By Sam Otuonye and Charles Olewezi
Imo, Zamfara, Abia, Kebbi, Bauchi – top losersLagos, Rivers, Delta, FCT, Kano – top gainersOne of the major policies of the President Bola Tinubu’s administration is to reform the tax system to make it efficient, equitable and of international best practices.
Consequently, in July 2023, the President approved the establishment of a committee on fiscal policy and tax reforms and appointed Taiwo Oyedele, a tax expert at PricewaterhouseCoopers (PwC), an internationally recognised Audit and Rating firm, as chairman.
Four months after its inauguration, the 38-member committee introduced 20 policy recommendations, tagged, “quick wins,” because they were meant to be implemented immediately. The panel later proposed the Economic Stabilisation Bills (ESBs) comprising four documents: the Nigeria tax bill, the Nigeria tax administration bill, the Nigeria revenue service establishment bill, and the joint revenue board establishment bill. While the ESBs were approved by the federal executive council (FEC) on September 23, Tinubu had asked the national assembly to consider and pass the four bills.
New National Star has taken a dive into the deep of the seemingly controversial bills if passed into law as it affects states and regions. While some states and regions would make gains others would count losses.
Some states which hitherto used to get large chunk of the total tax revenue, especially the Value Added Tax (VAT). This is because the sharing formular for VAT seems to favour certain states and regions of the country more than the others despite the fact that only a few states actually generate over 70% of the VAT revenue. This is why the bills have received stiff opposition from some states especially in the Northern region.
A critical analysis of the old sharing ratio and the new one for VAT would reveal the lopsidedness of the revenue system in favour of a few states and to the detriment of the actual States from where the revenues are generated.
In the current VAT revenue-sharing formula, the federal government takes 15 per cent, states get 50 per cent while 35 per cent goes to the local governments. Previously, States normally used the 50:30:20 sharing ratio — 50 percent for equality, 30 percent for population, and 20 percent for derivation. However, the bill proposes a different sharing formula that states thus:
“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 follows: (a) 10% to the Federal Government; (b) 55% to the State Governments and the Federal Capital Territory; and (c) 35% to the Local Governments. Provided that 60% of the amount standing to the credit of states and local governments shall be distributed among them on the basis of derivation,” the bill reads.
This section of the bill raises the VAT derivation from 20 percent to 60 percent as it intends to make more money available to states “fairly and equitably”.
Under this proposal, according to Oyedele during a stakeholders engagement session with Chief Financial Officers (CFOs), states will use the sharing ratio of 20:20:60 — equality, population, and derivation — if the bill is passed. This means states that have been generating little but getting much will now get little based on the 60% derivation principle of sharing. This no doubt will greatly distort the status quo but reward hardworking states.
For instance, looking at the VAT revenue generated by the States of the federation for August 2024 assuming the tax bills are passed by the National Assembly, would throw up possible losers and Gainers.
Below is the full list of the VAT generated
in states and FCT across Nigeria in August 2024
S/N
STATE
AMOUNT IN NAIRA
1
LAGOS
249.77B
2
RIVERS
70.54B
3
OYO
20.11B
4
FCT
18.17B
5
DELTA
13.09B
6
BAYELSA
7.12B
7
KANO
4.65B
8
AKWA IBOM
4.49B
9
ANAMBRA
4.28B
10
EDO
4.05B
11
EKITI
3.66B
12
BORNO
3.00B
13
KWARA
2.89B
14
ADAMAWA
2.59B
15
PLATEAU
2.58B
16
BENUE
2.56B
17
GOMBE
2.55B
18
KOGI
2.43B
19
KADUNA
2.03B
20
EBONYI
1.90B
21
TARABA
1.88B
22
SOKOTO
1.84B
23
OSUN
1.81B
24
OGUN
1.74B
25
NIGER
1.73B
26
YOBE
1.71B
27
KATSINA
1.68B
28
JIGAWA
1.59B
29
NASARAWA
1.47B
30
ONDO
1.45B
31
ENUGU
1.08B
32
CROSS RIVER
1.08B
33
BAUCHI
691.28M
34
KEBBI
665.17M
35
ABIA
663.42M
36
ZAMFARA
432.80M
37
IMO
235.41M
TOTAL
444.20B
Losers (By States)
From the above table, states like Imo, Zamfara, Abia, Kebbi and Bauchi, which generated less than a billion naira each will get the least share of the VAT revenue based on the 60% derivation principle. Also, states that generated less than two billion naira may not get much going by the same 60% derivation formular. They include Cross River, Enugu, Ondo, Nasarawa, Jigawa, Niger, Katsina, Yobe, Ebonyi, Taraba, Sokoto, Osun and Ogun states.
According to a report by the Nigerian Bureau Of Statistics (NBS), between January and October 2024, Imo State contributed N3.33 billion but received N57. 22 billion as its VAT share. Abia contributed N6.50 billion but received N51.59 billion in the period. Cross River State followed with a total contribution of N7.17 billion and VAT receipts of N51.97 billion. Kebbi State followed with a total contribution of N7.46 billion and receipts of N53.94 billion. These states are at the bottom of the VAT contribution ladder but received VAT revenue even more than states that contributed more. All these will change once the tax reform bills are passed.
Losers (By Regions)
From the table above, a record of ten Northern states contributed N13.69bn to VAT pool but were allocated N59.17bn in August 2024. This has always put the Northern region at an advantage above its Southern counterparts which interestingly generates the highest VAT revenue. This is however about to change with the introduction of the tax reform bill. The Northern region with the exception of states like Kano, Adamawa and Borno will definitely suffer loss.
Loser by re-allocation and consumption principle (Lagos)
In the old sharing formular, all the revenues from companies whose headquarters are based in Lagos are usually allocated to Lagos state as the place of derivation. Examples abound in the banking and telecommunications industries. These revenues help shore up the Lagos share from the old 20% derivation principle.
However, under the new proposed tax bill, VAT from companies with Head offices and branches will no longer be treated as such but will be attributed to the place of consumption. This will no doubt deprive Lagos of some TAX revenue it hitherto was enjoying by housing most company’s Head offices.
Gainers (By States)
Despite the fact that adjustments will be made on the issue of companies which have Head offices and branches for TAX attribution purposes, Lagos will still benefit from the new 60% derivation principle because most companies have considerable presence in the state. This also applies to Rivers, Delta, FCT, and Kano. These states are the top gainers of the Tax reform bills in terms of the proposed sharing formular.
Gainers (By regions)
An analysis of VAT collection and distribution on a regional baseline between January and October 2024, according to the NBS shows that states in the South-West region contributed N2.499 trillion to the nation’s VAT pool but received N685.91 billion. The South-South region contributed N887.57 billion but received N441.78 billion. This will definitely change and the regions (South West and South South) will begin to get more.
Opposition mounts
Despite the good intentions of the bills, they have received stiff opposition from northern elites under the umbrella of the Northern States Governors Forum (NSGF) — with the National Economic Council (NEC) asking Tinubu to withdraw them for further consultation.The president has however refused to withdraw the bills which have now scaled through the second reading at the National Assembly.
Governor Abdullahi Sule of Nasarawa State has expressed concerns about the proposed tax reforms bill, stating that his administration may not be able to sustain lofty programmes that can touch the lives of the poor and vulnerable in the state.
He said his administration is at the forefront of the current debate against the tax reforms initiated by President Bola Ahmed Tinubu because Value Added Tax (VAT) is responsible for 60 percent of Nasarawa State’s monthly federation allocation.
“In Nasarawa State, the VAT has always contributed over 60 percent of our FAAC allocation. You can understand why Nasarawa is also at the forefront in the issues of VAT. We are not doing it to antagonize anybody. We are not doing it to make anybody look bad. We are doing it because we believe that even some of these things that we are doing to touch the lives of the vulnerable would be affected the moment the VAT is affected,” he stated at a forum in Lafia recently.
The Chartered Institute of Taxation of Nigeria (CITN) while endorsing the proposed tax reform bills however, advised the Federal Government to drop the derivation aspect in order to ensure the success of the reforms.
The President of the Institute, Mr. Samuel Agbeluyi, gave the advice at a media forum in Lagos recently, saying, “If the derivation principle would pose a problem, then it can be dropped as we cannot throw away a baby with the bad water”.
The Governor of Borno State, Prof. Babagana Zulum, has raised the alarm that the tax bills will further pauperise the northern states.
Speaking during an interview on a national television, Zulum doubled down on his opposition to the proposed legislations.
Similarly, the lawmaker representing Borno South Senatorial District in the National Assembly, Ali Ndume, has criticised the proposed tax reform bills, stating they are “dead on arrival.”
Ndume expressed the strong sentiment among Nigerians against new tax initiatives, particularly in light of the ongoing economic challenges facing the nation.
“The governors and traditional rulers have said that the bill is not good. So, the best course of action is to withdraw it immediately.
“Right now, our people don’t want the VAT bill; they don’t even want to hear about it. That is why we are going to make it dead on arrival,” he stated.
The South-East Caucus in the Senate has joined the growing calls for broader consultations on the Tax Reform Bills currently before the National Assembly.
Speaking to journalists after the meeting, Abaribe clarified that while the caucus does not oppose the proposed tax reforms, it believes more extensive engagement with stakeholders is necessary before the bills are fully considered by both chambers.
He said, “As senators from the South-East, we are not against the Tax Reform Bills. However, we insist on wider consultations with our constituents across the 15 senatorial districts, state governments, and other critical stakeholders in our zone.
“We have reviewed the bills and feel it is essential to share our insights with stakeholders in the South-East to ensure the final framework reflects equity and addresses regional concerns. Consultation is vital for inclusiveness and effective legislation.”
A renowned Lawyer and Senior Advocate, Prof. Mike Ozekhome, has also lent his perspective to the reform, advising the Federal Government to “stagger” the implementation of the tax reform bills (if passed into law), while urging aggrieved parties to approach the reforms with an “open mind,” particularly the Nigerian Tax Bill and the Nigerian Tax Administration Bill.
As the debates for and against the proposed Tax Reform Bills continue to heat up the polity,
Tax experts have suggested that the proper thing, as it is done everywhere in the world is tax attribution to the area of collection and after that, the government can enforce