Chairman of the Presidential Fiscal Policy and Tax Reforms Committee, Taiwo Oyedele, has stated that Value Added Tax (VAT) is a consumption-based tax tied to where goods and services are used, not the residence of taxpayers and businesses.

Oyedele said this in response to a comment by the Revenue Mobilisation Allocation and Fiscal Commission (RMAFC) chairman, Mohammed Bello Shehu, who raised concerns about the distribution of VAT allocation and derivation.

He explained that the VAT, unlike income tax, operates as a consumption-based levy, where revenue is tied to the location where goods and services are consumed, not where taxpayers reside or businesses are registered.

“That VAT consumption needs to be determined based on taxpayer residence. This is not the case with VAT or any consumption tax, unlike income tax,” Oyedele said in a statement on Wednesday.

“The illustration regarding the purchase of an asset in Lagos for use in Kano does not pose any difficulties as VAT has an inbuilt mechanism for input and output VAT where only the VAT related to incremental value added in a jurisdiction will be attributed to such location with production treated as intermediate consumption at each stage of the production process prior to the final consumption.”

He added that “there is no need for any technology to track the location of consumption; every eligible business will simply be required to indicate the location of sales in its VAT returns as stipulated under Section 22(12) of the Nigeria Tax Administration Bill.

“It is not necessary to tag VAT collections to end-user locations from sale to consumption, neither is it practical to do so. After all we may not be able to tag services or creative work that are digitally delivered as intangible goods.”

According to him, the horizontal distribution of VAT revenue among states is not based on a formula of 50% derivation, 35% population, and 15% equality as stated by the Commission but rather 20% derivation, 50% equality, and 30% population.

He noted that not only was VAT excluded from this exercise despite the apparent inequity in the distribution formula, but the outcome of the revenue-sharing consultation is yet to be concluded many years later.

“We are aware of various efforts by the RMAFC over the past decade including the nationwide consultation exercise on the review of the federation revenue sharing formula 3 to 4 years ago,” he said.

“Not only was VAT excluded from this exercise despite the apparent inequity in the distribution formula, the outcome of the revenue-sharing consultation is yet to be concluded many years after.

“VAT administration is already under dispute, therefore seeking a political solution to avoid the risk of the tax being adjudged as a tax to be administered by states requires urgent action.”