Introduction:
The Nigerian government introduced the Nigerian Tax Bill 2024 as a part of the ongoing tax reform in the country1, with the aim of unifying the fiscal legislation governing taxation in the country for simplicity and transparency, and is an action that is being carried out in accordance with the provisions of the Constitution of the Federal Republic of Nigeria 1999 (as amended) which outlines the power of the federal and state governments to administer taxes and plays a crucial role in establishing fiscal federalism in Nigeria2. The tax bill repeals 11 existing tax legislations including the provisions of the Companies Income Tax Act, the Value Added Tax Act, the Capital Gains Tax Act, etc., and amends thirteen others.
As part of the reform, a committee was set up to fix a sharing formula that would address the nation's VAT concerns. The initial recommendation proposed by the committee was met with staunch pushback and contention from various national stakeholders including the Northern Governors Forum and the Economic Coalition.
However, after further deliberations on the issue, the committee reported the revision of their initial proposal for the formula which has received approval from national stakeholders. In light of this recent approval, this article aims to review the adjustments that have been made to the VAT sharing formula and the implications on the states of the Federation.
Examining the VAT Allocation Framework:
Nigeria's VAT regime is currently governed by the Value Added Tax Act which provides the legal basis for the imposition, collection, and distribution of the VAT in Nigeria. In line with its provisions, the recent VAT sharing formula, the VAT is distributed vertically between the Federal, State and Local Governments at a 15%, 50% and 35% rate respectively, however, with the current approval from the house of representatives, this has been adjusted to 10% for the Federal Government, 55% for the State Government and 35% for the State Government3. By taking this step, the state government received more VAT resources, possibly as a means to aid the provision and development of state facilities and to encourage even more revenue generation across the nation.
The VAT revenue allocated to the states are also distributed with recourse to other considered factors that are based on equality, population and derivation. Currently, the revenue derived from the collection of value-added tax is shared among states using the formula; 50% equality, 30% population, and 20% derivation.
Owing to the ongoing tax reforms, the proposed Tax Administration Bill suggested an increase in the derivation percentage of the VAT-sharing formula from 20% to 60%, while apportioning 20% each to equality and derivation. This was vehemently opposed by the Nigeria Governors' Forum who were of the opinion that the proposal would be detrimental to Northern and other less generating states, while being greatly beneficial to States like Lagos and Rivers. In response, they submitted a counter-proposal of 50% equality, 20% population and 30% derivation, and for a while, there was a standstill on the approval of the bill.
However, after careful considerations, there will be progress in the assent of a new formula that would be distributed based on 50% equality, 20% population and 30% consumption4. This new allocation formula disregards derivation and replaces it with consumption, a decision that was clearly made to address the concerns of stakeholders who believe that only the populous states where most industry headquarters are based would experience higher revenue regeneration, even if consumption is evenly spread across the country. With this new formula, consumption will be determined by the place of consumption irrespective of where a company's headquarters files its tax returns, thereby encouraging commercial transactions in the different states in the federation.
Impact of the Approved VAT Formula on States:
The recently approved VAT sharing formula would have different implications on each state of the federation, including that;
- States with high consumption levels like Lagos and Rivers which are regarded as states with significant economic activities will benefit from the 30% allocation, based on the rate of consumption in these states5. Additionally, making it based on consumption as opposed to derivation levels the playing ground a bit as now companies would be required to declare returns for each of the regions of the states where they have a presence instead of a single return from the headquarter. More than anything, the consumption allocation removes the air of doubt as to where VAT is being generated from and how it is calculated.
- States with larger populations like Kano and Kaduna will benefit from the 20% allocation based on population. This is to ensure that more populous states receive funds commensurate with their demographic size to address their needs and provide basic public amenities.
- States with low economic activity will still benefit from the 50% allocation based on equality. This is to ensure that each state of the federation regardless of their economic output or population receives an equal share of half the VAT revenue to support the development of the state's infrastructures.
As a result of this reform, many states in the federation would be required to intensify their economic activities to benefit more from the VAT allocation. To achieve this, the following recommendations ought to be taken into consideration;
- States with larger populations should invest in the education and healthcare of their residents to better manage their populations, while also creating job opportunities and entrepreneurial access to reduce the rate of migration to more economically viable states. However, states should also ensure that the growth of the state's population aligns with the available resources and infrastructure.
- States with low economic activities should take steps to broaden their economic base and enhance their internal revenue generation. This would reduce their dependence on federal allocations and allow them to benefit from the 30% consumption-based allocation.
- All the states of the federation should focus on the efficient utilization of the funds allocated to them and ensure those funds are channeled into projects that would stimulate economic growth and improve the resident's quality of life.
Similarly, companies can incorporate the following to adapt to the provisions of the VAT reforms:
- Adjust financial strategies to accommodate changes in the VAT rates and coordinate with all branches for accurate compilation of returns to be filed with the tax authorities, while strengthening internal tax systems to meet new requirements.
- Maintain regular communication with tax and legal professionals to stay informed about tax procedural changes and seek clarifications on the implications for their business.
- Train staff in finance and compliance departments on the new tax regulations to ensure adherence and minimize risks.
Conclusion
The newly approved VAT sharing formula by the House of Representatives marks a significant shift in the distribution of VAT revenue among states of the federation. Whether this formula achieves its intended objectives of balancing equality and promoting economic activities, will depend on the responses of states and broader economic reforms and implementation within Nigeria's evolving tax system.
Footnotes
1. The Nigerian Tax Bill (NTB) 2024 is one of four tax reform legislations being put forward for review and implementation by theTInubu-led administration. The other three legislations include the Nigerian Tax Administration Bill (NTAB), the Nigeria Revenue Service (Establishment) Bill (NRSEB), and the Joint Revenue Board (Establishment) Bill (JRBEB). Taiwo Oyedele, 'The People's Tax Bill' (LinkedIn, 3 December 2024) (https://www.linkedin.com/pulse/peoples-tax-bills-taiwo-oyedele-ndmof) accessed 10 January 2025.
2. Section 4 and 59 of the 1999 constitution
3. Tax reform: Reps approve new VAT sharing formula for states' (Punch Newspaper, 14 March 2025) (https://punchng.com/tax-reform-reps-approve-new-vat-sharing-formula-for-states/ ) accessed 18 March 2025.
4. 'VAT Remains 7.5% As Reps Adopt Tax Reform Bills' (Daily Trust, 14 March 2025) https://dailytrust.com/vat-remains-7-5-as-reps-adopt-tax-reform-bills/ accessed 18 March 2025.
5. Nigerian Economic Summit Group (NESG), 'NESG Consumption Expenditure Alert' (2020) https://nesgroup.org/download_resource_documents/Nigerian%20Consumption%20Alert%2014.05.2020_reviewed_1589808521.pdf accessed 18 March 2025
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