Flat tax without legislation: unconstitutionality of Fayose’s proclamation

The print media was awash on Tuesday, September 1, 2015 with reports of Gov. Ayo Fayose’s threat that no private school in Ekiti State will be allowed to commence school activities this Session unless it pays a tax of N150,000 and that anybody who buys one cow to be slaughtered for any ceremony will pay N1,000. It was further reported that the Governor vowed to shut four banks for ‘tax evasion’. Of all these issues, I intend to anatomise the issue of payment of N150,000 by each private school before the school will be allowed to re-open.

For private schools with large population of employees, payment of N150,000 may even be a blessing in disguise, especially if the monthly personal income tax remittance is above the N150,000 mark. The opposite will, however, be the lot of small and medium schools with low staff population. Each of such schools is now being compelled to cough out N150,000 without regard to what the actual remittance should be or ought to be. The implication of the Governor’s Proclamation is that a private school with, for example, 10 members of staff, at salaries varying from N10,000 to N50,000 must pay the same N150,000 in the manner of another school with 30 members of staff with salaries ranging from N15,000 to N80,000.

Flat tax has been defined by Tejutax at page 794 of her book, Tejutax Reference Book, Vol. 1, as a tax applied at the same rate to all levels of income. Flat tax means that everyone has to pay tax at just one and only one rate. In such a system, in place of a complex set of income tax brackets, a State declares a threshold above which all parties pay a fixed rate on all their income.

As at today, the Federal Government of Nigeria and its federating States apply the progressive system of taxation and not the flat tax system. This is why the system is classified as Pay-As-You-Earn (P.A.Y.E.). Paragraph 7 of Part II of the Second Schedule to the 1999 Constitution provides that:

In the exercise of its powers to impose any tax or duty on –

capital gains, incomes or profits of persons other than companies; and

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.

It was pursuant to this provision that the National Assembly made the Personal Income Tax (Amendment) Act, 2011 whose principal Act is the Personal Income Tax Act, Cap. P8, Laws of the Federation of Nigeria, 2004 (otherwise called “PITA”). PITA was actually enacted in 1993 and it is an existing law pursuant to Section 315(1)(a) of the 1999 Constitution.

Of equal relevance is Paragraph 8 of Part II of the Second Schedule to the 1999 Constitution, which provides that:

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 or duty is not levied on the same person by more than one State.

This provision makes it clear that the Act made by the National Assembly shall regulate the liability of the residents of a State to such tax in such a manner as to ensure that such tax is not levied on the same person by more than one State. This provision is intended to prevent multiplicity of taxes but much more than that.

Item 59, Part 1, Second Schedule to the 1999 Constitution, (which contains the Exclusive Legislative List) gives the National Assembly exclusive powers to legislate on taxation of incomes, profits and capital gains except as otherwise prescribed by this Constitution. The purport of these constitutional provisions is that the States are to enforce laws made by the National Assembly in relation to taxation of incomes, profits and capital gains.

A State is required to impose tax or levy with respect to any of the 25 taxes and levies contained in the Taxes and Levies (Approved List for Collection) Act (Amendment Order), 2015.

With respect to these 25 taxes and levies, Gov. Fayose’s proclamation is only related to income tax. Yours sincerely has shown that income tax cannot be charged arbitrarily; it can only be charged according to the relevant Act. I know as a fact that there is no law in Ekiti State, which makes it compulsory for each private school to pay N150,000 before resumption in a new session. Even if there is such a law, it will be unconstitutional because Section 1(3) of the 1999 Constitution provides that:

If any other law is inconsistent with the provisions of this constitution, this constitution shall prevail, and that other law shall to the extent of the inconsistency be void.

Taxes and levies cannot be charged by a rule of the thumb or by a Governor’s proclamation. There are guiding principles to taxation, which the State Governors and the Federal Government must imbibe if we want to have an equitable tax system. Let us consider the words of wisdom in the cases below:

“It is the law that the language of a statute imposing a tax, duty or charge must receive a strict construction in the sense that there is no room for any intendment and regard must be had to the clear meaning of the words. If the state claims a tax under a statute it must show that the tax is imposed by clear and unambiguous words, and where the statute is in doubt it must be construed in favour of the subject, however much within the spirit of the law the case might otherwise be, but a fair and reasonable construction must be given to the language used without leaning to one side or the order” Statement of law by Lord Atkinson in Ordmond Investment Co. v. Betts [1928] AC 143 at 162, adopted: per Ikpeazu J. in Aderawos Trading Co. Ltd. v. F.B.I.R. [1966] L.L.R. 196 at 200.”

“It is a general principle of fiscal legislation that to be liable to tax the subject must fall clearly within the words of the charge imposing the tax, otherwise he goes free. It is also for the State to establish that the charge prima facie extends to the subject matter sought to be charged: per Lord Halsbury L.C. in Tennant v. Smith (Surveyor of Taxes) [1892] A.C. 150 at 154, HL.”

A good tax system, therefore, should be part of the so-called democracy dividends. Ade Ipaye has outlined the essentials of a good tax system, in his book, Nigerian Tax, Law & Administration: A Critical Review, to include equity, certainty, convenience and administrative efficiency. Certainly, Gov. Fayose’s imposition of a new tax regime specifically for some citizens is not only discriminatory but uncertain.

According to the National Tax Policy,

State Governors are expected to play a similar role to that of the Presidency at State level. They would be responsible for the development of State Tax Policy which shall be complementary to the National Tax Policy. In addition, they are responsible for the enforcement of Federal and State tax laws in the States and carry out general oversight functions on tax and revenue authorities at the State and Local Government level. State Governors would be required to provide guidance and direction to the State Ministries of Finance, the State Boards of Internal Revenue Service and other relevant revenue generating agencies involved in tax administration in the States. They should also ensure adequate funding and autonomy is provided to these agencies in the discharge of their functions.

State Governors, as stakeholders in the Tax System, have roles and responsibilities, among which are:

adherence to Constitutional Federalism and the Rule of Law at all times;

strict adherence to Constitutional provisions relating to fiscal matters;

strict adherence to the provisions to tax legislation in the administration of taxes;

commitment to the enforcement of tax laws in a legal Constitutional manner;

commitment to the creation and sustainable development of a stable, secure and workable tax system for Nigeria;

The intendment of this piece is, therefore, not to encourage tax evasion or to avoid tax remittance, but to discourage State Governors from making tax laws – whether discriminatory or not – by executive fiat. This is my little contribution to tax law jurisprudence and I hope it will be useful to not only Ekiti people but to Nigerians as a whole.

Chukwuemeka Eze, FCTI, is a Lagos-based lawyer and taxation consultant. He was Chairman of the Chartered Institute of Taxation of Nigeria (CITN), Ikeja District Society between 2009 and 2011. He is currently the Legal Adviser of the West African Union of Tax Institutes (WAUTI).