CHAPTER TWO PERSONAL INCOME TAX JURISDICTION

             2:1          INTRODUCTION

 The personal income tax is a dynamic phenomenon due to its use as an instrument of fiscal policy.1 By its nature, the controversy over which tier of government should have authority to legislate on it keeps recurring in Nigerian fiscal arrangement.  The views being expressed by commentators on this significant tax range from one extreme to the other.

 On the one hand, it is canvassed that the incidence of benefits from personal income tax is nationwide.  As such, the jurisdiction of the federal government to levy it is borne out of the need from time to time, for the federal government to intervene to correct the inefficiency of the economy.2 Thus, Professor Fajana 3 in his view states that:

…the pursuit of macro economic objectives such as equitable income redistribution and economic stabilization, and the need to coordinate the promotion of economic growth at the national level have necessitated the allocation of the above revenue source (i.e. personal income tax) to the federal government … if states were to be given jurisdiction over… it ,the effectiveness of this tax

as 

1              Adesola S.M.-Tax Laws and Administration in Nigeria. O.A.U.Press, Ile Ife, 1998, P.2.

2              Ibid P.1

3.                     Fajana. O. – Three-and-half decades of Fiscal Federalism in Nigeria.  In :J Elaigwu & R. Akindele (ed) Foundations of Nigeria Federalism NCIR Abuja 1996 P.109.

instrument of macro - economic management will be diminished  by the likely unhealthy  inter-state tax

competition4

In essence, to ensure the efficiency and economy of tax administration and to sustain the economic integrity of the entire country, it is necessary to allocate the jurisdiction to levy the personal

income tax to the federal government.

 On the other hand, the antagonists of the allocation of absolute jurisdiction to levy personal income tax to federal government canvass a formidable objection.  In their view, the overall federal jurisdiction on personal income tax erodes the powers of state government under the constitution to initiate and manipulate tax polices in areas where each state tax authority has exclusive or concurrent tax jurisdiction.5 The arrangement may make a huge joke of the continued existence of state government in specified fields including taxation.6 Apart from this, under the 1960 and 1963 constitutions of Nigeria, personal income tax was not under the exclusive Legislative List on which only the Federal Government can legislate.  It was equally not made an item under the concurrent legislative list.  As such, it was made an exclusively residual matter.

But under the 1979 constitution,7 personal income tax was removed from state authority to levy and it was transferred to the exclusive jurisdiction of the federal government.  Consequently, the revenues that can be secured by the state 

1. Ibid P.109
2. C.S. Ola-Income Tax Law for Corporate and Unincorporated Bodies in Nigeria, Heinemman Education Books (Nig) Ltd, Ibadan, 1984, P.54.
3. Ibid P.54
4. The Position is the same under the 1999 Constitution.

governments are insufficient to provide not only for their immediate needs but also for a reasonable degree of expansion.8 Therefore, considering the significance of personal income tax in revenue generation, the sources of internally generated revenue available to

state governments is drastically reduced.

     This definitely foists a situation of excessive dependent on statutory allocations from federally collected revenue on the state governments for funds to discharge their socio-economic responsibilities.  And as a matter of fact, the statutory allocation is observed to be an unpredictable source of revenue.  Behind this view

is Professor Ayua who asserts that:

The federal dominance of the inter-governmental fiscal relations if not properly controlled will make the state completely dependent financially and thereof generally, upon the federal government, thereby denying them of their autonomy in matters that directly concerns them.  This is not a recipe for political unity particularly in a developing heterogeneous society like Nigeria where there is differential socio-economic development with the federal government apparently lacking any definitive policy to bring

about even development. 9

8. Ayua I.A. – The Nigerian Tax Law, Spectrum Law Publishing, Ibadan, 1996 P.25 9. Ibid P.25.

          A corollary of the above assertion is that the federal dominance of the inter-governmental fiscal relations has some adverse implications for the economic and political development of the country.  It can result in making the federal government so powerful to

bend the will of the state governments to its own.10

       In this chapter therefore, the thesis aims at a proper balance between these somewhat conflicting considerations.  The jurisdiction of the personal income tax in Nigeria will be examined with the view to strike a balance between the states and Federal fiscal autonomy over personal income tax.  Also, a survey of the impact of freedom of trade and commerce on personal income tax shall be considered with the hindsight that there is need for a more rational and equitable allocation of tax jurisdiction among the various levels of government

in Nigeria.

                 2.2                AN EXAMINATION OF PERSONAL INCOME TAX JURISDICTION

  The legal history of personal income tax in Nigeria may be traced to the enactment of the Direct taxation ordinance 1940.11  Under the ordinance, tax policy appeared to be based on a choice between bureaucracy (tax administration by officials) and the democratization of the tax system (the introduction of politicians as representatives into the tax system) and the former was preferred and practised.12

1. 10.           Nwabueze  B. – The Presidential Constitution of Nigeria, C. Hurst  & Co Publishers Ltd, London 1982, P. 40
2. 11.           No. 4 of 1940 Cap 54.  See also Ola C.S. op. cit P. 9
3. 12.           Ola C.S op. cit P. 9

Prior to independence in 1960, the three regions (as Nigeria was previously constituted) had various legislations for direct and indirect personal taxes resulting in differential income tax burdens throughout

the country. 13

Personal Income Tax, being one of the major sources of revenue of governments in Nigeria is beset by controversies.  History had it that it generated a contentious argument in 1957 constitutional conference in London. As a result of that a two-man fiscal commission was established in 1958 under the Chairmanship of Sir Jeremy Raisman. 

The terms of reference of the commission, inter-alia, requires it to have regard to the desirability of securing that the maximum possible proportion of the income of regional governments should be within the exclusive jurisdiction of those governments to levy and collect.14

         In considering the arduous task before it, the commission was confronted with a serious consideration of the possibility that the terms suggested, as it has brought some problems in its train.  The

commission’s report reads, in part, as thus: 

Our terms of reference require us to have regard to 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, and at the same time to take into account, considerations of national and inter-regional policy.  It is in the light of both these aspects 

13. Philips A.O. – Nigeria’s Tax Effort (1970) B.T.R. 180 @ P.186 quoted in Ayua I.A. op. cit P. 29 14. Report of Fiscal Commission, 1958 Para 23 P.18

that we are asked to examine the  present division of powers to levy taxation in the Federation and the present system of allocation of revenues and to make recommendations.  The primary desideratum being posed as a high degree of regional fiscal autonomy, the limitations on achieving that target are presented as being, first practicability…; second, national policy… and finally inter-regional policy, which implies the maintenance of  harmonious relations between the Regions, the avoidance of causes of friction, and above all, the preservation of the free movement of trade across the regional boundaries. 15

 In giving the regions exclusive jurisdiction to impose personal income tax on individuals, the commission identified three resultant problems.  First, there was the danger of regional income tax law conflicting with double taxation arrangement between Federal Government and foreign governments.  Second, there was the danger of internal double taxation.  Third there was the desirability of a careful definition of which income should be subject to Federal government’s jurisdiction and which one to be placed under the state government’s jurisdiction. 16  If the terms suggested to the commission were achieved, it means the regional governments will have exclusive power to fix rates of tax, personal allowances, and to decide upon its own, method of assessment and administration.