It is no longer news that the Federal Government of Nigerian (FGN) is facing an enormous revenue challenge to finance its operations, especially as oil revenue continues to dwindle. Unfortunately, there seems to be no end in sight for the fall in oil prices as more developed countries continue to gravitate towards green energy in place of fossil fuel.
The FGN therefore faces an urgent challenge to find more creative measures to increase its revenue generation, and to this end, has identified stamp duty as its new “black gold” for revenue generation. Is stamp duty really a new development in Nigeria, and why has it generated so much furore in recent years?
The Stamp Duty Legend
Stamp duty had been in legal existence in Nigeria many years before the country attained independence in 1960, but it remained largely unknown to the majority of the populace, including accountants, the business community, tax professionals, and indeed the tax authorities. While the law was arguably not dormant, its provisions were largely not enforced. The modest semblance of enforcement in about six decades related to the registration or authorization of companies’ share capital with the Corporate Affairs Commission, perfection of land title documents at the relevant Ministry of Lands, and more prominently, for the presentation of documents in law courts as evidence in trials. Accordingly, many people have wrongly held the view that the principal reason for paying stamp duty on an instrument is to allow its admissibility in court proceedings. Conversely, stamp duty is a civil obligation that is legitimately backed by subsisting legislation in Nigeria and non-compliance attracts penalties, including possible imprisonment.
Stamp duty was officially introduced into Nigeria by the British colonial government through the Ordinance 41 of 1939, and was later formalized as the Stamp Duties Act No. 5 of 1939 (SDA or the Act) which commenced on April 1, 1939. The SDA has been amended many times, with the most recent amendments passed through the Finance Act, 2019. Before the Finance Act, 2019, the last amendment to the SDA was in 1956. The enabling law is currently codified as Stamp Duties Act, Chapter S8 Laws of the Federation of Nigeria, 2004. The SDA imposes duty on a very wide range of instruments and it sets out the rates applicable to each dutiable instrument in its Schedule, subject to exemptions contained therein.
Manner of Stamping
The SDA provides that duty on qualifying instruments may be denoted either through the use of impressed (or embossed) stamps or by adhesive stamps. Impressed stamps are typically made on documents through the use of die or embossed into the document. On the other hand, the SDA provides that postage stamps may be used for duty denoted by adhesive stamps. Examples of documents to be denoted by adhesive stamp are bills of exchange, check leaflets, charter party, contract notes, lease agreements less than one year, notary acts. Further, embossed stamping applies to instruments such as conveyances on sale, insurance contracts, share capital registration or increases, loan capital, in accordance with the SDA.
More recently, the Finance Act, 2019 introduced electronic stamping by replacing the existing definition of “stamp” with a new one: “an impressed pattern or mark by means of an engraved or inked block die as an adhesive stamp or an electronic stamp or an electronic acknowledgment for denoting any duty or fee.” Consequently, the Finance Act, 2019 has widened the scope of dutiable instruments to now include both written and electronic documents for stamp duty purposes.
Forms of Stamp Duty Rates
Generally, embossed duties are denoted by ad valorem rates while adhesive duties are marked at fixed rates. Ad valorem rates are specified percentages that are applied on the value of consideration in a qualifying transaction while fixed rates are flat rates per transaction or contract/agreement. Although specific stamp duty rates are mentioned in the body of the SDA for some instruments, the Schedule to the SDA contains a more comprehensive list of other dutiable instruments and their applicable rates. For proper understanding of relevant rate for each dutiable instrument, however, the Schedule must be read along with the body of the Act.
Burden of Stamp Duty
Generally, there is no clarity in the SDA regarding the party that should bear the burden of paying stamp duty on qualifying transactions. Nonetheless, inference can be made from the SDA provisions regarding the persons that are liable to penalty for not stamping a qualifying instrument in order to determine the party that is obliged to bear the stamp duty burden. For instance, the lessee in a lease arrangement is liable to penalty for not stamping the agreement, also a transferee in an arrangement for a conveyance on sale, covenantee in a covenant arrangement, etc. Based on the above, a reasonable deduction will be that the “beneficiary” or the person making a payment in a contractual arrangement will be liable to bear the burden of stamp duty in a qualifying transaction.
Nonetheless, the relevant government authority may appoint the counter party in a transaction to collect the stamp duty from the responsible party and remit the amount collected to the government for ease of administration. This is called the “power of substitution” as enshrined in the Federal Inland Revenue Service (Establishment) Act, 2007.
Authority to Collect Stamp Duty
The Nigerian Postal Service (NIPOST) has historically been active in the sale of postage stamps and accounting for the revenue accruing on stamp duty on such transactions to the FGN. This function may have been performed based on Section 4 of the SDA that empowers the Federal Government as the only competent authority to impose, charge and collect duties upon qualifying instruments executed between parties involving a company.
Predictably, therefore, the recent efforts by the Federal Inland Revenue Service (FIRS) to commence enforcement of the SDA generated controversy between the two agencies of the FGN. This was, however, laid to rest (at least statutorily/legally) by the Finance Act, 2019 amendment to Section 4 of the SDA, to the effect that the FIRS is now the only competent authority to impose, charge and collect stamp duty on qualifying transactions involving one or more companies. (Consequently, it was disquieting that the NIPOST recently challenged the FIRS on social media with regard to the legitimate authority to collect stamp duty on behalf of the FGN.)
Resuscitation of Stamp Duty and Dispute over Rates
Following the continuous decline in oil revenue and the need to achieve its revenue target, the FIRS commenced enforcement of the provisions of the SDA in 2016 by focusing on insurance businesses in Nigeria. The tax authority issued several notices of non-compliance to insurers in respect of the policies they had issued for life and non-life businesses in the previous five years.
However, the FIRS adopted stamp duty rates contained in the Joint Tax Board’s (JTB’s) Harmonization Schedule which was created in 2002 purportedly to amend the rates specified in the SDA, given that the SDA rates are arguably obsolete. Unsurprisingly, the insurers pushed back through their trade association and got the FIRS to rescind its decision and commit to adopting specific rates provided in the SDA. This formed the basis upon which several assessments were resolved between the insurance companies and the FIRS.
Interestingly, the FIRS in its recent publications to signal its commitment to a full enforcement of the provisions of the SDA, reverted to the rates contained in the JTB Schedule (and other rates that are alien to the SDA) and this, to all intents and purposes, contradicts the provisions of the law. For instance, while the SDA provides a graduated set of rates of 0.78%, 3% and 6% for lease arrangements of one year and above but less than seven years, seven years and above but less than 21 years, and 21 years and above, respectively, the FIRS’ publication indicates a flat rate of 6% across the board. Although the FIRS has subsequently reversed itself via a social media post, it is noteworthy that the earlier publication has yet to be withdrawn.
While the SDA rates, particularly the fixed duty rates, are clearly outdated, the only competent authority to amend the SDA is the National Assembly or the House of Assembly of a State, based on Section 116 of the Act, and not the JTB or the FIRS. The FIRS missed an excellent opportunity to have pushed for a revision of the SDA rates through the recent Finance Act, 2019 and should abide by the current rates in the Act until a legitimate amendment is passed to the SDA.
Legacy Stamp Duty Liabilities
Given the paucity of knowledge/information about the compliance obligation for stamp duty over the years, and the non-enforcement of the law for about six decades, the majority of the parties that executed dutiable instruments during that period did not charge or account for stamp duty.
Statutorily, the FIRS has the power to enforce recovery of stamp duty for the five previous years by conducting an audit to ascertain the amount due. However, the principle of legitimate expectations may require the FIRS to only enforce stamp duty collection on a going-forward basis in order not to punish companies for duty not accounted for over the period. Moreover, the companies may not have been the parties statutorily responsible for bearing the burden (as in the case of insurance companies), paying or remitting the stamp duty, except where the tax authority had previously appointed such companies as its collection agents.
There is still a long way to go in order to promote a culture of voluntary stamp duty compliance in Nigeria and the FIRS must be at the vanguard of promoting this. A critical step towards achieving that objective is to work with all relevant stakeholders and the National Assembly to repeal and re-enact the SDA. The focus should be to narrow the list of dutiable instruments to a realistic number in line with global best practice, revamp the rates to reflect contemporary realities, and clearly specify the parties that are responsible to bear the burden and those responsible for accounting for the duty in each situation.
The FIRS should also ensure adequate stakeholder information with the objective of promoting voluntary compliance and reducing the cost of stamp duty administration in the long run. In amending the law, the National Assembly must further ensure that the new system is not regressive in nature. It should consider granting relevant exemptions to protect disadvantaged members of society and exclude critical or essential services, transactions or arrangements.
In addition, parties to contracts and professionals must upgrade their knowledge of the SDA in order to ensure prompt compliance and avoid penalties for default.
Overall, the government must ensure effective accountability for every duty collected and the revenue must be utilized to promote the general benefit of society.