or fail to take the cattle
to appropriate cattle control posts for inspection.887 It is not far to seek that the Law seeks
to regulate the keeping and grazing of cattles rather than revenue generation. Thus, the tax
is not quite significant in terms of revenue generation to the States.
883
No. 4 of 1978 Cap T4 Laws of Lagos State, 2003.
884
See section 6 of the Trade Cattle Control and Tax Law Cap. T4 Laws of Lagos State
885
See First Schedule.
886
Ibid First Schedule to the Law
887
Ibid section 7
309
6.4.3.7. Tenement Rates
Tenement is defined under the Tenement Rates Law 888 as “land with building on it
which is held or occupied as a distinct or separate holding or tenancy or any wharf or pier
but does not include land without building”. 889 The Law establishes the Lagos State
Valuation Office saddled with the responsibility of carrying out assessment of all rateable
properties in the State.890 Each Local Government Area is regarded as the rating authority
for properties situated within its area of jurisdiction. 891 The rating authority has the power
to demand and collect tenement rates from owners or occupiers of tenements and buildings
after due notice of demand has been sent to them.892 The Law exempts from assessments
and rating certain properties which include land and buildings used exclusively for public
worship, cemeteries and burial grounds, palaces of Obas and Chiefs of the State, etc 893 .
6.4.3.8. Personal Income Tax Law
Personal Income Tax is imposed under the Personal Income Tax Law894 of Lagos.
The law imposes income tax on every individual deemed to be resident for that year of
assessment in Lagos State895 . The Law imposes personal income tax at the rate of ten per
cent for the first N2,000, fifteen per cent for the next N2,000, twenty per cent for the next
N2000, twenty-five per cent for the next N2,000, thirty per cent for the next N3,000, thirty-
five per cent for the next N5,000, forty per cent for the next N5,000, forty-five and fifty
888
No. 10 of 1989 Cap T2 Laws of Lagos State, 2003.
889
Id section 51.
890
See section 1 of the Tenement Rates Law Cap. T2 Laws of Lagos State
891
Ibid section 1(3)
892
Ibid section 6
893
Ibid section 13.
894
No 16 Cap. P 4
895
See section 11 of the Personal Income Tax Law Cap.P4 Laws of Lagos State
310
per cent for the next N10,000 and N30, 000, respectively. 896 The chargeable income of an
individual is his total income for that year subject to allowable deductions, exemptions 897
and reliefs.898 The tax is administered by the Lagos State Internal Revenue Board.899
By 2003 when the Personal Income Tax Law of Lagos State (PITL)900 was revised, the
1979 Constitution which vested powers on the Federal Government in respect of “income”
had become operative. Not only that, the Personal Income Tax Decree901 (PITD) had been
promulgated in 1993 to establish a uniform regime throughout the federation on the
chargeable income, rates, computation, allowances, assessment, recovery, administration,
offences, penalties and appeal procedure inter alia68 . The copious provisions of PITD on
virtually every aspect of income tax law and administration should leave no one in doubt
about the policy of the federal government to unify the income tax laws and administration
throughout the whole federation. Based on the foregoing, the PITL can be faulted on many
grounds beginning from its title which reads: “A law to impose tax on the income of
persons other than companies.71
Section 10(1) PITL also provides that income tax shall be payable on the total income of
the taxpayer without stipulating the sources of income as done in section 3 of PITD.
Against this background, it is submitted that the PITL and any other state laws on any
aspect of personal income tax is null and void to the extent of their inconsistency with the
896
Ibid sections 10 and Table 1 of the Second Schedule to the Law
897
Ibid section 13
898
Ibid sections 14, 15, 16 and 17 of the Law.
899
Ibid section 4
900
Cap. P4, Laws of Lagos State, 2003.
901
No. 104 of 1993.
311
provisions of the PITD and the 1999 Constitution. Where the provisions of any such laws
are in harmony with the PITD then they are mere surplusage and unnecessary.
It was clear that the Law Reform Commission of Lagos State was not aware of the
existence of PITD during the law reform exercise otherwise the PITL ought not have been
included in the consolidated laws of the state which stated the law as at 1 st February, 2003.
Due to this oversight, the administration of personal income tax and recovery of income
tax in the state until recently were being made pursuant to the provisions of the Personal
Income Tax Law of Lagos State, instead of PITD. This is clearly wrong and
unconstitutional in view of the provisions of item 59 of the Exclusive Legislative List that
vests the federal government with the exclusive power to legislate on income taxes.
6.4.3.9. Stamp Duties Law.
Stamp Duties Law 902 imposes duties upon documents or instruments specified in
the Schedule to the Law.903 The duties charged shall be accounted for in a manner to be
prescribed by the State Commissioner. The functions of the State Commissioner, however,
are confined to matters in respect of which the Government of Lagos State has competence
to make laws.904 The provisions of the Stamp Duties Law are virtually the same with that of
the Stamp Duties Act except that the following sections of the later were omitted in the
former:
902
No. 16 of 1972 Cap. S 10 Laws of Lagos State, 2003.
903
Such documents include affidavits, leas e agreements, annuities, bonds, covenants, conveyances,
declaration, deeds, marketable securities, power of attorney, surrender and warrants. See section 3(1) and
Schedule to the Stamp Duties Law Cap. S 10 Laws of Lagos State
904
Ibid section 3(3)
312
Bank Notes, Bills of Exchange and Promissory Notes, 905 Bills of Exchange and
Promissory Notes906 and Policies of Insurance907 which make the Stamp Duties Law Lagos
State 30 sections shorter than the Stamp Duties Act.
In view of the Exclusive allocation of stamp duties to the federal government pursuant to
item As 58 of the Exclusive Legislative List, there is no scope for the States to legislate on
the subject matter. What is more, the Federal Government in exercise of its power had
enacted a uniform comprehensive statute charging the same duties on various instruments
and granting the same exemptions throughout the country. However, Lagos State has
continued to retain in its statute book a Stamp Duties Law which contains identical
provisions with that of the Stamp Duties Act except the provisions of the Act relating to
companies and allied matters. Following our argument on the unconstitutionality of the
PITL, it is also submitted that the State Stamp Duties Law of Lagos State is inconsistent
with the provisions of the 1999 Constitution and therefore null and void.
6.4.3.10. Capital Gains Tax Act
The Capital Gains Tax Act908 is reproduced in the Laws of Lagos State 2003 as
Capital Gains Tax Law, No 44 of 1967, Cap C1 Laws of Lagos State, 2003. The law
imposes a tax rate of ten per cent on the gains accruing to any person from disposal of
assets.909 Assets chargeable to capital gains tax include all assets situated within or outside
905
Sections 34-35 SDA.
906
Id, sections 36-43.
907
Id, Section 84-88.
908
No. 44 of 1967 Cap C1, Laws of Federation of Nigeria, 2004
909
See section 2 of the Capital Gains Tax Act Cap.C1 Laws of Lagos State
313
the country except where such asset is expressly exempt by the law910 . Chargeable assets
include, inter alia, options, debts, stocks and shares, foreign currency, and any form of
property created by the person disposing of it.911 Capital gains tax is imposed on the profits
accruing from disposal of assets. Disposal under the law is not limited to a sale but
includes lease, transfer, assignment, compulsory acquisition and any other disposition of
assets.912
In view of the Exclusive allocation of stamp duties to the federal government pursuant to
item 59 of the Exclusive Legislative List, there is no scope for the States to legislate on the
subject matter of capital gains tax. This point seems to be appreciated by the Lagos State it
merely reproduced the Capital Gains Tax Act in the 2003 Laws of Lagos State. It can be
argued that the Law Revision Committee of the State had done this basically to facilitate
access to the Capital Gains Tax in the Laws of the State rather than enact a new Capital
Gains Tax Law which would have been unconstitutional to the States.
6.4.3.11. Produce Sales Tax
The Produce Sales Tax Law 913 imposes a tax on sales of certain produce914 which
includes cocoa, palm kernels, palm oil, copra and rubber.915 Although the tax is payable by
the seller at the time of delivery of the produce sold, it is deducted from the price payable
by or on behalf of the commodity Board upon purchase from a seller. 916 The tax is
collected, accounted for and remitted to the Board by the agent within such time in such
910
Ibid section 3
911
Ibid
912
Ibid section 6(1)
913
No. 19 of 1972, Cap P 19 Laws of Lagos State, 2003.
914
Produce means any product of agriculture or horticulture. See section 3 and Schedule to the Produce Sales
Tax Law Cap P 19 Laws of Lagos State
915
Ibid section 2
916
Id. section 8(1).
314
manner as may be prescribed by the Board. 917 A licensed buying agent is required to
furnish to the Commodity Board within such time and in such form as it may require such
information relating to chargeable sales.918 This tax has ceased to be a source of revenue
since the abolition of the Regional Marketing Boards throughout the country.
6.4.3.12. Sales Tax Law.
The Sales Tax Law 919 imposes a tax at the rate of five per cent on all chargeable
commodities listed in the Schedule to the Law. 920 Every purchaser or consumer of the
listed commodities is liable to the tax at time of the purchase or consumption. 921 The seller
or supplier of the commodities shall act as the agent of the State, collect, account for and
remit the tax to the Board.922 The tax is administered by the Lagos Internal Revenue
Service923 while the revenue collected forms part of the revenue of the State.
However, the enthronement of a civilian rule under the 1999 Constitution injected a dose
of dynamism in inter governmental fiscal relations. The Lagos State Government was the
first to openly engage the share sharing formula of VAT on the ground that the State was
receiving far less from the amount being collected by the FIRS from Lagos State. The
State therefore called for a review of the sharing formula in such a way that will take
account of derivation principle. The failure of the Federal Government to address the
917
Id section 12(2)&(3).
918
Id section 9(1).
919
No. 9 of 1982 Cap S3 Laws of Lagos State.
920
Such as beer, liquor, cigarette and tobacco, jewels, perfumes carpets and rugs, soft drinks, building
materials, sales and services in registered hotels, motels and restaurants and personal services establishments.
921
Ibid section 2
922
Ibid section 3
923
Id, section 3(3).
315
concern of Lagos State eventually led the state to re-introduce its Sales Tax Law924 vide
the Sales Tax 9Schedule Amendment) Order, 2000.
Following the reintroduction of Sales Tax in Lagos, a number of aggrieved taxpayers
instituted actions against the Lagos State Government in the Lagos High Court challenging
the constitutionality of the Sales Tax Law. In Manufacturers’ Association of Nigeria v. The
Attorney-General of Lagos State & Anor,925 being the first case to be determined, Falase J.
upheld the constitutionality of the Lagos State Sales Tax and declared VAT as ultra vires the
Federal Government and unconstitutional. Relying on the case of Aberuagba, Sales Tax was
held to be residual not being one of the taxes enumerated in the Exclusive Legislative List as
federal taxes. According to the learned Judge:
“In the two case referred to above, the appellant courts having held that it
is the State legislature that can legislate on intra state trade and commerce,
I have no difficulty in holding that VAT Decree No. 102 to the extent that
it purports to usurp the residual powers of the State as provided under Item
9 of the concurrent list is null and void and of no effect…. To the extent
that the VAT Decree goes beyond the exclusive and concurrent list same is
void and of no effect and can only continue to be valid to the extent that it
does not purport to regulate intra state commerce.”926
This decision sealed in effect the fate of other pending and subsequent cases as the Lagos
High Court consistently upheld the constitutionality of Sales Tax Law of Lagos State.
Following this development, some taxpayers decided to institute their actions in the
Federal High Court against the Lagos State and the FIRS. 927 In Eko Hotels Ltd. v.
924
See Sales Tax (Schedule Amendment) Order 2000 of Lagos State (Sales Tax Law)
925
Suit No. ID/105M/2001.
926
Id. See Unreported judgment delivered by Hon Justice O.M. Falase on 14 th November, 2003.at p. 19.
927
Mama Cass Restaurants Ltd & 2 Ors (Suing for and on behalf of the members of the Fast Food and Allied
Operators Association of Nigeria (FALLON) v. Federal Board of Inland Revenue & Attorney General of
Lagos State.Unreported Suit No. FHC/L/CS/826/ 04.
316
Attorney-General, Lagos State & FIRS928 the taxpayers instituted an action against both the
Lagos State Government and FIRS praying the court for a determination of which of the
two authorities was entitled to received the 5 percent (tax) VAT collected by it before the
introduction of Sales Tax.929 The applicants argued that the introduction of Sales Tax
amounted to double taxation and it was not under obligation to pay the same tax twice to
the two authorities. The Federal High Court upheld the constitutionality of VAT Act and
declared the Sales Tax Law of Lagos State null and void and directed the applicant to pay
to the FIRS.
The plaintiff had appealed unsuccessfully to the Court of Appeal in Attorney-General,
Lagos State v. Eko Hotels930 which affirmed the decision of the Federal High Court that
Sales Tax Law of Lagos State was null and void. Following this decision, the continued
administration of the Sales Tax Law of Lagos State ran into legal troubled waters, a
development which caused Lagos State to invoke the original jurisdiction of the Supreme
Court in the case of Attorney General Lagos v. Attorney General Federation & 35 Ors931
vide an Originating Summons issued on 25 th February 2008 seeking the determination of
the constitutionality of Value Added Tax Act as a federal statute.
The argument of the plaintiff is that VAT is a replacement of Sales Tax and to the extent
that VAT is imposed on supply of goods and services within a State, the VAT Act has
transgressed the boundaries of the powers of the Federal Government to impose VAT
928
Suit No. FHC/L/CS/205/2004 now reported in (2009) 1TLRN 198.
929
The same approach was adopted by the applicants in Mama Cass & Ors. v. Attorney-General, Lagos State
& FIRS. Supra note 92.
930
Supra note 93.
931
Suit No SC/20/2008.
317
under the 1999 Constitution. Relying on the Aberuagba case, the plaintiff argues that a
combination of sections 2,3,5,6 & 7 of VAT Act infringe on its legislative power and
should be declared null and void. According to the plaintiff:
“…as submitted, section 2,3,6 and 7 are unconstitutional and ought to be

nullified. The said provisions are however the key provisions of the tax and
once they are nullified the remaining parts of the VAT would become
meaningless and unworkable. Accordingly, the “blue pencil” rule cannot be
applied here and therefore, plaintiff submits that the entire Act ought to be
nullified.”932
The Federal Government, in its defence, argued that it was erroneous to equate VAT with
Sales Tax and that the case of Aberuagba Case which Lagos State heavily relies upon
applied to Sales Tax and not VAT. VAT is said to be a new invention, a new tax which is
governed by different set of principles. VAT is a multi stage tax which is paid and
collected at all the chains of production shifted forward to the final consumer through input
and output mechanism. The VAT system is essentially a national and international tax
compared to Sales tax which is a one stage local tax.
Without prejudging the decision of the Supreme Court on the constitutionality or otherwise
of VAT, the case it is our view that the Value Added Tax Act is null and void to the extent
that it imposes tax on the supply of goods and services within States. In Nigerian Soft
Drinks Company Limited v. Attorney General of Lagos State 933 the Court of Appeal had
upheld that the Lagos State Sales Tax Law was valid and constitutional since it death with
intra State trade and commerce unlike the Ogun State Sales Tax which sought to impose
932
(Para 4.4.19 p.26 of the plaintiff‟s brief)
933
[1987] 2 NWLR (Pt57) 444.
318
tax on goods coming into Ogun State and goods that were governed by the Price control
Act. Notwithstanding that VAT and Sales Tax are different and governed by different
principles, the decision in Aberuagba affirming the legislative competence of the State on
intra State trade and commerce still holds good in this regard. The VAT Act would
therefore be deemed to be a Law enacted by Lagos State House of Assembly to the extent
that it imposed tax on supply of goods and services in Lagos State. 934 It will then be at the
discretion of the appropriate authority in Lagos State to effect such modifications of VAT
decree in order to bring it to conformity with the Constitution pursuant to section 315(4)(c)
of the 1999 Constitution.935 Alternatively, the Supreme Court could declare the VAT
decree null and void leaving the States with the option to enact a new Sales Tax Law.
However, the validity of the VAT Act to the extent that it imposes tax on inter State and
International supply of goods and services cannot be assailed in view of items 62(a) of the
Exclusive Legislative List and the decision of Aberuagba on the extent of the taxing
powers of the Federal Government in pursuance of item 62(a). It will then be at the
discretion of the President being the appropriate Federal authority in to effect such
modifications of VAT decree in order to bring it to conformity with the Constitution
pursuant to section 315(4)(c) of the 1999 Constitution. 936 Alternatively, the Supreme Court
934
See Attorney General of Lagos State v. Attorney General of the Federation [2003] WRN 1 (SC) holding
that the Urban Regional Planning Decree No. 8 of 1992 to the extent that it covered matt ers in relation to
whicj the States could legislate upon under the Constitution, would be deemed to be a Law made by the
House of Assembly of Lagos State. See also Emelogu v The State [1988] 2NWLR (Pt78) 528, Fawehinmi v
Babangda [2003] 3 NWLR (Pt.808) 604.
935
Bolodeoku, I.O. “Battle Over Value Added Tax (VAT) Revenue – A Review of the Decision in Attorney
General of Lagos State v. Eko Hotels limited & FBIR” Appellate Review, Vol 1 No. 1, September, 2009, pp.
128-9.
936
Bolodeoku, I.O. “Battle Over Value Added Tax (VAT) Revenue – A Review of the Decision in Attorney
General of Lagos State v. Eko Hotels limited & FBIR” Appellate Review, Vol 1 No. 1, September, 2009, pp.
128-9.
319
could also declare the VAT Act as null and void leaving the Federal Government the
choice of enacting a new Act imposing tax on inter state and or international supply of
goods and services.
The outcome of the case is likely to be determined by the approach taken by the majority
of the seven justices hearing this appeal. If the majority are centrist in their view, they will
find a way to save VAT whose revenue has become very important to the three arms of
government and leave the legislators to address the issue of fairness or otherwise through
legislative intervention. The position is likely to be based on the reasoning that VAT and
sales tax are not the same. If the VAT Act were to be declared null and void, the
implication will be that VAT will cease to operate throughout the federation except in the
Federal Capital Territory.
Meanwhile, while the VAT case is pending at the Supreme Court, the Lagos State House
of Assembly passed the Hotel Occupancy & Restaurant Consumption Law (popularly
known as “tourism tax”) which imposes a five per cent tax on goods and services
purchased from hotels, restaurants and event centres in the State which again had sparked
off chains of litigation. The Law exempts the facilities or transactions cover by the Law
from the operation of the Sales tax Law, Laws of Lagos State 2003. 937 The validity of this
tax is currently being contested in the law court. It suffices to say that the tax is an attempt
by Lagos State to reintroduce through the back door, the Sales Tax which was invalidated
by the Court of Appeal in the case of Attorney General of Lagos state v Eko Hotels Ltd.938
937
Section 16.
938
Supra
320
This conclusion is reinforced by the fact that the tourism tax is an hospitability industry
specific. It is also remarkable that the tourism tax commenced operation during the
tendency of the case instituted by Lagos State in the Supreme Court to determine the
constitutionality of VAT. We consider this approach as unhealthy for the development of
the tax law in Nigeria. While it is conceded the legislation had been initiated before the
determination of the Eko Hotels case, Lagos State should have put the commencement of
the law on hold pending the determination of the constitutionality of VAT by the Supreme
Court.
6.4.4. Delegation of States taxes to the Local Government Councils
Notwithstanding the fact that taxes have not been specifically reserved for the States,
items D-9 & 10 of the Concurrent Legislative List provide thus:
“D-9. A House of Assembly may, subject to such conditions as it may

prescribe, make provisions for the collection of any tax, fee or rate or for the
administration of the law providing for such collection by a local
government council.”
“D-10. Where a Law of a House of Assembly provides for the collection of

tax, fee or rate, or for the administration of such Law by a Local Government
Council in accordance with the provisions hereof, it shall regulate the
liability of persons to the tax, fee or rate in such manner as to ensure that
such tax, fee or rate is not levied on the same person in respect of the same
liability by more than one local government council.”
These provisions clearly justify the inference that a State House of Assembly has the
prerogative, to determine, by law which taxes, fees and rates to impose (other than those that
had been expressly reserved for the federal government under the Exclusive Legislative List)
within its jurisdiction. If the States do not have power to impose as some have erroneously
321
concluded, there will be no basis for the Constitution to confer power on the State to delegate
the collection of any such tax, fee or rate to local government councils on the conditions that it
may be prescribed. It is trite law that a state or authority cannot give what it does not have.
In providing conditions for the administration of any such tax, fee or rate to local
government councils, a State House of Assembly has a responsibility to ensure that the
administration does not result in double taxation.
In practice, there is no State tax, levy or fee whose collection has been delegated to the
local government councils. Even the Development Levy of just a sum of N100 per person
is directly by the States.939 Rather, the trend is for States to encroach upon or usurp the
local government taxes on the pretext of lack of efficient local administrative wherewithal.
A good example here is section 1(3) of the Land Use Charge Law of Lagos State940 which
provides that each local government may by written agreement delegate the collection of
rates and assessment of privately owned houses or tenement to the State. The practical
effect of the law is that the State Government now charges and collects Tenement rates
from occupiers of properties located within each local government council in the State.
6.5. Local Government Taxing Powers
The 1999 Constitution contains a few provisions on local governments a feature which
depart from federal constitutions.941 It is important to briefly examine some of these
939
Item 8 of Part II of the Taxes and Levies (Approved List for Collection) Act, Cap T2, LFN 2004 vests the
collection of development levy on the State thus: “The Development levy (individuals only) not more than
N100 per annum on all taxable individuals”.
940
Cap L61, Laws of Lagos State of Nigeria, 2003.
941
Usually a federal constitution is a union between the States and establishing relationships between the
Federal and State while the local governments are residual matters. See section 2(2) of the 1999 Constitution.
322
provisions in order to appreciate the origin of the issues that issue of illegal and arbitrary
taxes at the local government level in Nigeria. For example, the 1999 Constitution
guarantees a democratically elected local government system and mandates each State to
ensure the existence of their local governments under a (State) Law that provides for their
establishment, structure, finance, composition, finance and functions 942 which shall include
those listed in Fourth Schedule.943 The functions of a local government council shall
include participation in the provisions and maintenance of primary, adult and vocational
education, the development of agriculture and natural resources other than the exploitation
of minerals and the provisions and maintenance of health services.944
The Constitution equally provides revenue streams for the local governments to perform
these functions. Section 162(2) of the 1999 Constitution grants direct access to the local
governments to share out of the revenue allocation from the Federation Account. Based on
the current Allocation of Revenue (Federation Accounts) Act, 945 the local governments are
entitled to 20 percent of the revenue from the Federation Account. 946 Furthermore, section
162(7) mandates each State to pay to local government councils in its area “such
proportion of its total revenue on such terms and in such manner as may be prescribed by
the National Assembly”.947 Local governments are also vested with the “assessment of
942
Id., see section 7(1).
943
Id., see section 7(5).
944
Id., see para 2 of the Fourth Schedule.
945
Cap A15 LFN 2004
946
See Id., section 1(c)
947
See Id, section 4(1) & (2) which provide “(1) In addition to the allocation made from the Federation
Account under section 1 of this Act to Local Government Councils, there shall be paid by each State in the
Federation to the State Joint Local Government Account (as specified in subsection (5) of section 162 of the
Constitution of the Federal Republic of Nigeria) in each quarter of the financial year, a sum represe nting 10
per cent of the internally-generated revenue for that quarter of the State concerned. (2) The 10 per cent of
each State's internally-generated revenue payable to the Local Government Councils in the State, under the
323
privately owned houses or tenements rates as may be prescribed by the House of Assembly
of a State. It is also envisaged that local government would generate revenue in form of
fees and charges through the exercise of its regulatory powers. 948
From the provisions, it is not far to seek that the drafters of the 1999 Constitution
envisaged a dynamic and important roles for the local government in terms of service
delivery and development. The entrenched status of the local government councils under
the Constitution has raised the question whether or not they have independent power to
raise their own taxes. It is generally agreed among writers that local governments in
Nigeria lack any independent taxing power. The argument is that being creatures of the
Law of House of Assembly local governments can only exercise powers delegated to them
by the enabling law. To what extent is this position correct?
The taxing powers of local governments, if any, can also be traced through the prism of
their legislative powers. In this regard, as a matter of strict conceptual analysis, Nigerian
federalism is a two-tiered structured or „partnership‟ between the Federal Government and
the States as can be gleaned from section 2(2) of the 1999 Constitution which provides that
“Nigeria shall be a federation consisting of states and a federal capital territory”.949
Consequently, the division of legislative powers under section 4 of the Constitution
involves only the Federal and State Governments.
provision of subsection (1) of this section, shall be distributed among the Local Governments in that State on
such terms and in such manner as the State House of Assembly may prescribe.”
948
See generally the Fourth Schedule to the 1999 Constitution.
949
324
Although Section 7(5) of the Constitution mandates the States to vest the local government
councils with the functions contained in the Fourth Schedule including “assessment of
privately owned houses or tenements for the purpose of levying such rates”, the provision
is not a direct grant of power to the Local Government to impose or even collect tenement
rate. Thus, a State Government must first enact appropriate enabling law, which will
determine the taxable persons, assessment procedure, and method of collection, recovery
and penalties for tax delinquency. And where such a law has been enacted a local
government council must exercise its power within the limits prescribed by the law. For
instance, where the local government council charges rates it must be within the range
prescribed by the law. Any exercise of power beyond the limits allowed by the
Constitution or the enabling law will be ultra vires, null and void.
It is noteworthy that the power of Local Governments can only be exercised in respect of
“private house or tenement”. A private house connotes a building provided or owned by an
individual or entity rather than the State. 950 In Shell Petroleum Development Company of
Nigeria Limited v Burutu Local Government council951 the respondent levied assessment
of over N30m on the appellant‟s restaurants, waiting rooms, caravan, lawn tennis,
petroleum oil and gas pipelines, tank farms, storage tanks located within its territory for
1981 to1993 (where is this power contained in the Law). Although the appellant did not
object to the published rating, it refused to pay as assessed. Rather, it only paid N32,998.
30 which it considered to be the amount due. The respondent sued to recover the balance.
At the trial, it was contended inter alia, that the properties that formed the basis of the
950
See Oxford Advanced Learner’s Dictionary, S. Wehmeir, (ed.) (Oxford University Press, 6th edn. 2001)
pp. 926-7
951
(2000) 1 NRLR, p.1.
325
ratings were jointly owned by the appellant and the Nigerian National Petroleum
Corporation (NNPC) and therefore not subject to the tenement rates. A copy of the joint
venture agreement between the appellant and the NNPC which showed an ownership ratio
of 20% to 80% shareholding in favour of the federal government was tendered and
admitted in evidence. It was held that the respondent was wrong in levying rates on the oil
storage tanks or tank farms and oil pipelines, which are not privately owned. According to
the Court of Appeal:
“Any provision in a Law made by a State Legislature providing for

assessment of any property not coming within privately owned houses or
tenements is ultra vires, null and void.”952
While a measure of arbitrariness may be attributed to the respondent by seeking to levy
assessment for a period of 12 years,116 it is submitted that the decision does not represent
the correct position of the law. The appellant, here, is a company registered as a
commercial entity under the Nigerian law and engages in petroleum operations which are
purely commercial in nature. The fact that it entered into a joint venture with any one
including the Federal Government to achieve its objectives is not sufficient to change the
nature of its assets from being private. What is more, the parties, ostensibly in recognition
of the nature of their transaction have chosen a business model as a vehicle to attain their
objectives. The bottom line is that the tax will be paid by the operator of the joint venture
while the tax burden is deducted from their respective profits. What is more, section 10(1)
of the Petroleum Profits Tax Act allows companies engaged in petroleum operations to
952
Id, at p.24.
326
deduct all the taxes paid in the course of their operations in arriving at their taxable
profits.953
The scope of inter governmental immunity has been established in a number of foreign
cases.954 While a building owned by the either a federal or State government being used for
purely official governmental purposes such as ministry, maternity home, offices will not
attract tenement the same cannot be said of building being used for non governmental or
commercial purposes. This will include guest house, letting apartment, etc. It is therefore
our submission that both the States and Federal Governments and their agencies are liable
to pay tenement on their buildings that are not being used for purely governmental
functions unless they are specifically exempted under the enabling law imposing tenement
rates. If the rates are fair and reasonable it should be affordable for a government
institutions or agencies which own the properties. If the local governments judiciously
utilise the revenue the owners will derive benefits therefrom in form of general
improvement of infrastructures.
Also, a recent attempt by Apapa Local Government Council to impose a mobile
advertisement tax on companies for display of their corporate names on vehicles vide
Apapa Local Governments Vehicle Mobile Advertisement Bye Law. No 1 1999 was
successfully challenged by eight companies in the case of S.D.V. Nigeria Limited and
953
See section 10(1)(l) of the Petroleum Profits Tax Act, Cap P13, LFN, 2004.
954
See South Carolina v. United States 199 US 437 (1905) Ohio v. Helvering 293 US 360 (1943), Helvering
v Powers 293 US 214 (1943)
327
others v Apapa Local Government Council955 where the applicants were granted injunction
restraining Apapa Local Government Council from implementing the bye law. According
to the trial judge the mere display of the applicants‟ names on their vehicles for the purpose
of identification, without advertising any product, does not amount to advertisement or
sign board/advertisement.
Due to lack of effective administrative machinery, tenement rate has not achieved any
measure of success in most local governments in Nigeria. In its determination to strengthen
its revenue base, the Lagos State Government had introduced the Land Use Charge Law 956
which consolidated the Land Rates Law,957 the Neighbourhood Improvement Charge
Law958 and Tenement Rate Law.959 Apparently to obviate the provisions of item 1(j) of the
Fourth Schedule, section 3(1) of the Land Use Charge Law provides that each local
government could delegate its power to collect the LUC to the State by written agreement.
The legality of this development has been severely criticised as unconstitutional. 960
As the Lagos State continues with the administration of the Land Use Charge Law, it is
only a matter of time that either the Court of Appeal and later the Supreme will be called
upon to make a pronouncement on the legality or otherwise of the law. It suffices to say
that section 1(3) of the Land Use Charge Law in our view is an attempt to “amend” the
provisions of item 1(j) of the Fourth Schedule through the backdoor. It is submitted that
955
(Unreported) See „Firms secured injunction against council on vehicle display law”, The Guardian 13 th
May, 2000, p.31.
956
Cap L61 Law of Lagos State, 2003.
957
Id., Cap L58.
958
Id., Cap N4
959
Id., Cap T2
960
A.O. Sanni, The Controversial Lagos Property Tax – The Flip Side of the Coin, (2003) Vol. 23 Journal of
Private & Property Law, pp. 71-92.
328
the local government cannot lawful delegate their power to administer tenement rates to
the State in the absence of any express provisions to that effect in the Constitution. Such
express provisions will have to be sought from the Constitution itself and not the Land Use
Charge Law or any other law made by the State.
Granted that most of the local governments may not have the necessary administrative
structure and wherewithal to effectively administer tenement rate, the proper thing for the
States to do, in our view, is to help the local government overcome these challenges
through appropriate legislative961 and administrative interventions.962 If States were
allowed to take over or usurp the administration of tenement rate, the laudable objective of
vesting the local government council with autonomous tax revenue may be defeated.
In Knight, Frank and Rutley (Nig) Ltd. v Attorney-General of Kano State963 the Kano State
Government contracted with the appellants for the valuation of properties which will serve
as the basis of raising assessment for tenement rates. The Court of Appeal affirmed the
power of the local government in respect of tenement and declared the action of the Kano
State Government as an intrusion in the affairs of the local government and therefore,
unconstitutional. Mohammed, JCA (as he then was) stated the law thus:
“I believe that once a State passes a legislation assigning the function of

valuation of tenement rates to the local government as the Constitution
has directed, only the Local Government Council will have the power to
961
The tenement rates laws in various states have not been revised for decades. Assessment are based on
outdated property value. See Osinbajo, Y., “Property Taxation as Catalyst for Development – Land Use
Charge Law of Lagos State”, Journal of Private and Property Law, Vol.22, pp2-3.
962
Most local governments are yet to constitute their Revenue Committee in accordance with section 85D
PITA. The Ministry in charge of local government affairs should see to it that this is done and composed by
capable hands.
963
[1998] 7 NWLR (Pt 556) 1.
329
deal with the subject matter and the local government cannot even if it
wants to, divest itself of these powers.”964
Also in Bamidele & Others v Commissioners for Local Government and Community
Development, Lagos State & Ors965 an attempt by the Lagos State Government to regulate
the day-to-day running of Alayabiagba Market within the Lagos Island Local Government
was declared unconstitutional by the Court of Appeal.
6.6. Division of Taxing Powers and Principles of Federalism
Granted that federalism has acquired a functional and dynamic character in different
societies in the light of the socio-political, economic and cultural forces that may be at
play, it is still generally agreed that any federal system should have certain irreducible
features. Nwabueze has identified certain principles which are involved in the definition of
a federal system of government.966 The principles continue to be useful guides in the
understanding and analysis of the workings of a federal system. An attempt is made in this
section to situate some of the principles of federalism within the context of taxation in
Nigeria with a view to finding out the functional dimension which federalism has assumed
in this regard.
6.6.1. Separateness and independence of each government
Each government must exist, not as an appendage of another government, but as an
autonomous entity in the sense of being able to exercise its own will in the conduct of its
964
Id., at p.27.
965
[1994] 2 NWLR (Pt 28) 568.
966
Nwabueze, B.O., supra note 10 at pp. 1-17.
330
affairs, free from direction by another government. 967 This principle can manifest in
various forms as discussed below.
6.6.1.1. Financial Independence
The concept of federalism is dependent on the availability of resources for each
level of government to perform the functions assigned to it under the Constitution. This is
particularly true of the State for them to be truly independent of the Federal Government.
K.C. Wheare has postulated that there is no federalism where the States are financially
subordinate to the federal government. According to him:
“If state authorities, for example, find that the services allotted to them are
too expensive for them to perform, and if they call upon the federal authority
for grants and subsidies to assist them, they are no longer coordinate with the
federal government, but subordinate to it. Financial subordination makes an
end to federalism in fact no matter how carefully the legal forms may be
preserved. It follows therefore that both state and federal authorities in a
federation must be given the power in the constitution for each to have access
to and control its own sufficient financial resources. Each must have a power
to tax and to borrow for the financing of its own resources.”968
However, it has not been possible in any known federation to guarantee financial
autonomy of both levels of government. Even if that feat was achieved at the time the
Constitution was framed, there can be no assurance that the balance could be
maintained.969 The pendulum of financial power has the peculiarity of not remaining in a
state of equilibrium, but tends to swing in the direction of the central government970 .
Nevertheless, it is generally agreed that each level of government should have access to
967
Id.p. 1.
968
Wheare, K.C., Federal Government, 4th ed. (London: OAU, 1953) p.10.
969
Dare, L.O, op. cit., p. 28.
970
The regions were richer than the Central Government in the First Republic.
331
adequate revenue to discharge its responsibilities. Where the States are not in a position to
generate adequate revenue on their own, their finances must be augmented by transfer from
the federal government. Federalism therefore accommodates a certain amount of inequality
in powers and resources between the national and regional governments, so long as the
preponderance in favour of one is not such as to reduce the other to virtual impotence. 971
Nigeria operates a fiscal system whereby all the revenue of the federal government are
pooled together in the Federation Account and distributed among the three arms of
government based on a formula that is exclusively determined by the National
Assembly.972 Presently, virtually all the tiers of government are almost totally dependent
on the monthly allocation from the Federation Account. In political parlance, the inter-
governmental fiscal arrangement in Nigeria is said to emphasise “how to share the national
cake rather than how to bake it”. The fiscal arrangement has always engendered intense
acrimony because of the centrality and significance of the Federation Account (FA) to the
survival of all three arms of government. Although the Constitution unequivocally states
that the FA shall be maintained by the “Federation” which is defined in section 318 of the
1999 Constitution as the “Federal Republic of Nigeria”, 973 the Allocation of Revenue
(Federation Account, etc) Act 974 vests the power to distribute the revenue in the FA
971
The national government is necessarily bigger than a regional government in terms of the territorial area
over which its powers are exercised while those of the regions are confined to only a part. Secondly, matters
within their respective competence must necessarily differ in terms of their relative importance. See BO
Nwabueze, op. cit., p. 3.
972
See generally, section 162 of the 1999 Constitution.
973
See section 318 of the 1999 Constitution
974
Cap A27 LFN, 2004
332
exclusively in the federal government thus giving the false impression that the States and
local governments are donees of the revenue from the Federation Account.975
The Federal Government has used its advantageous position over the years to introduce
certain practices in the management of the Federation Account to the detriment of other
beneficiaries of the account.976 Notwithstanding, the beneficiaries of the Federation
Account have a settled expectation of a regular stream of revenue because of the
entrenchment of their rights in the Constitution to share in the revenue from the account. 977
The expectation of the local government councils in five States 978 was however violently
shaken, recently, when the President of the Federal Republic of Nigeria directed the
Ministry of Finance to withhold their statutory allocations. The action of the President was
eventually declared to be unconstitutional, null and void in the case of Attorney General,
Lagos State v. Attorney General of Federation & 35 Ors.979 CJN Uwais (as he then was)
held that:
“The President of Nigeria has no power vested in him (by executive or

administrative action) to suspend or withhold for any period whatsoever
the statutory allocation due and payable to Lagos State Government
pursuant to the provision of section 162(5) of the 1999 Constitution.”980
975
The Supreme Court held in the recent celebrated case of Attorney General, Federation v Attorney General,
Abia State & 35 Ors [2002] 6 NWLR (Pt 764) 542 popularly known as “the Resource Control Case” that the
federal government is a trustee of the revenue in the FA and that like all trustees , it must account for the
revenue to all the beneficiaries.
976
For instance, certain revenue was being deducted from the FA as first line charges before distribution of the
residue among the three levels of government. Such deductions were recently declared null and void in
Attorney General, Federation and Attorney General, Abia States & 35 Ors. (supra).
977
978
Ebonyi, Katsina, Lagos, Nasarawa and Niger States. However, Lagos was the only State which eventually
challenged the action in court. See Note 104.
979
[2004] 18 NWLR (Pt. 904), p. 1.
980
[2004] 18 NWLR (Pt. 904), p. 1.
333
The fiscal dependence of States and local governments on monthly revenue allocation from
the Federation Account has engendered fiscal recklessness and lack of accountability at all
levels of government obviously because governments are less careful in the utilisation of
revenue they do not generate. This arrangement has also compromised the basis of
Nigeria‟s federal system especially in terms of the financial independence of the States
from the federal government. In this regard, one can liken the States under the current
fiscal structure to a 50 year old individual that still regularly goes home to collect stipend
from his/her parents without which he/she cannot survive. In as much as his/her survival is
dependent on his/her parents‟ financial support, it is illusory to expect the individual to
have a measure of independence. It is submitted that the system in Nigeria, whereby 90%
of the country‟s revenue is generated by the federal government981 while the States rely on
monthly disbursements from the federal government is a transgression of this basic
principle of independence and therefore unacceptable.
The relatively dire financial situation of the States and local governments have led them to
introduce certain fiscal measures in their desperate bid to boost their internally generated
revenue, some of which have resulted in problems of double taxation and multiplicity of
taxes and levies. The phenomenon of multiplicity of taxes has become a major concern to
the Organised Private Sector982 with resultant macro-economic consequences on the
economy.983
981
In 2001 financial year, the federal taxes accounted for about 99 per cent of all tax revenues in Nigeria. See
Report of the Tax Study Group, 2003, p.35.
982
The Organised Private Sector (OPS) in Nigeria consists mainly of the members of the Manufacturers
Association of Nigeria (MAN), Nigerian Chambers of Commerce and Industries (NACIMA) and Nigeria
Employers Consultative Assembly (NECA).
983
See Nigerian Tax Reform in 2003 and Beyond, the Main Report of the Nigerian Study Group on the Review
of the Nigerian Tax System (2003) p. 297.
334
It is submitted that a decentralisation of revenue raising powers including taxing powers
has the potential of transforming the present weak and inefficient federal system of
government in Nigeria into an efficient one by diversifying the revenue base of the country
and strengthening competition between different levels of government (vertical
competition) in revenue generation. Rational allocation of taxing power has the further
potential of significantly contributing towards the development of a civic culture which is
one of the main ingredients for a vibrant democracy. In this regard, Soremekun‟s statement
is instructive:
“The ruling class in oil producing countries lives off rents such that they
have very little need to impose tax on the populace. In the process, and
unconsciously perhaps these areas of the world cannot evolve a civic
culture which is one of the ingredients for a democracy. Incidentally this
absence of a civic culture and the consequent absence of a democratic
rigour can be found in almost all oil producing countries.”984
6.6.1.2. Taxation and Territoriality
Laws generally, by their nature, including tax laws, do not have extra-territorial
application. This principle can be traced as far back as 1735 when it was firmly established
in the case of Boucher v. Lawson985 that “a forum court will not take notice of the revenue
law of another country”. Thus, in Government of India v. Taylor986 the House of Lords
rejected the claim for the recovery of capital gains tax levied by an Indian government on a
company trading in India but whose assets had been transferred to England shortly before
it was wound up.
984
See K Soremekun, “Course Reader, Summary and Outline for MA Participants in the Peace and
Development Program on Governance and Democratization in West Africa (Unpublished), p. 11.
985
(1735) Cas. Tem. Hard (1738) Cunning P. 144 (1735).
986
[1955] AC 491 (HL)
335
The challenge posed by this rule therefore is that each government or country must devise
means of collecting taxes due to it from a foreign taxpayer while the taxpayer and/or his
property are still within its jurisdiction. This reality has, inter alia, led to the development
of the concept of withholding tax on income of non-resident taxpayers who may not be
available in the country during the normal tax period to file assessments and duly pay
tax.987 The principle in Government of India v. Taylor is however no longer good law
within the European Union because of the EU Mutual Assistance Directive which requires
the government of any EU Member State (A) to assist any other EU government (B) to
collect the tax due or allegedly due to B by deploying A‟s tax enforcement resources to act
directly against a taxpayer on behalf of B where the taxpayer or his property is located
within A‟s jurisdiction.988
In Nigeria, a person is liable to pay tax on his global income to the relevant tax authority of
the State of his/her residence as at the 1st day of the year of assessment989 irrespective of
where the income is derived.990 Elaborate provisions are made in the first Schedule to the
987
Withholding tax is a system of tax administration whereby government, in certain circumstances , appoints
persons making certain types of payments such as salaries, rents, dividends, and royalties etc as agents of
collection and authorises them to deduct tax due at source and remit the amount withheld to the tax authority
as advance tax. The legal basis of withholding tax are sections 68-73 of the Personal Income Tax Act (PITA),
Cap P8 LFN, 2004 and section 60-65 of the Companies Income Tax Act, Cap C21 LFN, 2004 (CITA).
988
In 2004 the OECD completed a comprehensive review of the article on exchange of information of the
OECD Model Tax Convention and a new article 27 on assistance in tax collection was added to the Model
Tax Convention. In the EU context, the legal instruments on mutual assistance within the European Union
have recently been reinforced for co-operation on both direct and indirect tax matters. See Council Directive
2004/56/EC of 21 April 2004 amending Directive 77/799/EEC in the field of direct taxation, certain
excise duties and taxation of insurance premiums. Available online at
http://ec.europa.eu/taxation_customs/
taxation/tax_cooperation/mutual_assistance/direct_tax_directive/index_en.htm. Site visited on 24 June
2008.
989
That is, 1 January each year.
990
See sections 3(1) and 2(2) of the Personal Income Tax Act, No. 104 of 1993, Cap P8, LFN, 2004.
336
Personal Income Tax Act (PITA) on the determination of residence of a taxpayer. 991 The
residence rules under PITA have been criticised as arbitrary, artificial and inequitable on
the basis that a State may be deprived from the benefit of a tax on an income derived
within its territory merely because the taxpayer (beneficiary of the income) resides outside
that State.992 The result of these complexities is that many taxpayers often escape being
taxed in respect of income derived from outside the State of their residence. 993 While some
States are unhappy about the basis of liability to personal income tax in Nigeria, there is no
reported case between States‟ Boards of Internal Revenue on the basis of liability to
personal income tax on the basis of residence. It is regrettable that the Joint Tax Board
(JTB) has failed to develop appropriate legal and administrative regulations for
information sharing between the tax authorities for the purpose of stemming the tide of tax
evasion in Nigeria.
6.6.1.3. Autonomous tax institution
Each government requires not only the legal and physical existence of apparatus of
government such as Legislative Assembly, Governor, Courts, Ministries and Departments,
etc but it also requires that its powers cannot be taken away, altered or controlled by the
federal government. Likewise, all the States acting in concert cannot take away, alter or
control the powers of the federal government. 994 Therefore, within the context of taxation,
both the federal government and each State should have their separate tax administrative
machinery established under their respective laws by their legislatures.
991
See the First Schedule to PITA.
992
Akanle, “The Structure of Personal Income Tax Law and Basis of Liability in Nigeria”, (Lagos: Nigerian
Institute of Advanced Legal Studies, 1991) p. 32.
993
Id, p. 32.
994
Hogg, P..W., Constitutional Law of Canada, 4th edn, (Toronto: Carswell, 2001), p. 104.
337
Tax administration in Nigeria is basically a function of the three tiers of government. Each
tier has or should have a machinery to ensure the effective collection of taxes within its
jurisdiction. At the federal level, the Ministry of Finance is the principal organ of tax
administration. The Ministry in turn operates through a statutory body, the Federal Inland
Revenue Services (FIRS), which is established by virtue of the Federal Inland Revenue
Service (Establishment) Act.995 Within the FIRS there is a technical committee which
considers all tax matters that require professional and technical expertise. At the State
level, there is a State Board of Internal Revenue (SBIR) for each State. Within the SBIR
there is a technical committee which considers all tax matters that require professional and
technical expertise. Each State has a Joint State Revenue Committee mainly to implement
decisions of the Joint Tax Board and advise the Joint Tax Board and the State and local
governments on revenue matters. The membership of the Committee includes
representatives of federal agencies such as the Revenue Mobilisation Allocation and Fiscal
Commission and the Federal Road Safety Commission.996 There is also a Local
Government Revenue Committee for each Local Government Council charged with the
responsibility of assessment and collection of all taxes, fines and rates under the
jurisdiction of the Local Government Council997
The State and local government revenue agencies were established and their compositions
and functions determined under PITA998 which also prescribes the composition and
995
No. 13 of 2007.
996
Section 85F of PITA
997
Sections 85D and 85E of PITA.
998
Section 85A-B of PITA.
338
functions of the Board. PITA goes further to establish and prescribe the composition of the
revenue authorities for the local governments999 which by constitutional arrangement is
within the competence of the States. 1000 This arrangement is a carryover from the military
era which cannot fit into the framework of the 1999 Constitution. 1001 It is submitted that
the Federal Government cannot lawfully establish revenue agencies for the States and
dictate the membership of such agencies. These matters, in our view, are the prerogatives
of each State. Some States1002 have asserted their independence by enacting laws
establishing their Boards of Internal Revenue under their own laws. Although the laws in
some respects merely reproduced the provision of PITA, it is nevertheless significant that
those provisions are contained in a State law rather than a federal law. Such intervention
will enable a State to seize initiatives to amend the law as it may consider appropriate from
time to time, through its House of Assembly instead of going to the National Assembly.
The recently enacted Federal Inland Revenue Services (Establishment) Act 1003 (FIRS Act)
which (re)establishes the Federal Inland Revenue Services has raised significant
constitutional questions on the powers of the State Boards of Internal Revenue to continue
to administer the personal income tax, capital gains tax and stamp duties under the extant
999
Section generally 85A-G of PITA
1000
Section 7 of the 1999 Constitution vests the State with the power to ensure the existence of Local
Government Councils under a State law and also provides for the establishmen t, structure, composition,
finance and functions of such councils.
1001
The Federal Military Government usually had power to enact laws on any subject matter whatsoever
irrespective of whether the matter was hitherto within the residual power of the States. See the Constitution
(Suspension and Modification) Decree No. 107 of 1993.
1002
Lagos States and Adamawa States have enacted their laws while some other States are at different stages
of the legislative process. See Tax Administration Law of Lagos State No. 1 of 2007, Adamawa State Board
of Internal Revenue Law No. 4 of 2007, Adamawa State of Nigeria.
1003
No. 13 of 2007.
339
laws. The controversy has centred on the provisions of sections 25(1) and 68 of the FIRS
ACT which vest the FIRS with the power to administer all the enactments listed in the
First Schedule including those presently being administered partly by States such as the
personal income tax, capital gains tax and stamp duties without limiting the powers of the
FIRS to those residents within the Federal Capital Territory, . . . non-residents in Nigeria as
it is the case in the laws establishing each of these taxes. Furthermore, section 68(1) of the
FIRS Act provides:
“Notwithstanding the provisions of this Act, the relevant provisions of all

existing enactments including, but not limited to, the laws in the First
Schedule, shall be read with such modifications as to bring them into
conformity with the provisions of this Act.”
Subsection (2) further provides that:
“If the provisions of any other law, including the enactments in the First
Schedule are in conflict with the provisions of this Act, the provisions of
this Act shall prevail and the provisions of that other law shall to the
extent of the inconsistency be void.”
In order to appreciate the divergent views of writers on theses issues it is necessary to have
recourse into the constitutional basis for division of taxing powers in Nigeria. The National
Assembly has exclusive legislative powers in respect of all subject matter in the Exclusive
Legislative List under section 4(2) of the 1999 Constitution. In this regard, item 59 of the
Exclusive Legislative List vests the National Assembly with power in respect of “taxation
of incomes, profits, and capital gains, except as otherwise provided by this Constitution”,
making these taxes federal taxes. In addition, the National Assembly is vested with powers
to make laws on any matter included in the Concurrent Legislative List to the exclusion of
the Houses of Assembly. Item D7 of the Concurrent Legislative list bearing “Collection of
Taxes”(as the marginal note) authorises the National Assembly to delegate the
340
administration of the taxes to the States “subject to such conditions” as the National
Assembly prescribes. A limitation was prescribed in this regard by Item D8 of the
Concurrent Legislative list that where the collection of the three taxes is delegated to the
States, the Act shall regulate the liability of persons to avoid the incidence of double
taxation.1004 Item D7 of the Concurrent Legislative List is hereby reproduced for ease of
reference:
“D7. In the exercise of its power to impose any tax or duty on –

(a) capital gains, incomes or profits of persons other than companies
and
(b) documents or transactions by way of stamp duties,
the National Assembly may subject to such conditions as it may
prescribe, provide that the collection of any such tax or duty or
the administration of the law imposing it shall be carried out by
the Government of a State or other authority of a State.”
The administrative framework provided by the National Assembly to avoid double taxation
is the splitting of the collection of personal income tax (PIT), capital gains tax (CGT) and
stamp duties (SD) between the federal and State governments. The collection of CGT and
SD is split between the two levels of government on the basis of individuals and
corporations, respectively while that of PIT is based on the nature of employment of
certain personnel. The joint administration is effected through the specific provisions in
each of the tax statute as will soon become manifest below. While States are vested with
power to administer personal income tax in respect of individuals resident within their
territories, section 2(2) of PITA exempts the following categories of people and vests
jurisdiction over them on the FBIR:
(i) persons employed in the Nigerian Army, the Nigerian Navy, the Nigerian
Air force, the Nigerian Police Force other than in a civilian capacity;
1004
Item D8 of the Concurrent Legislative list
341
(ii) officers of the Nigerian Foreign Service;
(iii) every resident of the Federal Capital Territory, Abuja; and
(iv) a person resident outside Nigeria who derives income or profits from
Nigeria.
Section 43(1) of the Capital Gains Act adopts the administrative framework of PITA while
section 4(1) of the Stamp Duties Act (SDA) reserves to the federal government the power
to collect stamp duties upon instruments executed between a company and an individual
thus:
“4 (1) The Federal Government shall be the only competent authority to

impose, charge and collect duties upon instruments specified in the
Schedule to this Act if such instruments relate to matters executed between
a company and an individual, group or body of individuals”.
The revenue collected by the States from the PIT, CGT and SD form part of their
Consolidated Revenue Fund pursuant to section 163(a) of the 1999 Constitution. 1005 On the
other hand, net proceeds collected by the FIRS from these taxes are mandated to be
distributed among the States on the basis of derivation pursuant to section 163 of the 1999
Constitution. This arrangement has been in place since the introduction of the 1999
Constitution. It is against this backdrop that FIRS ACT was enacted.
The controversy on the possible effect of section 25(1) of FIRS Act was
first provoked by a question posed by this writer at the 117th meeting of the Joint Tax
1005
Section 163(a) of the 1999 Constitution provides that “where such a tax is collected by the Government
of a State or other authority of the State, the net proceeds shall be treated as part of the Consolidated Revenue
Fund of the State.”
342
Board,1006 namely, “whether the FIRS can latch on the provisions of section 21 of FIRS
ACT to „take over‟ the administration of these taxes from the States or reduce their scope
of administration”.1007 The concern was that “since the administration of these taxes by the
States is permitted by federal statutes, it follows that the Federal Government may also
withdraw such delegation by amending the relevant statutes accordingly”. 1008 However, we
cautioned that “such a policy shift may be problematic administratively and politically
because of the long history of the personal income tax as a regional or State tax.”1009
Apparently being uncomfortable (and rightly so) with the prospects of losing their power
to administer and keep the revenue from these taxes to the FIRS, the State governments
have argued that FIRS Act still preserves the existing tax administration scheme. 1010
Ipaye1011 is of the view that the combined reading of item 59 of the Exclusive Legislative
List, section 4(3), 4(4) and 4(7)(c) of the 1999 Constitution show that the jurisdictional
power over the administration of PIT, CGT and SD is shared between the Federal
Government and States. To that extent, the learned writer submitted that for FIRS Act to
attempt to stipulate otherwise by exclusively vesting the jurisdiction on the Federal

1012
Government would be null and void. The main crux of his argument is that there are
other provisions of the Constitution which allow the States to participate in the
1006
See Sanni, A.O, “New Tax Laws – Implication for Members of JTB – FIRS & SBIRS”, unpublished paper
delivered at the 117th Meeting of the Joint Tax Board holding in Maiduguri, Borno State, from 28-30 August
2007.
1007
id at. p. 17.
1008
Id at. p. 18.
1009
Id at. p. 19.
1010
This view was expressed by virtually all the Chairmen of the State Board of Internal Revenue who either
asked questions or contributed to the discussion of the paper referred to above.
1011
Ade Ipaye is a Special Adviser to Lagos State Government on taxation and revenue matters .
1012
See A Ipaye, “The Fallacy of Centralizing Tax Administration”, available online at:
http://www.tmcnet.com/usubmit/2007/11/3123909.htm.
343
administration of these taxes. He argues further that the general provisions of FIRS ACT
cannot override the specific provisions of PITA, CGTA and SDA. 1013
Another writer has posited that the Constitution gives a “complete and unabridged
jurisdiction to the National Assembly over taxation of income, capital gains and stamp
1014
duties”. He asserts, rightly in our view, that “there is no instance where the
Constitution derogates from the National Assembly‟s power to make laws on taxation of
incomes and profits and capital gains in favour of the States‟ House of Assembly”. He
debunks the arguments that item D7 of the Concurrent Legislative List is evidence of such
derogation but rather a reaffirmation of the power of the National Assembly to make laws
on those matters. On the possible implication of the provisions of FIRS ACT on the vested
rights of the States to administer these taxes, the writer argues that section 68(1) and(2) of
FIRS ACT are clear enough to accomplish the objective. Relying on section 68(1) and (2)
he posited that:
“One could hardly imagine a clearer effort by a legislating authority to

resolve possible conflicts between two sets of laws it enacted.
Consequently, reference by Ipaye to a principle of interpretation by which
a specific provision is taken to override a general provision dealing with
the same subject matter may not apply to the interpretation of sections 2,
8(1)(a), (b) and 25(1) of the FIRS Act and section 2(2) of PITA and
section 4(2) of SDA.” 1015
1013
Id.
1014
IO Bolodeoku, “Centralization of Tax Administration in Nigeria: The Legal and Efficiency Considerations”
(Unpublished), p. 11.
1015
Ibid, p.15.
344
Notwithstanding this damning conclusion on the taxing powers of the States, the writer
views the centralisation as ill-advised on the basis of cost-benefit analysis agency costs for
1016
both the States and the Federal Government.
Although Item 59 of the exclusive legislative List, which vests the legislative power on the
National Assembly in respect of “taxation of incomes, profits and capital gains”, contains a
power-limiting phrase “except as otherwise prescribed by this Constitution”, no provision
in the Constitution has been found which derogates from the power of the National
Assembly in this regard. There is therefore no constitutional basis in support of the
argument that the Federal Government and States have concurrent power on collection of
PIT, CGT and SD simply on the basis that items D 7 and 8 bear the phrase “Collection of
Taxes”. A careful consideration of the provisions of item D7 will reveal that the National
Assembly has power to (i) impose PIT, CGT and SD; (ii) provide for the administration of
the taxes; (iii) delegate their administration to the States if it chooses; (iv) prescribe such
conditions under which the administration will be delegated.
It should also be noted that the provision of item D7 has not affected the delegation of any
of the three taxes, but merely provides a legal basis for the National Assembly to delegate
their collection if it so wishes. For a delegation to be properly effected, it must be done in a
statute of the National Assembly, ostensibly the statutes imposing the taxes. In the absence
of any statute of the National Assembly effecting such delegation, it is submitted that the
1016
He also identified the problem which a federal agency may encounter in the identification of self-employed
taxpayers in the absence of a Tax Identification Number (TIN). The States have decades of experience in the
administration of these taxes and have invested human and material resources on the development of the
system. Id, pp. 15-21.
345
State will lack any constitutional or legal power to collect or generally administer the tax.
It is submitted that the power of the National Assembly in respect of PIT, CGT and SD is
plenary notwithstanding the provisions of items D7 and D8 on the Concurrent Legislative
List.
Section 163 puts it beyond doubt that taxes specified in item D of Part II of the Second
Schedule to the Constitution are exclusively federal taxes by providing that the taxes may
be collected by the government of the Federation or other authority of the Federation.
However, where this is the case, the net proceeds of the taxes shall be distributed among
1017
the States on the basis of derivation. In this regard, the National Assembly cannot
provide for the treatment of the revenue in any other manner except as prescribed by
section 163 of the Constitution. For instance, the National Assembly can only adopt the
derivation formula in the distribution of the revenue from these taxes. Also, the Federal
Government cannot retain more than the actual cost of collection of the taxes. The last
alternative is that the National Assembly may provide that the administration shall be by
the State. Where this is the case, the net proceeds of the taxes collected by the States shall
1018
be treated as part of the Consolidated Revenue Fund.
It is noteworthy that FIRS ACT has not expressly amended any of the provisions of PITA,
CGTA and SDA which unambiguously split the administration of these taxes between the
federal and State governments. If the intention had been to withdraw the delegation of the
power of the SBIR to administer these taxes, the logical thing to do would have been to
1017
Section 163(b) of the 1999 Constitution.
1018
See generally section 163(b) of the 1999 Constitution.
346
specifically amend the relevant provisions of each of these statutes accordingly. To achieve
the objective would have required the amendment of section 85 of PITA which establishes
a Board of Internal Revenue for each State and vests it with the responsibility for “ensuring
the effective and optimum collection of all taxes and penalties due to the government under
the relevant laws”.1019 FIRS also ought to have taken practical steps in furtherance of the
provisions of FIRS Act to centralise the administration of these taxes throughout the
Federation. FIRS has been assuring the States that it has no “hidden agenda” to centralise
1020
the administration of these taxes. On the contrary, FIRS, through the JTB, have been
encouraging each State to establish their own Board under the Laws of the House of
Assembly.1021
In our view, the attainment of the objective of centralisation would also require a specific
review or repeal of the Taxes and Levies (Approved List for Collection) Act which still
charges the State government with power to collect taxes and levies listed in Part II of the
Schedule to the Act including:
“1. Personal Income Tax in respect of –

(a) Pay-As-You Earn (PAYE), and
(b) Direct taxation (Self-Assessment).
2. Withholding Tax (Individuals only)
3. Capital Gains Tax (Individuals only)
4. Stamp Duties on instruments executed by individuals.”
1019
See section 85(B)(1)(A).
1020
See Ibid where it was stated that: “Let me use this opportunity, distinguished ladies and gentlemen to very
clearly note that the use of a unique tax payers identification number does not in any way mean that this
signals the move to a centralized tax administration for all tiers of government”.
1021
For example, in the welcome address by the Chairman, Joint Tax Board, at its 118th meeting which was
held at Kano from 28-30 April 2008, the Joint Tax Board listed as one of the major highlights of the federal
government tax reform the “granting of administrative and financial autonomy to the FIRS and a few SIRS
(Lagos and Adamawa). See The Guardian, 16 May 2008, p.70.
347
Although there are patent conflicts in the provisions of FIRS Act and the extant statutory
provisions on the administration of PIT, CGT and SD, it is our view that section 68(1)
FIRS Act, on which the advocates of centralisation heavily rely, is insufficient to resolve
this conflict. To the extent that that section seeks to give the provisions of the statute
general overriding effect over all other statutes, it may be challenged on the grounds of
inconsistency with the Constitution. Only the Constitution is capable of having this
attribute by virtue of the principle of constitutional supremacy entrenched in section 1(3)
of the 1999 Constitution. Therefore, it is submitted that section 68(1) and (2) of FIRS Act
stand the risk of being successfully challenged as being null and void to the extent that
they elevate the provisions of FIRS Act to the same pedestal as that of the Constitution.
6.6.1.3. Autonomous tax policy
Separateness of the federal government and that of the States also implies that in
the field of public policy, decision-making is divided between the two levels of
government and neither can dictate the decisions to the other. Bearing in mind that
governments often use taxation as part of a fiscal policy instrument to control or influence
the economy to achieve set objectives, 1022 a level of government should have the
prerogative of structuring its tax system in such a way that meets its fiscal objectives. For
example, a State may choose not to impose certain taxes and charge a higher or lesser rate
depending on its fiscal policy. For this reason, the taxes imposed at the State and local
government levels may vary widely from one State or local government to the other. For
example, while income tax is within the jurisdictional competence of States in the United
1022
Miller A. & Oats L., Principles of International Taxation, (West Sussex: Tottel Publishing Ltd., 2006), p.
4.
348
1023
States, some States on their own volition have chosen not to impose income tax. The
same is true of some other taxes such as estate and gift tax, sales tax etc. The result
therefore is that there is a significant degree of plurality in the tax system of the United
States.
The reverse is the case in Nigeria where attempts are made to determine with finality the
extent of taxing powers of the States and Local Government Councils. The Act purportedly
limits the taxing power of the States to ten taxes and levies and even stipulates the upper
1024
limits of the rate chargeable. The consequence therefore is that the Nigerian tax system
lacks any appreciable degree of diversity which one should reasonably expect in a
federation. The monolithic nature of the Nigerian tax system was manifested in the
ongoing tax reform by the federal government. The thrust of the reform which was
initiated by the Federal Ministry of Finance was geared towards a review of “all aspects of
1025
Nigeria‟s tax system”, “all tax legislations” and “the entire tax administration”. The
Study Group noted the ambitious nature of its terms of reference in the following words:
“In comparison with the Terms of Reference of the 1991 Study Group
which precede this one, our terms of reference are much wider and much
more comprehensive. Thus, while the 1991 exercise was limited to a
1023
The following States have no personal income tax in the United States: Alaska, Florida, Nevada, South
Dakota, Tennessee, Texas and Wyoming. As a matter of fact, Article VII of The Florida Constitution
explicitly prohibits a personal income tax. Article VII specifically prohibits the levying of an income tax,
except via very strict limitations. The article further delineates the purp oses for which bonds can be issued,
and requires that certain bonds be approved by the voters in the affected area. See “State Income Tax”.
Available online at http://en.wikipedia.org/wiki/State_income_tax. Site visited on 25 June 2008.
1024
For instance, a maximum of N10 000 and N5 000 are prescribed for Business Premises Registration and
Renewal fees, respectively, in the urban area while N2 000 and N1 000, respectively, are prescribed for rural
areas.
1025
See the terms of reference of the Study Group on the Review of the Nigerian Tax system headed by
Professor Dotun Phillips. See Nigerian Tax Reform in 2003 and beyond – Main Report of the Study Group
on the Review of the Nigerian Tax system, p. 1.
349
review of direct taxes under the jurisdiction of the Federal and State
services, we are covering all taxes in the Nigerian tax system, at Federal,
State and Local Government levels.” 1026
No matter how desirable a reform of the entire tax system might be, it is patently a
violation of the principles of federalism for the federal government to proceed unilaterally
on the matter without the collaboration and/or consent of the States. It is submitted that
each State has the prerogative of carrying out a reform of its own tax system within the
limits of its powers based on its policy preferences. Any attempt by the federal government
to foist its policy preferences on the States on areas within the residual powers of the
States, without their consent, is an affront to the principle of federalism and bound to be
resisted by the States. It is therefore not surprising that some States have unequivocally
1027
taken positions that are diametrically opposed to the policy of the federal governme nt.
However, separateness of each government need not extend to the entire governmental
machinery; certain agencies may be common, eg the police and the courts, and the
executive of one government may be empowered to execute some of the laws of the
other.1028 In this regard, there is scope for co-operation between the tax authorities of the
Federal Government and the states. For instance, section 165 of the Constitution
recognises that the federal government may collect certain taxes on behalf of the State and
1029
provide a framework for the federal government to be reimbursed for its expenditure.
The Joint Tax Board presently provides a limited platform for such co-operation which can
be widened to serve the mutual interests of the States and federal government in tax
1026
Nwabueze, B.O. supra note 10., p. 2.
1027
For example, engagement of private tax consultants.
1028
Nwabueze, B.O. Supra note 10, p. 1.
1029
Section 165 of the 1999 Constitution.
350
administration generally.194 For example, it should be permissible for the tax authorities to
agree on strategies for joint tax collection and administration. In Canada, for example, Tax
Collection Agreements (TCA) are a dominant feature of Commonwealth and provincial
relationships in tax administration.1030
Autonomy of institutions also implies that neither the federal government nor the States
can confer functions or impose duties on the functionaries of the other without the consent
1031
of its chief executive, otherwise it would bring a level of government within the
supervisory or controlling power of another level of government, its organ or agency. In
Attorney-General of Ogun State v. Attorney-General, Federation1032 the Supreme Court
held that:
“Neither the President of the Federal Republic of Nigeria nor the National
Assembly can unilaterally confer powers on a State functionary such as the
Governor or the Attorney-General of a State and thus bring him within the
investigatory or scrutinizing powers conferred upon the National Assembly
by section 82 subsection (1) of the 1979 Constitution.”1033
Similarly Sir Udo Udoma JSC (as he then was) said:
“On the basis of the provisions of the Constitution and having regards to
the autonomy of the state, I am satisfied that neither the National
1030
Tax Collection Agreements between the government of Canada and the provinces are an integral part of the
general framework of federal-provincial fiscal relations. This framework includes Equalisation Payments,
Established Programs Financing, and other intergovernmental transfers. Under the agreements, most of
which were implemented in 1962, the federal government collects individual and corporate income taxes on
behalf of the participating provinces and territories and remits to them taxes assessed under their respective
income tax Acts. See “Department of Finance – Tax Collection Agreements”. Available online at
http://www.oag-bvg.gc.ca/internet/English/aud_ch_oag_1989_14_e_4263.html. Site visited on 25 June 2008.
1031
This particular implication of the principle of autonomy was expressly enshrined in the 1963 Constitution.
See sections 99 and 100 of the 1963 Constitution. While these are not repeated in the 1999 Constitution it has
been argued that the same result follows as a necessary implication of the principle of autonomy.
1032
(1982) 1-2 SC 13, (1982) 2NCLR 166.
1033
Ibid at p. 12.
351
Assembly nor the President has constitutional power to impose any new
duty on the Governor of a State. Such an imposition would normally meet
with resentment and refusal to perform for the enforcement of which there
is no constitutional sanction.” 1034
Therefore, the State Boards are not subject to the general direction of the Chairman of the
Federal Inland Revenue Service in the discharge of their functions. This applies with equal
force to the decisions of the Joint Tax Board. In practice, States are known to ignore
directives or communiqués of the JTB which they either disagree with or consider to be
ultra vires.
6.6.2. Mutual non-interference or inter-governmental immunities
The power of each level of government is not to be impeded, obstructed or
otherwise interfered with by the other government while acting within its own power. This
doctrine operates to invalidate an interfering act of one level of government which has the
effect of impeding the other level of government from discharging its constitutional
1035
functions. Where the Constitution has expressly vested some powers in a level of
government, such powers are not to be exercised in such a way as to destroy or weaken the
capacity or functions of the other.201 In McCulloh v Maryland1036 it was held that a State
tax levied on a central government agency charged with responsibility for the currency of
the nation was as much an interference with the discharge of those functions as if the tax
had been levied directly upon the government in respect of the discharge of any of its other
functions.
1034
Ibid at p. 21.
1035
See D’Emden v. Pedder (1904) 1CLR 91 at p.111.
1036
4 Wheat. 316 (1819)
352
It is generally agreed that the doctrine prohibits the imposition of a tax upon a government,
or upon its property or other assets or upon the exercise of its essential functions. The
United States Supreme Court held in New York v. United States1037 that a State cannot
impose a tax on “an income of another State, its capital, its State-house, its public school
1038
houses, public parks or revenue from taxes or school lands”. Also, in the Australian
case of City of Essendon Corp v. Criterion Theatres Ltd.1039 where a government was
occupying land for military purposes, it was held that a tax upon its occupation of the land
was a tax upon the discharge of the functions of government for which the land was
occupied.
The doctrine which prohibits the imposition of a tax upon a government has been extended
to the agencies of government upon the rationale that, since a government cannot execute
functions single-handedly and must of necessity employ agencies for the purpose, the
control of those agencies by the other government would impede or interfere with the
operation of the latter.1040 However, the principle does not extend to the activities of a
government while engaged in the business of selling liquor1041 or operating a railway. 1042
In Pirrie v McFarlane,1043 a member of the Australian air force was held to have been
properly convicted of driving without a licence, as required under State law,
notwithstanding that the air force vehicle was being used by him on official business, duly
commanded by his superior officer. It was held by the High Court that the license
1037
326 US 572 (1946) 587.
1038
Ibid, pp. 587-588.
1039
(1947) 74 CLR. 1.
1040
McCulloh v Maryland Supra note195
1041
See South Carolina v. United States 199 US 437 (1905) Ohio v. Helvering 293 US 360 (1943)
1042
Helvering v Powers 293 US 214 (1943)
1043
(1925) 36 CLR 170.
353
requirement was binding upon every person in the State whether the employee was in the
public service or not. To exempt the employees of each government would simply be an
invitation to anarchy.
The courts have also rejected the attempts to extend the immunity to all sorts of agencies,
persons, and things that have only a tenuous, if any, bearing upon the preservation of the
existence of government, such as private railway companies operating under a federal
franchise;1044 lessees of government land engaged in the performance of governmental
functions;1045 government employees in respect of their official salaries;1046 persons

1047
holding patent or copyrights granted by government; vendors of commodities to
1048
government; and a driver with the post office transporting mail in a mail van without a
licence, as required by State law.1049
Issues relating to inter-governmental immunities are yet to give rise to any decided cases in
Nigeria largely because of the prolonged military rule and less reliance on tax revenue by
all the levels of government. Neither the Constitution nor the respective statutes pay
specific attention to these problems. With regards to certain federal taxes such as customs
duties, the practice is to grant waivers to commodities that are imported by States. States
also usually grant concessions tofederal property, say in the administration of tenement
1044
Califonia v. Central Pacific Railroad Co. 127 US 1 (1888)
1045
Burnette v. Coronado Oil & Gas Co. 285 US 393 (1932); Gilepsie v. Oklahoma 257 US 501 (1922).
1046
Dobbins v Commissioners of Erie County 16 Pet 435 91842); Collector v Day US 113 (1870); Deakins v.
Webb (1904) 1 CLR 585; Baxter v. Commissioner of Taxation (NSW) (1807);
1047
Long v. Rockwood 227 US 142 (1928).
1048
Panhandle Oil Company v. Mississippi 277 US 21 (1928); Indian Motorcycle Ltd Co. v. United States 283
US 570 (1931).
1049
Johnson v. Maryland 254 US 51 (1920); Ohio v Thomas 173 us 276 (1899)
354
rates. However, as more attention is paid to tax administration, the scope of such
1050
concessions may be gradually reduced if not withdrawn entirely.
6.6.3. Equality between State Governments
The notion of equality here does not necessarily imply equality in terms of wealth,
status or actual power. Within every federation some States may be wealthier and more
powerful than others, and of course, the federal authority is wealthier and more powerful
than any of the States.1051 The notion of equality may be likened to a constitutional
requirement of equal protection in the case of individuals. Therefore, no State government
should have more or less power than the others or be accorded a special position in the
federal government otherwise the State governments cannot interact among themselves and
with the federal government as equal partners. The lodging of greater powers in one State
government would tend to produce an attitude of superiority and arrogance towards the
others and thus destroy the equilibrium which should exist between them. 1052
In the context of taxing powers of government, the scope of the power of each State is
coterminous with that of the others. For instance, all the States have power to impose all
the taxes within their powers under the 1999 Constitution. This however does not mean
that every State is under an obligation to impose and collect all the taxes and levies within
its competence. Rather, each State has the prerogative of choosing the tax mix based on its
1050
The government of Lagos State recently served an assessment notice on the University of Lagos to pay
property tax under the Land Use Charge Law of the State. While the Land Use Charge Law does not contain
any specific exemption for educational institutions owned by federal government, the administration of the
tax may pose serious problems where the University fails to comply voluntarily.
1051
Hogg, PW, supra note 153, p. 104.
1052
Nwabueze, B.O. supra note 10, p. 17.
355
policy. The point being made here is that every State is competent to impose and collect
any or all of the taxes if it so desires. Experience has shown that in Nigeria, once a State
successfully introduces a new tax or adopts a particular strategy in its administration,
others usually follow suit.1053
Furthermore, the Chairmen of the States‟ Boards of Internal Revenue are by no means
subservient or inferior to the Chairman of the FIRS. Although, the Chairman of the FIRS is
made the Chairman of the JTB,1054 he/she is still technically first among equals.
Apparently, in realisation of this point, the 2003 Study Group recommended that the
Chairmanship of the JTB should be rotated among the States‟ Chairmen.
6.6.4. Division of Powers
The trademark of federalism is that all levels of government have a significant
amount of separate and autonomous responsibilities for the social and economic
welfare of those living within their respective jurisdictions. 1055 However, the technical
division of these responsibilities might differ from country to country or from
constitution to constitution. The technique for the division of powers is that of
enumerated powers and residual powers. The enumeration may be made under one list of
matters exclusive to either the national or regional governments, or there may be two or
1053
In the Second Republic several States started introducing sales tax following the example of Lagos State.
Such States include Ondo, Ogun, Bendel, Cross River, Benue, Bauchi, Imo, Anambra, Gongola and Kwara
States. See O Akanle, “Financing the States: The Constitutionality of Sales Tax Law”, NIALS Lagos, 1983,
(hereinafter “Sales Tax”) p. 1. C/f. O Akanle, The Power to Tax and Federalism in Nigeria, Legal and
Constitutional Perspectives on the Sources of Government Revenue , Centre for Business and Investment
Studies, Lagos (hereinafter “Power to Tax”).
1054
See section 85(2)(a) of PITA
1055
Panayi Christiana, H.J.I. Double Taxation, Tax Treaties, Treaty-Shopping and the European
Community, (Alphen aan den Rijn : Kluwer Law International; Biggleswade : Turp in, 2007), p. 126.
356
even three lists, one for the federal government exclusively, one to the State government
exclusively and another concurrent to both. 1056
The idea of having two legislative lists has long been a feature of the Nigerian
1057
Constitution. The enumerated matters under the 1999 Constitution are grouped under
two lists – one exclusive to the federal government and the other concurrent to it and the
State governments, namely, the Exclusive and Concurrent Legislative Lists, respectively.
1058
As the name suggests, matters on the Exclusive Legislative List belong to the federal
government to the exclusion of the State governments in so far as the Constitution does not
provide otherwise.1059 The Exclusive Legislative List consists of 68 items while the
Concurrent Legislative List has 12 items. Where there is a list of matters concurrent to
both the federal and State governments, the federal government almost invariably prevails
in the event of conflict or inconsistency between the laws of the two governments.
However, this does not mean that the State law is completely overridden and thereby
rendered a nullity. On the contrary, it remains in existence as a valid law, but its operation
1060
is suspended for as long as the federal law is in force.
The advantages of having a concurrent list have been articulated by Watts thus:
“Firstly, a concurrent list enhances flexibility. In a new federation it permits

the central government to postpone exercising its authority in a field until
such time as the matter has assumed national importance, while not
preventing any region which is forward looking from going ahead and
legislating in the meantime on its own account. Secondly, it provides a means
1056
Nwabueze, B.O. supra note 10, p.20.
1057
Akande, J.O., Akande: Introduction to the Nigerian Constitution (London: Sweet & Maxwell, 1982), p. 8.
1058
Nwabueze, B.O. loc. cit., p. 39.
1059
See section 4(3) of the 1999 Constitution
1060
Id, p. 21.
357
whereby, in certain spheres, especially the social services, the central
government may legislate to secure a basic national uniformity and to guide
regional legislation, while leaving with the regional legislatures the initiative
for details and for adaptation to local circumstances. Thirdly, a concurrent
subject allows the central government to step into what is normally a regional
field in order to provide remedies for particular backward regions or for
difficulties arising from regional legislation which affects other regions.
Fourthly, concurrent list may facilitate „comparative federalism,‟ by
encouraging co-operative rather than independent action in these fields.
Fifthly, such a list may reduce the necessity for complicated, minute
subdivisions of individual functions assigned exclusively to one government
or another.” 1061
Tax collection is on the Concurrent List. It follows that if a particular State is able to come
up with fresh initiatives on a strategy for collection through the use of an electronic
identification card, the federal government could later establish a uniform nationwide law
for the operation of such scheme. In this regard, there are two possibilities. Firstly, the
federal and State laws may be incompatible in certain respects. Secondly, the federal law
may be so comprehensive that it makes the State law redundant. The former situation
refers to the doctrine of inconsistency while the latter refers to the doctrine of covering the
field. Both doctrines operate to dislodge the existing State law on the subject matter. How
does this structure of division of power impact on allocation of taxing powers?
6.6.5. A supreme Constitution
The basis of the federal arrangement, especially on the division of powers generally,
including taxing powers, must be embodied in a constitution. 1062 The Constitution must be
supreme over both the Federal and State Governments, and override any act done by any of
them in violation of those terms.229 Any alteration to the provisions of the Constitution
1061
Watts R.L., , New Federations: Experiments in the Commonwealth (Oxford: Clarendon P.,
1966), pp. 174-175.
1062
Nwabueze, B.O. supra note 10, p. 21.
358
must be consented to by the two levels before such alterations become valid and
binding.230 Thus, the existence, powers and rights of each level of government is not left to
the whims and caprices of the other level of government. In this regard, section 1(1) of the
1999 Constitution declares that “this Constitution is supreme and its provisions shall have
binding force on all authorities and persons throughout the Federal Republic of Nigeria”.
Section 1(3) goes further to declare that “if any law is inconsistent with the provisions of
this Constitution, this Constitution shall prevail, and that other law shall to the extent of its
inconsistency be void. This principle was adumbrated by the Supreme Court in the case of
Attorney-General, Abia State v. Attorney-General, Federation231 thus:
“The Constitution is the grundnorm and the fundamental law of the land.
All other legislations take their hierarchy from the provisions of the
Constitution. The provisions of the Constitution take precedence over any
law enacted by the National Assembly even though the National Assembly
has the power to amend the Constitution itself, by the provisions of the
Constitution, the law made by the National Assembly comes next to the
Constitution.”
The existence of the Taxes and Levies (Approved List for Collection) Act 1063 as an existing
law pursuant to section 315 of the 1999 Constitution has introduced a measure of
confusion into the determination of the basis of taxing power in Nigeria. A brief historical
background to the Taxes and Levies Act is necessary for proper elucidation of the issue.
The Taxes and Levies Act was enacted in 1998 by the Federal Military Government to
arrest the growing menace of arbitrary and illegal taxes through the activities of private tax
consultants engaged by the States.1064 Part I, Part II and Part III of the Schedule contain 8,
1063
Cap T2 LFN, 2004.
1064
The Joint Tax Board (JTB) had appropriately been opposed to the confo unding variety of taxes and levies
in Nigeria. Indeed, it was that Board that prepared the ground for the passage of the Taxes & Levies
(Approved List for Collection) Decree No. 21 of 1998 (TLD), which listed taxes and levies to be collected by
the federal, state and local government authorities throughout Nigeria. The Decree was unanimously hailed
359
11 and 20 taxes and levies respectively1065 which are collectible by the Federal, State and
Local Government Councils respectively.
Since the enactment of this Act, the Schedule has never been amended either by way of
addition or deletion of the taxes and levies collectible by the tiers of government. The false
impression given by this is that the there is no development as such on the subject of
division of taxing powers in Nigeria. Yet, this is an area that has witnessed exponential
growth and controversies in terms of who has power to tax what. For example, there are a
number of federal taxes and levies which are not included in the Taxes and Levies Act, yet
they have not been declared to be null and void on that account. These include import
1066
duties, export duties, excise duties and Technology Tax, Niger Delta Development
Levy and Nigerian Communication Commission Levy.
The starting point is to clarify the basis of division of taxing powers in Nigeria in view of
the Taxes and Levies (Approved List for Collection) Act 1067 as an existing law under the
1999 Constitution. The basic question is whether the Taxes and Levies Act is relevant for
the determination of the extent of taxing powers in Nigeria and to what extent. This
question is germane in view of the recent doubtful interpretation given to the statute by the
Nigerian Court of Appeal.1068
as the much-expected solution, as it became illegal for any government to go outside its list. Taxpayers could
now tell what taxes they were liable to pay, and to what authority. See Ipaye, A. “Harmonisation of LGA
Taxes and Levies”, Available online at
http://www.thisdayonline.com/archive/2001/05/16/20010516co m02.ht ml. Site visited on 12th May 2010.
1065
The List are provided in Appendix A
1066
See the National Information Technology Development Agency (NITDA) Act of 2007.
1067
Hereinafter referred to as „Taxes and Levies Act”
1068
See Eti-Osa Local Government v. Jegede, Infra note 232
360
A cursory approach to the study of this Act might lead to an erroneous conclusion that it
has neatly allocated or delineated the extent of the taxing powers of each level of
government. Section 1(1) provides:
“(1). Notwithstanding anything contained in the Constitution of the Federal

Republic of Nigeria 1979, as amended, or in any other enactment or law, the
Federal Government, State Government and local government shall be
responsible for collecting the taxes and levies listed in Part I, Part II and Part
III of the Schedule to this Act, respectively.”
(2) The Minister of Finance may, on the advice of the Joint Tax Board and
by Order published in the Gazette, amend the Schedule to this Act”. 1069
(Emphasis mine)
A careful consideration of the provision of section 1(1) of the Act will reveal that the
statute deals with the power to collect and not power to impose. This conclusion is
reinforced by the language of the statute which employed words and phrases such as
“collecting”,1070 “collects”,1071 “ shall assess or collect1072 while the word “impose” does
not feature at all in the entire legislation. It is submitted therefore that the Taxes and Levies
Act is not relevant for the purpose of determination of the extent of the taxing powers.
Unfortunately, this important point seems to have eluded the Nigerian courts. In Eti-Osa
Local Governmnet v Jegede,1073 the Corporate Outfit levy by the appellant was challenged
on the basis that it was ultra vires not being on the Taxes and Levies Act. Upholding the
argument, the learned judge held that:
1069
See section 1 of the Taxes and Levies (Approved List for Collection) Act, Cap T2, LFN, 2004
1070
S.1(1), 2(2), 3(b)
1071
S.3(a)
1072
S.2(1)
1073
[2007] 10 NWLR (pt.. 1043) p.537.
361
“Any attempt to act outside the ambit of Part III of Taxes and Levies
(Approved List for Collection) Decree No. 21 of 1998 will be futile. I
therefore hold that the respondent has no power to legislate and demand
whatever taxes and levies it deems fit outside the provisions of Taxes
and Levies (Approved List for Collection) Decree No. 21 of 1998
The reasoning was upheld by the Court of Appeal. 1074 The basic distinction between the
relevance of Taxes and Levies Act on the power to impose and power to collect was
appreciated in Mobil Producing (Nig.) Unlimited v. Tai Local Government Council & 2
Ors1075 where the defendant‟s Bye-law required the payment of tax on “community
development, effluent discharge pollution, education/youth empowerment, Niger Delta
Development permit, land index/oil gate way agricultural resources” was challenged as
ultra vires. The learned trial judge held as follows:
“The 1st defendant power to that extent is ultra vires, they exceeded the
legal right conferred by the Constitution and Decree No. 21 and if there is
no powers to impose there is no legal authority on the 2 nd and 3rd defendant
to collect these levies and taxes”.1076
It is important to note the provisions of section 1(1) of the Taxes and Levies Act seeks to
override the provisions of the Constitution. This can be gleaned from the opening phrase
“notwithstanding anything contained in the Constitution of the Federal Republic of Nigeria
1979” which is clearly meant to give the provisions of the Act an overriding effect on any
contrary provisions in the Constitution. While the use of such a phrase in Decrees and
Edicts was aligned with the prevailing legal order under a Military Government, its
continued validity under the 1999 Constitution is suspect. Since the commencement of the
1999 Constitution it is well established that where there is inconsistency between the
1074
Id. “I cannot possibly fault this well garnered decision of the trial court”. Per Dongba n-Mensem, JCA at
p558.
1075
(2004) 10 CLRN 99.
1076
At pp109-110.
362
provisions of the Constitution and any other Act or Law, the other law will be null and
1077
void to the extent of its inconsistency.
From the peremptory language of the provisions of section 1(1) of the Taxes and Levies
Act, it is arguable that the list of taxes and levies listed in Parts I, II and III of the Schedule
to the Act are meant to be definitive, exhaustive and final subject only to the amendment of
the Schedule by the Minister of Finance. Strictly construed, it follows that the collection of
any tax or levy that is not on the Schedule will be invalid, null and void. Following the
above reasoning, it would mean that the collection of four federal taxes viz: import duties,
export duties, excise duties and Technology Tax is null and void on the basis that they
were not on the Schedule to the Taxes and Levies Act from inception and presently.
It is remarkable however that no one has seriously contended that these taxes are invalid.
Thus, the relevant Federal Government agencies1078 has continued to collect these taxes
unhindered despite their non inclusion in the Taxes and Levies Act. The inference that can
be drawn from this is that the Taxes and Levies Act is not regarded as not limiting the
powers of the Federal Government to impose and collect taxes. There is however nothing
either in the language or spirit of the Act to suggest that it has such a discriminatory
application. What is good for the goose must also be good for the gander. Any intervention
by the Federal Government in curbing the menace of multiplicity of taxes and levies
should ordinarily begin with taxes within its jurisdiction for its intervention to be taken
seriously.
1077
See A.G. Ondo State v. A.G. Federation (2002) 9 NWLR 223; A.G. Ogun State v. Aberuagba (1985) 1
NWLR 395.
1078
Such as the Federal Inland Revenue Service and the Nigeria Customs
363
In view of the above, it is submitted that the Taxes and Levies has never been and is
presently not relevant for the purpose of determining the extent of taxing power of
government under the 1999 Constitution. Any attempt to either trace the power of a
government or lack of it to impose a particular tax or levy to the Act is futile, time wasting
and unproductive. This leads to the question, where or how else can one determine the
scope of the taxing powers in Nigeria?
364
CHAPTER SEVEN
SUMMARY, FINDINGS AND CONCLUSION
7.0. Conclusion
Attempt has been made in this work to point out the salient differences between a tax and
taxing power and related concepts such as a fee, charge, regulatory power and legislative
power. The word “tax” within the context of this work refers to a compulsory levy
imposed by a statute specifically enacted for that purpose. Such a taxing statute will not
only impose a tax but also establish the necessary legal framework for its administration.
The primary test, therefore, is whether or not a particular levy is in pursuance of a
specific statute enacted mainly for the purpose of imposing it. Therefore, if a levy is
collected by an agency of government in pursuance of its regulatory power such an
imposition is not a tax within the meaning of this work.
Against this background, Personal Income Tax Act,1079 Companies Income Tax Act,1080
Petroleum Profits Tax Act,1081 Capital Gains Tax Act,1082 Value Added Tax Act,1083
Education Tax Act,1084 Sales Tax Law 1085 and Tenement Rates Law 1086 , among others,
will qualify as taxing statutes. However, the Taxes and Levies (Approved List for
Collection) Act,1087 Federal Inland Revenue Service (Establishment) Act,1088 National
1079
Cap P8, LFN 2004.
1080
Cap C21, LFN 2004.
1081
Cap P13, LFN 2004.
1082
Cap C1, LFN 2004.
1083
Cap V1, LFN 2004.
1084
Cap E4, LFN 2004.
1085
Cap S3, Laws of Lagos State, 2003.
1086
Cap T2, Laws of Lagos State, 2003.
1087
Cap T2, LFN 2004.
365
Sugar Development Council Act, National Automotive Act, Technology Tax, National
Information Technology Development Tax Act,1089 Niger-Delta Development Commission
(Establishment, etc) Act 1090 will not qualify as taxing statutes.
There is, therefore, the need for the policy makers to keep in view the main objectives of
regulatory powers and taxing powers on the one hand and legislative powers and taxing
powers on the other hand. Unless this is done any attempt to allocate taxing powers
among the different levels of government will be blurred. Besides distinguishing a tax
from related terms is equally important to know the different types of taxes that exist and
the precise meaning and scope of each in order to determine the extent to which the
taxing powers of each level of government can go.
The study of division of taxing powers in the United States, Canada, Australia, Brazil,
India, and Brazil has revealed that none of them adopts either the normative theory or
rational choice theory in establishing their constitutional framework. Rather, at the
inception, the focus had been on few of the taxes that were considered very important.
While these countries vary significantly in their approaches in addressing the problems of
fiscal federalism,1091 there seems to be a common cord running through them - a
recognition of the need to ensure that each level of government has access (whether
through independent revenue generation or through transfer) to sufficient revenue to
discharge its respective functions. In none of the country do we have a system whereby
the States go cap in hand on monthly basis for federal allocation bulk of which is derived
1088
No. 13 of 2007.
1089
Of 1997. The Act was not assigned a number.
1090
Cap N86 Laws of Federation, 2004.
1091
See Chapter 3.
366
from mineral resources without which they cannot survive. This singular feature of the
Nigerian fiscal structure is an indication that the fiscal foundation of the country is
inherently weak and in dire need of a complete overhaul hence our clarion calls for a
paradigm shift.
It is evident that the establishment of federalism requires a trade off of fiscal autonomy of
the coordinate units to an appreciable extent. For example, there are a few taxes such as
import and export which the States will have to forego, inevitably, in the interest of the
federation. This is so even where tax forms the plank of the economy of such States. For
instance, some provinces in Australia derived as much as 75 per cent of their revenue
from tariff, yet the tax had to be relinquished to the Commonwealth. Thus, there is a
general recognition that certain taxes must be surrendered for the union no matter how
important that may be to the States. What is important, however, is to ensure that the
States at the losing end must be sufficiently compensated for the revenue loss in a manner
that is considered equitable and acceptable. The compromise may be permanent or

1092
temporary.
It is not far to seek that the balance of power will always be in favour of the level of
government with more revenue. Thus, the common approach in federal systems seems to
be to allocate important taxes in terms of revenue potential and convenience of
administration to the level of government which is meant to have more economic power.
For example, in the United States, the original idea was to significantly constrain the
taxing powers of the Congress by putting some seemingly insurmountable pre-conditions
1092
This is the consideration that informed the temporary clauses contained in the Constitution on how to
carry out necessary adjustments to ensure that each level of government has sufficient revenue.
367
on imposition of directs taxes. The drafters of the Canadian Constitution on their part
followed the opposite route by establishing a strong centre with plenary taxing powers
while the powers of the provinces were limited to only direct taxes. Also, in Australia, the
overall philosophy at inception was to limit the provinces to only direct taxes meaning
that the States were not meant to raise indirect taxes which are currently regarded as the
best form of fiscal financing for the states.
Notwithstanding the initial constitutional framework, the exigencies of inter
governmental fiscal relationships have always given rise to subsequent adjustments either
as a result of one level seeking to challenge the extent of the powers of the other, the
judiciary expanding the taxing power of a level of government by ascribing to some taxes
meanings that are wider than their usual meaning and general understanding or a level of
government (usually the federal government) taking advantages of exigencies of war and
depressions to expand the scope of their powers. In some cases, adjustments have been
brought about through a reform of the system usually by Fiscal Commissions.
Even in the absence of normative rule for division of taxing power, the general principles
of division of taxing power may help in guiding the allocation of taxing power to some
extent. The general principle for allocation of powers in a federal system is that purely
local matters should be assigned to the local government while matters that are of inter
locality concerns should be assigned to the States. The federal matters generally should
be few matters that transcend the jurisdictions of local and States governments such as
defence, environmental protection, international relations, etc. The allocation of excise
and custom duties to the Federal Government seem to be in line with this principle,
hence, it is not likely that any nation will transgress this principle. Thus, in virtually, all
368
federations, these taxes are allocated to the federal although there may be different
approaches in the treatment of the revenue. In the US the revenue is for the exclusive use
of the federal. In Canada there is a constitutional framework for equalisation. In Nigeria,
the revenue from customs and excise are paid into the Federation and shared among the
three levels of government.
Where this basic philosophy is departed from by vesting in a level of government taxes
which ordinarily should be shared with another level or even be for the exclusive use of
the other, the dynamics of inter-governmental fiscal relations have converged to adjust
the balance of power. For example, while there are rational basis why customs should be
a federal matter, this is not the same with income tax (of companies and individual),
capital gains, stamp duties, etc. In other words, the rational basis for exclusively vesting
sales tax, inheritance tax and stamp duties in the Federal Government has not always
been persuasive to the level of government at the receiving end. In so far as taxable
persons (whether companies and individuals) are beneficiaries of services and
infrastructure being provided by respective governments, it is difficult to prescribe that
only one level should collect such taxes. Such an arrangement will lead to dissatisfaction
by the level of government that is excluded which makes compromise between the two
extremes attractive. The alternative therefore is the adoption of concurrent use of the
same tax base by both levels of government.
Therefore, irrespective of what may seem like a well delineated scope of division of
taxing power in the constitutional framework or even seeming abhorrence of concurrent
use of tax base by the Federal and States, tax sharing seems to be most prevalent in
practice. It is remarkable that concurrent tax-based sharing has been brought about
369
mainly by co-operation rather than constitutional and legal framework in most countries.
The bottom line therefore is for federal and states to develop viable platform to make
optimum use of their tax bases in a harmonious manner to grant them access to sufficient
revenue to enable them discharge their respective functions effectively.
This thesis has also reinforced the fact that taxation is indispensable in any society and is
indeed the bedrock of prosperity and development.1093 This is also true of indigenous
communities that eventually became known as Nigeria. Although taxation in the pre-
colonial era was rudimentary, it was sufficient to facilitate the transfer or mobilisation of
resources from the people to the community for public development of the community .
There was also a healthy competition among the communities in their quest for
development.1094
The British Colonial Administration introduced a modern system of taxation in Nigeria
because the Royal Majesty in Britain was not prepared to continue to bear the cost of
local administration. This was achieved by leveraging on the existing traditional
institutions.1095 Traditional rulers and other eminent members of the communities were
appointed as tax collectors and given the backing of the authority of the colonial
government in the enforcement. Tax administration was vigorously pursued with the
objective that every taxable adult must discharge his civic obligation to the government
through the payment of tax.
1093
See Nicols v Ames 173 U.S 509 (1989) at 505.
1094
For instance, communities built their first schools, maternity houses, sponsored the first graduates that
formed the first crop of elites and became role models in the society.
1095
Indirect rule system was first adopted in the North and later in the West while warrant Chiefs were
appointed in the Eastern Nigeria.
370
When a modern tax system was first introduced in 19041096 in the Northern Protectorate,
the revenue from each Protectorate was used exclusively for each Protectorate without
any transfer of revenue from one Protectorate to the other. At this stage of development,
resources for the development of each community were sourced almost entirely from
within the community thus making each community self reliant. The amalgamation of
Nigeria in 1914 however introduced a new dimension into the fiscal equation. The
revenues of the different protectorates were pooled together to finance the whole country.
This development fuelled suspicion about the motive behind the amalgamation. Some
writers have contended that the motive was to use the surplus revenue from customs
duties in the South to balance the deficit in the North. 1097
In 1954 Nigeria made history as the first African country to adopt a federal system of
government. Federalism is a deliberate choice to establish a multi-layer government
which inexorably gives rise to division of taxing powers among the different levels of
government. A good system of division of taxing powers should guarantee financial
autonomy of each level of government to some extent, promote equity in the distribution
of tax burden of the taxpayers and also avoid double taxation.
The three earliest taxes in Nigeria were poll tax (a head tax), personal income tax and
custom duties which were enacted by the (central) colonial government. The revenue
from poll tax was for the exclusive use of the native authorities and varied from
community to community. The revenue from personal income tax was shared between
the Regional Government and Central Government. Custom Duties were administered by
1096
See the Land Revenue Proclamation of 1904.
1097
See Osuntokun J, in “Historical Background of Nigerian Federalism” In Akinyemi, A.B., et al (eds)
Readings in Federalism, (Lagos: Nigerian Institute of International Affairs), 1979), pp.85.90. Akinjide, R,
“The Amalgamation Of Nigeria Was A Fraud” Available online at http://www.dawodu.com/akinjid3.htm.
Site visited on 23rd July 2010.
371
the Central Government under a revenue sharing formula which emphasised
derivation.1098 Thus, the Nigerian tax system commenced with a fairly decentralised
system of allocation of taxing powers under an arrangement which afforded the native
authorities the power to determine and vary the tax rate from community to community.
The pertinent question is if the taxing powers were so decentralised even under a regional
government, how did the current centralised system evolve?
As revenue from poll tax proved inadequate to discharge their responsibilities, the
Regional Governments started agitating for the control of personal income tax thus
signalling the first sign (though subtle) of contest between the Central and Regional
Governments for the tax with a significant revenue potential. The British administrators
approached the issues in a sensible and pragmatic manner by establishing the Hick
Phillipson Commission of 1946, a first Fiscal Commission in Nigeria, to review the inter-
governmental fiscal relations between the Central and Regional Governments. Since then,
the establishment of a Fiscal Commission or Committee as forerunner to a Constitutional
review became the hallmark of constitutional development in Nigeria 1099 until 1979 when
a permanent Fiscal Commission, the Revenue Mobilisation, Allocation and Fiscal
Commission1100 was established.
1098
Under this system, if a duty of 20 per cent was imposed on a particular product, say sugar, a portion of
the duty collected by a federal agency at the port of entry good were shared between the federal gove rnment
and the Region of the consignee of the products. 1098 The revenue from mineral resources, which was quite
insignificant at the time was shared in the ratio of 50%:50% between the Regions and the central
government. The Western and Northern Regions were favoured by this policy being the mineral producing
Regions at the time. All the demands of the Eastern Region for an allocation in favour of equality of Regions
fell on deaf ears.
1099
Subsequent Fiscal Commissions or Committee s are: Hicks-Phillipson Commission, 1951, Chicks
Commission of 1953, Raisman Commission 1958, Dina‟s Committee of 1968 and Aboyade Panel of 1977,
1100
Established under the Revenue Mobilisation, Allocation and Fiscal Commission Act, No. 49 of 1989. See
Cap R7, Laws of Federation of Nigeria, 2004.
372
As a result of the inadequacy of the revenue from poll tax, the Regions started agitating
for control of the personal income tax. Following the adoption of a federal system in
1954, the power to impose and administer the Personal Income Tax was vested on the
regions. With the regional control of the Personal Income Tax both in terms of legislation
and administration, it would seem that the Regions had assumed the highest degree of
fiscal autonomy possible in a federal system. However, in an attempt to further increase
the fiscal position of the Regions, a system of derivation was introduced for the sharing
of revenue from (federally administered) Import, Export and Excise Duties. The revenue
from mineral resources was also shared on equal ratio between the Federal Government
and the Regions under the 1960 and 1963 Constitutions. The derivation formula initially
benefited the Western and the Northern Regions while the East was disadvantaged
because no mineral resource was being derived from the Region. However, the table
turned in favour of the East when the exploitation of crude oil in commercial quantity
began in the early and mid 1960s. The fiscal disparity between the oil producing States
and non-oil producing States was so huge that the adjustment of the percentage of
derivation was gradually de-emphasised to the chagrin of the Eastern Region.
Taxation of personal income by the Regions gave rise to some perceived problems of
double taxation which informed the enactment of a model federal statute, the Income Tax
Management Act 1101 for all the Regional Personal Income Taxes. Under this arrangement,
the States were still allowed to impose their personal income tax under their statute and
determine their rate, allowances etc. The States retained their powers to impose and
administer the personal income tax throughout the initial 13 years of military rule and the
commencement of the 1979 Constitution.

1101
Cap 173, Laws of Federation of Nigeria, 1990.
373
Of all the factors that shaped the fiscal relationship between the Federal and State
Governments in Nigeria, the military intervention in politics seems to be the most
fundamental. The military, due to its centralised nature of operations, preferred a unitary
fiscal system. The trend during the military rule was to gradually reduce the fiscal powers
of the States in favour of the federal and adopt a uniform personal income rates and
allowance in Nigeria. The civil war also played a significant role in shaping the
centralised fiscal structure of Nigeria. Seeing the devastating effect of war and the
consequences of having a relatively weak Federal Government, the military government
leveraged on the prevailing mood to strengthen the Federal Government in all
ramifications. The establishment of Federation Account and creation of new States also
introduced a new dimension of state dependence on federal allocation as the newly
created states were totally dependent on federal allocation.
Sales Tax did not feature in the evolution of division of taxing powers in Nigeria until
1960. The framework adopted under the 1960 Constitution was to vest the (general)
sales taxing power on the Federal Government with the exemptions of a few
commodities.1102 Considering the level of economic development at the time, the
exempted commodities seemed to be the main goods on which Sales Tax could be
imposed. Consequently, the Regions enacted their respective sales tax laws. There was no
Federal Sales Tax. State Sales taxes, therefore existed throughout the 13 years of the
military rule. Against this background, the drafters of the 1979 Constitution thought it fit
to exclude Sales Tax from the Federal legislative competence on the Exclusive
Legislative List. Notwithstanding, the clear constitutional scheme to make sales tax
1102
Such as produce, hides and skin, motor spirits and diesel oil excluding diesel oil for industrial purpose.
See item 38 of the Exclusive Legislative List of the 1960 Independence Constitution and the 1963
Republican Constitution.
374
residual, the Supreme Court held in the case of Attorney General of Ogun State v. Alhaja
Ayinke Aberuagba1103 that the power of the Federal Government to impose Sales Tax can
be implied from the trade and commerce power of the National Assembly under item 60
of the 1979 Constitution. However, in 1986 when the Federal Military Government
enacted a uniform Sales Tax Decree1104 for the entire country, the administration was left
for the States while the revenue formed part of their Consolidated Revenue Fund of each
State.
The Federal Military Government introduced a federally administered Value Added Tax
(VAT) to replace Sales Tax under a revenue sharing arrangement whereby the revenue
from the tax was shared on the basis of 20 and 80 percent in favour of the States. As soon
as VAT proved to be a significant source of tax revenue, the Federal Military
Government altered the formula in its favour and included the Local Government
Councils in the sharing of the VAT revenue. While the replacement of State administered
Sales Tax with VAT has improved the revenue of the States, Lagos State in particular,
regards the basis of sharing the VAT revenue among the States as unfair. When all its
complaints to redress the situation proved abortive, it reintroduced its sales tax which is
being collected simultaneously with VAT thus imposing double taxation on the
taxpayers. Following the decision of the Court of Appeal which declared the Sales Tax
Law of Lagos State null and void,1105 Lagos State has finally invoked the original
jurisdiction of the Supreme Court to challenge the constitutionality of the VAT.1106 Since
the battle for supremacy between the Federal Government and States over VAT began,
1103
(1984) S.C. 20, (1997) 1 NRLR Part 1, p.51.
1104
No.7, 1986, Cap 399, Laws of Federation, 1990.
1105
See Attorney General Lagos State v. Eko Hotels Limited & 1 Or. 1 TLRN, 25.
1106
Suit No: SC/20/2008.
375
the Revenue Mobilisation Allocation and Fiscal Commission has, to the knowledge of
this writer done virtually nothing to address the problem especially in terms of
recommendation on the appropriate level of government to administer VAT and
constitutional amendments.
From the foregoing, one can safely conclude that the dynamism in the division of taxing
powers in Nigeria right from inception has always been on the control of the Personal
Income Tax and later Sales Tax. The Personal Income Tax was initially imposed and
administered exclusively by the Federal Government, later exclusively by Regions, later
established by regional laws in line with the principles established under the Income Tax
Management Act and currently imposed under a federal legislation and administered by
the States. As for Sales Tax, its evolution in Nigeria began with Regional Sales Taxes as
the Federal Government did not exercise its sales taxing power. States-administered Sales
Tax was however established under the Sales Tax Decree until the emergence of a federal
VAT in 1993. There are current forces to split the administration of VAT between the
Federal and States. If Lagos State succeeds in the suit pending before the Supreme Court,
VAT will become applicable only in the Federal Capital Territory, Abuja while the States
will be free to establish either Sales Tax or Modified VAT within their territories.
It is evident that the current scheme of division of taxing powers under the 1999
Constitution is heavily in favour of the Federal Government. Most of the significant taxes
such as the Petroleum Profits Tax, Companies Income Tax, Personal Income Tax, Capital
Gains Tax, Stamp Duties, Customs and Excise Duties are exclusively allocated to the
Federal Government.1107 While, writers are unanimous on the urgent need to decentralize
taxing powers to the States no one has really told us which of the existing federal taxes
1107
See items 16, 25, 58 and 59 of the Exclusive Legislative List of the 1999 Constitution.
376
should be ceded to the States. Our study of five federal countries reveals that Nigeria is
the only country which adopts a system of exclusive use of a tax handle by one level of
government. In a colloquial language, Nigeria has a system of “one tax, one
government”.
Since all these taxes were imposed under federal statutes, there is no appreciable degree
of diversity in the Nigerian tax system as one would expect in a federation. All the 36
States and the Federal Capital Territory and the 768 Local Government Councils in
Nigeria have a monolithic tax system as prescribed in the Taxes and Levies (Approved
List for Collection) Act.1108 This is in sharp contrast with the situation in the past when
the Northern Region derived the bulk of its tax revenue from direct taxation including
cattle taxes compared to the Southern Region where the bulk of its tax revenue was
derived from indirect taxes.
The major effect of this approach is that the level of government vested with power over
the most important taxes is able to generate more revenue at the expense of other
component units. Apart from the fact it is difficult to arrive at a sharing formula that will
satisfy all parties, research has shown that governments are less careful in utilizing
revenue that they do not raise.
The root cause of Nigeria‟s economic problems seems to be the reliance by the three tiers
of government on revenue from the Federal Account bulk of which is derived from oil.
Before this departure from the old path of financing the public sector through taxation,
governments, (at the federal, regional and local levels) though smaller compared to what
obtains today, were effective and more efficient; there was probity and integrity in the
1108
Act No. 21 of 1998, Cap T2 LFN, 2004.
377
workforce. The average standard of living was better. The spirit of nationalism was
generally higher and Nigeria commanded respect of other Nations as the emerging giant
of Africa. But as the country started relying more on revenue from oil and less on taxes,
corruption, mismanagement and all forms of maladministration started creeping into the
public sector. The disconnection between citizens and the States in terms of payment of
taxes affected the quality of political participation and leadership at all levels which
worsened the problem of development.
It is against this background that we recommend a decentralization of taxing power in a
manner which will allow the Federal and State Government to jointly make use of a few
broad based taxes under an arrangement that will bring more people into the tax net
without necessarily increasing the tax burden. Different models exist on a concurrent use
of tax base by the Federal and State Governments which include a relief method, a credit
method and surcharge or piggyback method. Each of these systems as explained in
chapter three of this work works in such a way to either totally remove or attenuate the
burden of taxation by two levels of government. For example, the credit system works by
crediting or deducting what has been paid to the lower levels of government either as a
credit or deduction. In this way, each local government and state government are able to
get direct contribution from the individuals and activities within their territory. The
system thus has an inbuilt incentive for the lower levels of government to maintain and
improve their tax effort. It is inevitable that under the system, some local governments or
states might be richer than the others. The strength of the recommendation is that at least
some local governments and states might be financially self sufficient while the surplus
of the federal government can be utilized in such a way to address the concern of the
378
poorer states and other problems of fiscal federalism. The design for the policy makers,
tax experts, legislators and draftsmen is to reflect and focus more on which of these
models will be most efficient in terms of the policy objectives of the governments.
7.1. Findings
This study has come up with the following major findings, among other things:
1. A study of the Constitutions of federal countries such as the United States,
Canada, Australia, India, Brazil and Nigeria reveals that the Constitution of the Federal
Republic of Nigeria, 1999 is the only Constitution without substantive provisions on
division of taxing powers. The fusion of taxing powers with legislative powers in section
4 and the Second Schedule to the Constitution makes it difficult to delineate with
reasonable certainty the scope and extent of the taxing powers of the Federal and State
Governments in Nigeria.
2. The systems of division of taxing powers adopted under different Constitutions in
Nigeria were essentially products of short-term socio-political and fiscal pressure and
bargaining between the Federal and Regional/State Governments. Consequently, taxation
has never assumed a strong role in the management of fiscal policies in Nigerian. This is
also true of the Independence Constitution 1960 and the Republican Constitution, 1963.
Rather, fiscal management in Nigeria has merely changed from one primary product-
based revenue to another (that is, from agricultural products to crude oil), making the
economy susceptible to fluctuation in the prices of crude oil in the international market.
379
3. The policy towards a uniform, albeit uncompetitive, tax system which was
introduced and reinforced during successive military rules formed the basis of the
division of taxing power under the Constitution of the Federal Republic of Nigeria, 1999,
a major factor which makes the framework unsuitable for a federal system in many
significant respects.
4. The attainment of the twin goals of decentralisation of taxing powers and
diversification of the revenue base through taxation will require a paradigm shift from the
current policy of exclusive taxation of a particular tax by a level of government to a
policy of concurrent use of a few broad-based taxes. Under the proposed scheme, both
the federal and state governments should be able to jointly utilise simultaneously the
most important taxes such as personal income tax and value added tax/sales tax for their
independent use. This framework, if well implemented, will address the concern of
double taxation and multiplicity of taxes and levies without resulting in extra burden on
the taxpayer beyond the current level.
7.2. Contributions to Knowledge
It is believed that the efforts made in this study will enrich extant literature by filling the
existing gap in the discussion of the principles of allocation of taxing powers in Nigeria
in the following significant ways:
1. To the best of the researcher‟s knowledge, this is the first Study to recommend a
paradigm shift from the current policy of exclusive use of tax bases by a level of
380
government to a policy of concurrent use of tax bases as a panacea for the much needed
objectives of decentralisation of taxing powers to the state governments and
diversification of Nigeria‟s revenue base from oil revenue.
2. To the best of the researcher‟s knowledge, the study is a pioneer legal writing
in Nigeria with inputs from economic literature and international perspectives.
3. To the best of the researcher‟s knowledge, the study has provided an in-depth
legal analysis of the constitutionality of some of the taxes introduced during the Military
government which may provide guidance to the courts in determining some of the cases
pending before them.
7.3. Conclusion & Recommendations
From the foregoing discussion, it can be seen that the techniques for the division of the
taxing powers of the federation under the 1999 Constitution is in many ways similar to
that of the 1979 Constitution. Generally, the taxing powers of each level of government
broadly follow the division of its legislative powers in the Constitution. Thus, a level of
government can impose taxes only in respect of subject matters within its competence.
The Federal Government has the exclusive power to impose Custom Duties, Excise
Duties, Stamp Duties, Personal Income Tax, Companies Income Tax, Education Tax, and
VAT and any tax on any of the subject matters contained in the Exclusive Legislative
List to the extent permitted by the Constitution. Notwithstanding the exclusive powers of
the Federal Government to impose all the above-mentioned taxes, the Constitution
381
authorizes the Federal Government, at its discretion, to share the administration of
Personal Income Tax; Capital Gains Tax and Stamp Duties with the State Governments.
Item D-7 of the Concurrent Legislative List, section 2 (2) PITD, section 43 (1) Capital
Gains Tax Act and section 4(2) of the Stamp Duties Act which provided the legal
framework for the delegation of the collection of those federal taxes by the State
Governments have been examined. We have also seen that the revenue collected by the
Federal Government from the personal income tax is paid into Federation Account
subject to the right of the Federal Government to retain its expenditure for collecting the
tax. Hence, to all intent and purposes, it can be said that the personal income tax, capital
gains tax and stamp duties tax are “state taxes” except that their imposition and
administration are wholly subject to federal laws.
We have also seen that, unlike the Federal Government, no taxing power is specifically
reserved for the States in the Constitution except the power to collect Personal Income
Tax, Capital Gains Tax and Stamp Duties in item D-7 subject to the terms and conditions
that may be prescribed by the Federal Government. The implication of this technique is
to vest the State Governments with residual taxing powers on any subject matters that is
not contained in the Exclusive Legislative List. While the taxing powers of the states
might appear to be bloated or impressive in theory, it is not so in practice. As it can be
seen from the example of Lagos State Government, the state‟s taxing powers have been
exercised, in practice, only in respect of taxes of lesser economic significance such as
betting duties, casino tax, and entertainment tax, among others. The relatively weak
taxing powers of the State Governments vis-à-vis that of the Federal Government must
382
have informed the arrangement whereby the revenue in the Federation Account is shared
among the three levels of government pursuant to section 162(2) 1999 Constitution.
The point has also been made that the Local Governments have no power to impose any
tax whatsoever by their own by-law. Their powers under section 7 and Schedule four to
the 1999 Constitution are limited to the collection and administration of taxes and rates as
may be prescribed by the enabling State‟s Law. Any exercise of power by a Local
Government in excess of the enabling State‟s Law or the Constitution is ultra-vires and
null and void.
Also, the validity of some existing tax Decrees and Laws have been considered against
the background of the provisions of the 1999 Constitution. It is submitted that the
Personal Income Tax Law, Cap 142 and Stamp Duties Law Cap 181 of Lagos State, 1994
are inconsistent with the provisions of the 1999 Constitution and therefore null and void
to the extent of their inconsistency. It was also argued that the aspects of the VAT
Decree relating to the intra state supply of goods and services are ultra-vires the powers
of the Federal Government based on the principle enunciated in the case of it Attorney
General of Ogun State v Aberuagba. Hence, the VAT Act as it is presently constituted is
null and void to the extent that imposes tax on intra-state supply of goods and services.
The Taxes and Levies (Approved List of Collection) Act,1109 on its own part, tends to
introduce a measure of constitutional rigidity into the taxing powers of the Federal and
State Governments by circumscribing all the levels of government to the taxes and levies
1109
No.21 1998 now Cap T2, Laws of Federation of Nigeria, 2004.
383
contained in the Schedule to the Act. A view has also been expressed that the Act is also
null and void to the extent of its inconsistencies with section 4 of the 1999 Constitution.
Taxes and Levies (Approved List of Taxes for Collection) Act 1110 has failed to curb the
problems of multiplicity of taxes and levies/illegal taxes at all levels of government in a
democratic dispensation whatever might be the utility during the military era. It is
predictable that the problems will be further worsen as each level of government strives
to improve its revenue in the wake of the ongoing global financial crisis unless there is a
conscious and deliberate intervention to guide the orderly development of tax policy, law
and administration.
The problem of multiplicity of taxes has lingered on because we have been applying the
wrong fiscal antidotes. The attempt to solve the problem has been mainly inspired by the
Federal Government without the cooperation of other levels of government. We seemed
to be trapped by the feeling that every problem can be solved only by federal might
forgetting that the Federal Government is not omnipotent - an attribute which only
belongs to God. There is a need for us to rethink the basis of the division of taxing
powers in Nigeria. For example, is the present system where a company pays its income
tax to the Federal Government to the detriment of the State and Local Government where
it is located an efficient structure? The reality today is that the States and Local
1110
Id.
384
Governments are attempting to take their own shares of the revenues of corporate bodies
through the back door in form of illegal taxes and levies.
Secondly, the various State Governments have failed to address the problems because
they are responsible for creating a situation which led to the financial desperation of their
local governments by withholding the revenue due to the Local Governments. Not only
that, some States have even usurped the taxes assigned to the Local Governments when
the Constitution requires them to delegate the administration of some States taxes to the
Local Governments. It is sad to note that a Development levy of just N100 is being
collected by the States. Without intending to play the devil‟s advocate, how then do we
expect the Local Government to survive in this kind of stifling fiscal environment?
It is instructive to note that the Federal Government is also contributing to the problem of
multiplicity of taxes through the imposition of Education Tax and Technology Tax as two
extra layers of taxes in addition to Companies Income Tax. The first layer of taxation of
income of companies in Nigeria is a tax of thirty per cent of the net profit of companies
under the Companies Income Tax Act. The second layer is a tax of two per cent of the
assessable profits of Nigerian companies under the Education Tax Act. The FIRS
initially yielded to the complaint of the Organized Private Sector that the Education Tax
really amounted to double taxation and proposed to abolish the Education Tax via the
Education Tax (Amendment) Bill. The third layer is a levy/fee/tax under the National
Information Technology Development Agency (NITDA) Act on the gross profit of digital
mobile operators and all telecommunication companies, pension managers, internet
385
service providers, cyber companies and all financial institutions, including insurance
companies whose income is above one hundred million naira (N100m).
Thus, the Companies Income tax is imposed on net profit, the Educational Tax is
imposed on assessable profits while the NCC levy/fee/tax and the new technology tax are
imposed on gross profits. These, in our view, are all variants of taxation of income under
different guises. These differences among the taxes, if any, are that between six and half a
dozen.
From the foregoing, curbing the problems of multiplicity of taxes and levies will require
drastic action by and cooperation of all the levels of government. In this regard, the
Federal and State Governments will have to put in place appropriate legal framework at
the State and Local Government levels to combat the problem. This writer is of the view
that an effective solution lies more at the State level. Furthermore, if a Governor is
sincere about curbing the problem of multiplicity of taxes and levies within his State let
him (i) make available to the local governments all the revenue from the Federation
Account, (ii) allocate to the local government councils in his State a proportion of the
State revenue as mandated by section 162(7) of the 1999 Constitution, (iii) adequately
fund the various agencies and department and (iv) ensure that the Ministry of Local
Government and the House of Assembly play their oversight functions very well on the
activities of the local government.
As Nigeria faces the challenges of development 50 years after its independence, this work
has revealed that serious thought must be spared on the arrangement of allocation of
taxing powers. In this regard, it is recommended as follows:
386
1. The Constitution should be amended to remove “taxation of income, capital gains
and stamp duties” from item 59 of the Exclusive Legislative List to pave way for state
legislations in these regards. Meanwhile the Personal Income Tax Law Cap P4 and
Stamp Duties Law Cap S10 of the Laws of Lagos State, 1994 should be repealed by the
Lagos State House of Assembly since the subject matters are under the Exclusive
Legislative List of the 1999 Constitution.
2. The VAT Act should be modified by the President, Commander in Chief of The
Federal Republic of Nigeria pursuant to section 315(4) of the Constitution or be amended
to exclude intra-state supply of goods and services that are within the residual powers of
the state government under the 1999 Constitution.
3. Similarly, the VAT Act should be modified by the Governor of each State
pursuant to section 315(4) of the Constitution or be amended to exclude inter-state and
international supply of goods and services that are within the exclusive legislative
competence of the Federal Government under the 1999 Constitution.
4. In doing these, it is recommended that the federal VAT should be imposed at the
wholesale and export stages while the State VAT/Modified VAT or Sales tax should
apply only at the retail stage. The States on their part must be prepared to cope with the
additional challenges of administering state VAT/sales tax by empowering their revenue
agencies with the necessary human and material resources on a sustainable basis. These
interventions might pave way for the concurrent use of consumption tax in Nigeria by
both the Federal and State Governments to help in the urgent task of decentralizing
powers to the States.
387
5. Taxes and Levies (Approved List of Collection) Decree no 21, 1998, Cap T2,
Laws of Federation, 2004 should be repealed by the National Assembly being
inconsistent with the provisions of section 4 of the 1999 Constitution.
6. Concerted effort should be made by the State Governments to fully harness their
fiscal potentials for generating revenue. A situation where the State Governments simply
wait for federal allocation and allow the machinery for generating revenue internally to
rust is not acceptable. Efforts should be made to block the existing loopholes in the
revenue generating structure of the States by empowering their relevant agencies through
the provision of necessary human and material resources and job motivation. State
governments may also explore the possibility of introducing new taxes such as
inheritance taxes and road taxes. Necessary cautions should, however, be taken in
designing the structure of the new taxes to ensure that the revenue objective is counter
balanced by other social and economic objectives such as redistribution of income.
7. State governments should provide the necessary legal framework and direction
for the local governments to improve their revenue collection effort. The rates or fee
collectible by local governments under certain state laws are ridiculous and laughable to
say the least and therefore in urgent need of review.
8. The final analysis, the three levels of governments should ensure that they keep to
their respective powers under the Constitution in the spirit of constitutionalism and
388
cooperative federalism. Any infraction of the constitution may be successfully
challenged in the law court either by an affected taxpayer or any level of government.
9. The Revenue Mobilisation Allocation and Fiscal Commission should as a matter
of urgency set up a multi disciplinary study group to further consider the various system
of division of taxing power which allow concurrent utilisation of some taxes and
recommend the most suitable for Nigeria. The outcome of the Study Group should then
form the basis of the constitutional review in this regard. In reviewing the Constitution, it
is suggested that specific section(s) should be inserted in the Constitution clearly
demarcating the taxes which each level of government could impose. The present
situation which lumps taxing power with legislative power and give the erroneous
impression that states do not have power to impose any tax is unsatisfactory. In this
regard, it is hope that this work will help to stimulate and deepen robust discourse
towards the adoption of an efficient and sustainable arrangement on division of taxing
powers along the line recommended in this work.
389
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