3 days Ago By Oluyemi Ogunseyin
The Federal Government on Monday moved to calm the nerves of governors and stakeholders who are worried about the proposed tax reform bills, particularly the new derivation-based model for Value-Added Tax (VAT) distribution. The government assured that the reforms will benefit all states fairly and are not targeted at any region. Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, Taiwo Oyedele, made the clarification at an interactive session on the proposed bills organised by the House of Representatives on Monday.
President Bola Tinubu, in September, transmitted four tax reform bills to the National Assembly for consideration, following the recommendations of the Presidential Committee on Fiscal and Tax Reforms headed by Taiwo Oyedele for the review of existing tax laws. The bills are the Nigeria Tax Bill 2024, which is expected to provide the fiscal framework for taxation in the country, and the Tax Administration Bill, which will provide a clear and concise legal framework for all taxes in the country and reduce disputes. Others are the Nigeria Revenue Service Establishment Bill, which will repeal the Federal Inland Revenue Service Act and establish the Nigeria Revenue Service, and the Joint Revenue Board Establishment Bill, which will create a tax tribunal and a tax ombudsman.
The executive bills have, however, not gained the support of state governors who called for their withdrawal to allow for more consultation; a proposal rejected by President Tinubu. Specifically, the Northern Governors Forum, chaired by Gombe State Governor, Muhammed Inuwa Yahaya, rejected the derivation-based model for Value-Added Tax (VAT) distribution proposed in the new tax bill. Part of the proposal in the new bill changes the sharing formula of VAT, reducing the federal government’s share from 15 percent to 10 percent.
However, the bill includes a caveat that the allocation among states will consider the derivation principle, a proposal that was rejected by the Northern Governors Forum. Currently, under Section 40 of the VAT Act, VAT revenue is allocated 15 percent to the Federal Government, 50 percent to the states and FCT, and 35 percent to local governments. Briefing lawmakers and stakeholders, Oyedele argued that the proposal would only ensure efficiency and give more revenue to states where goods and services are consumed.
Explaining the principles behind the bills, Oyedele said the proposed legislations would do away with the nuisance of very low revenue yield, high cost of collection, and the ultimate burden on the poor and small businesses. He said the bills would allow the government to focus on high revenue-yielding taxes that are broad-based and relatively easy to collect, and ensure that taxes and levies imposed on the same or substantially similar tax base were merged. “There is no negative thinking about any region or anything,” he said.
Oyedele explained that the current VAT law provided that the principle of derivation of not less than 20 percent shall be reflected in the distribution of the allocation among states and local governments. He argued that the idea that derivation should be based on the location of VAT remittances does not reflect true derivation by each state due to the headquarters effect. In the proposed law, Oyedele said Section 77 of the amendments provided that “Notwithstanding any formula that may be prescribed by any other law, the net revenue accruing by virtue of the operation of chapter six of the Nigeria Tax Act shall be distributed as 10 percent to the Federal Government; 55 percent to the State Governments and the Federal Capital Territory; and 35 percent to the Local Governments.
He noted, “Provided that 60 percent of the amount standing to the credit of states and local governments shall be distributed among them on the basis of derivation.” Section 22(12) further noted that “For the purpose of attribution, any return under this section shall provide details of derivation of taxable supplies by location in a manner prescribed by the Service.” He, however, explained that five percent of the total amount available for distribution to states shall be applied to ensure that no state receives less than the amount it would have received under the distribution formula as contained in the repealed VAT Act LFN 2004.
Oyedele added that Nigeria’s economy would be headed for trouble if states are allowed to collect VAT. Recalling previous efforts of some states who challenged the legality of the federal government collecting VAT, Oyedele expressed concerns that allowing states to collect VAT could lead to a chaotic tax system that would harm the economy. VAT collection has been a contentious issue for years between the federal government and the states.
Some states have previously challenged the legality of the federal government collecting VAT. The Federal High Court in Port Harcourt, Rivers State, in 2021 issued an order restraining the Federal Inland Revenue Service (FIRS) from collecting value-added tax (VAT) and personal income tax (PIT) in Rivers State. Rivers State argued that the FG’s powers to tax were limited to stamp duties and the taxation of incomes, profits, and capital gains, stressing that the power to administer VAT must be delegated to a state agency.
But while providing clarification on the derivation-based model for Value-Added Tax (VAT) distribution proposed in the new tax bill, Oyedele said states should stop being under the illusion that they would make more money when they collect VAT. Oyedele explained that VAT was introduced in Nigeria in 1993 by the VAT Act No. 102 of 1993 as a replacement for the sales tax.
He said despite that sales tax was collected by the state governments at that time, there was no meaningful progress. Oyedele explained: “Some states believe that if they can make VAT a state thing, they will make a lot of money. We all know that states like Rivers State went to court.
Lagos State has been to court so many times, and Lagos has a VAT law. Rivers too has a VAT law. When I read those VAT laws, my heart broke.
Those VAT laws are worse than when we introduced VAT in 1993. “In 1986, the military introduced sales tax. Sales tax was collected by states.
Five years later, in 1991, no progress. They were struggling. Then the military set up a committee and that committee considered and said VAT is a better consumption tax for Nigeria but can’t work as state tax, it has to be collected centrally.
“So if there is any state that is under the illusion that they will start doing VAT at the state level, they will lose more than half of what they are getting now. When states start collecting VAT, all of us will be in trouble.” However, after his presentation, Rep.
Ahmadu Jaha (APC, Borno) and Yusuf Adamu Gagdi (APC) raised concerns about the VAT distribution formula proposed in the new tax bill. Noting that this is not the right time to introduce such legislation, Jaha observed that states which are in crisis and not economically viable might be cheated in the proposed arrangement. “There are states across the federation that are not economically viable.
You are aware that a substantial number of places are affected by crisis and, as I am speaking, about 85 percent in my community are not residents in the community. Some are in Cameroon and other places due to the crisis. So, how can you identify VAT based on consumption across the country?” Gagdi, on his part, stressed the need to address issues of vulnerabilities.
“We have to make laws to be fair to all parts of the country,” he stated. Babajimi Benson, a member representing Ikorodu federal constituency, said the legislation might be injurious to Lagos. “Currently, Lagos generates 40 percent of VAT.
If we are not using this anymore, states not generating might have a larger share,” he queried. Responding to the concerns, Oyedele assured that no state will lose out if the bills are passed. “This is not about one state losing and another benefitting, it is about doing the right thing.
Every state will benefit. Even if your state is the least developed in Nigeria and we implement this proposal, there will be uniformity in taxes,” he said. Earlier, Speaker Abbas Tajudeen, however, said the House was yet to take a definitive position on the bills.
The Speaker lamented that despite being Africa’s largest economy, Nigeria still struggles with a tax-to-GDP ratio of just six percent—far below the global average and the World Bank’s minimum benchmark of 15 percent for sustainable development. He said the proposed legislations would be diligently scrutinized in the best interest of Nigerians. The Speaker said the four tax reform bills represent critical proposals from the executive to expand Nigeria’s tax base, improve compliance, and establish sustainable revenue streams for the nation’s development.
He explained that the purpose of the interactive session is to provide members with a comprehensive understanding of the proposed bills and deepen their appreciation of their provisions, commence constructive dialogue on contentious or controversial areas, and build consensus. He said the interaction will help identify areas that need amendment, clarification, or improvement, as well as consider the compatibility of these bills with the 1999 Constitution (as amended) and other extant laws. The Speaker said tax reforms form part of the provisions of the House Legislative Agenda because of their central role in achieving sustainable economic growth and development.
He stressed that in every modern state, taxes are the bedrock of public revenue, providing the resources required to deliver education, healthcare, infrastructure, and security. This is a challenge, he said, that must be addressed if the country..
