FG Douses Tension, Says Tax Reform To Ensure Equitable VAT Sharing

Amidst pushback from some sections of the country, particularly Northern politicians, the federal government has maintained that the ongoing tax reform is designed to support growth by addressing challenges such as the multiplicity of taxes, ambiguous and outdated provisions, and reducing the tax burden on individuals and businesses.

The federal government stated that, instead of focusing on the unfounded fears raised by those opposed to the reform process, Nigerians should understand that the aim is to promote ease of doing business, facilitate sustainable economic growth, and deliver shared prosperity for all.

Controversy has arisen from concerns that the proposed formula might result in lower revenue for some states, potentially exacerbating poverty in the North.

In an explanation provided to this newspaper yesterday, Taiwo Oyedele, chairman of the Presidential Fiscal Policy and Tax Reforms Committee, stated that the reform would not disadvantage any part of the country.

He noted that the 5% to be ceded by the federal government could be set aside for equalisation transfers to address any shortfalls for a state under the new model.

“This ensures that no state is worse off in the short term while significantly enhancing economic activities and revenue for all states in the medium to long term,” Mr Oyedele said.

The key objectives of the proposed tax reform include a single-digit number of taxes, harmonised and efficient revenue administration, an increase in the tax-to-GDP ratio, economic competitiveness, and the removal of tax burdens on the poor.

When asked why the VAT proposal is generating so much controversy, Mr Oyedele stated that the current VAT system is fractured.

“Some issues include disputes over VAT administration between states and the federal government, leading to landmark judgements and pending court cases. This situation is further complicated by the fact that VAT is not mentioned in the 1999 Constitution, creating a legal lacuna.

“Our analysis shows that a central collection system is more efficient and benefits all. Once the contentious issues are resolved, VAT can be properly included in the constitution. The current sharing formula of FG 15%, States 50%, and LGs 35% is proposed to change to FG 10%, States 55%, and LGs 35%,” he stated.

Another issue is the imposition of parallel consumption taxes by some states alongside VAT, which increases the tax burden on citizens and contributes to multiple taxation. The reform aims to discontinue all consumption taxes other than VAT.

Currently, VAT sharing among states is based on 20% derivation, 50% equality, and 30% population. The tax reform proposes a different derivation model, attributing VAT to the place of supply and consumption rather than where it is remitted, which currently favours states with company headquarters.

Under the new model, derivation will account for 60% of VAT distribution, ensuring better equity and discouraging any state from seeking to administer VAT as a state tax. Such a move would not only lead to lower revenue for all tiers of government but also impose a higher burden on businesses.

Chairman of the Federal Inland Revenue Service Zacch Adedeji stated that if passed into law, the new process will ensure fair treatment for states without many headquarter-companies and recognise their economic contributions.

Mr Adedeji also assured that the new tax bill would not threaten the existence of any government agency or jobs.

He emphasised that none of the four tax bills currently before the National Assembly threatens the existence of any agency, including the National Agency for Science and Engineering Infrastructure (NASENI), the National Information Technology Development Agency (NITDA), and the Tertiary Education Trust Fund (TETFUND).