The Constitution’s non-mention of Value-Added Tax has created a lacuna, accentuated by the proposed Tax Reforms Bill pending at the National Assembly. The Chairman of the Federal Inland Revenue Service (FIRS), Dr. Zacch Adedeji, on Monday, described the allocation of 70% of value-added tax (VAT) proceeds to Lagos, Rivers, and the Federal Capital Territory (FCT) as unfair to the remaining 34 states.

Interacting with members of the House of Representatives on the proposed tax reform bills on Monday, Adedeji posited that the existing VAT distribution structure does not serve Nigeria’s best interests. He noted that the current framework allows Lagos (42%), Rivers (16%), Oyo (5.2%), and the FCT (10%) to take over 70% of VAT proceeds, primarily because the head offices of many revenue-generating companies are located in these regions.

The Governors meeting in the National Economic Council had advised a withdrawal of the Reforms Bill but the Presidency rejected the call.

The VAT issue has already been politicised with Alhaji Rabio Kwankwaso saying Tinubu’s Lagos Boys want to take all the money from Kano and their part of the country to Lagos. But Taiwo Oyedele, Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms thinks otherwise. According to him the current formula for sharing VAT among states is based on 20% derivation, 50% equality, and 30% population. The tax reform proposes a different model of derivation which will attribute VAT to the place of supply and consumption rather than the current model which attributes VAT to the state where it is remitted thereby favouring states with companies’ headquarters.

But Adedeji has criticised the arrangement, pointing out that 70% of Nigerians who consume the products and services provided by these companies are spread across the country. To illustrate, he cited the example of a major mobile telecommunications network, MTN, which contributes the highest VAT to Lagos despite its services being consumed nationwide.

“What the bill seeks to correct is that the existing structure does not represent the interest of either the President or the nation,” Adedeji said. “Today, I just signed the data on VAT for October. Lagos will take 42% of the VAT, Rivers will take 16%, Oyo State will take 5.2%, and the FCT will take 10%. Go and check; these three states are taking more than 70%. Why? Because those are the places where the head offices of those companies are.

“As we know, 70% of consumption is not accruing to those three states. So, whatever way you look at it, apart from Lagos, Rivers, and FCT, every northern state would benefit. That is the Bill being presented. “If you look at it, MTN contributed the highest, but because MTN’s head office is in Lagos, all derivation from MTN is accruing to Lagos. With this Bill, irrespective of the economic situation of any state in Nigeria, all states would benefit.”

Adedeji expressed concern over the disparity, noting that states like Borno and Bauchi collect only 0.32% and 0.4% of VAT proceeds, respectively, compared to Lagos’ 42%. “Any day I sign it, I don’t feel like I am a Nigerian because this is not what we represent in our prayer as a nation. That is why, in the wisdom of Mr. President, we need to change this structure,” he stated. He assured the lawmakers that the proposed tax reform bills would ensure a fair distribution of VAT proceeds based on consumption.

His remarks were applauded by the lawmakers, despite conflicting opinions being expressed during the session. Hons Babajimi Benson (APC, Lagos) and Adamu Yusuf Gagdi (APC, Plateau) expressed concerns about the impact of the reforms on their respective states.

Gagdi questioned how conflict-displaced citizens in the North could benefit from VAT proceeds tied to consumption and other import-related taxes. Adedeji reiterated the necessity of the reforms, calling for fairness in the distribution of resources across the federation.

In the thinking of the Presidential Committee, “the current VAT system is fractured. The major issues include: (i) disputes over VAT administration between some states and the federal government resulting in some landmark judgements and pending court cases. This is compounded by the fact that VAT is not stated in the 1999 Constitution thereby creating a lacuna.

“Our analysis shows that a central collection system is more efficient and benefits all. Once the contentious issues have been resolved, then VAT can be properly included in the constitution. The current sharing formula of FG 15%, States 50%, and LGs 35% is proposed to become FG 10%, States 55%, and LGs 35%. (ii) imposition of parallel consumption taxes in some states along with VAT which increases the tax burden on the people and contributes to multiple taxation.

“The reform seeks the discontinuation of all consumption taxes other than VAT. (iii) basis of distribution – Further, derivation under the new model will account for 60% of VAT distribution for better equity and to discourage any state from seeking to administer VAT as a state tax, which will not only result in much lower revenue for all tiers of government but will impose a higher burden on businesses.

“The proposed derivation model is contained under S.22 (12) of the Nigeria Tax Administration Bill which states that “For attribution, any return under this section shall provide details of the derivation of taxable supplies by location …” The controversy has arisen from the perception that the proposed formula would lead to lower revenue for some states.

“However, the 5% to be ceded by the FG can be set aside for equalisation transfers to cater for any shortfall to 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”
Question: Are the bills also seeking to merge or scrap some agencies?