Why Northern governors are rejecting new Tax Bill

Recently, the governors of 19 Northern States, under the aegis of the Northern States Governors’ Forum (NSGF), concluded their meeting with traditional rulers from the zone and announced their rejection of the new tax reform bill recently sent to the National Assembly by President Bola Tinubu.

The bill, among other provisions, seeks to raise the value-added tax (VAT) from 7.5 per cent to 10 per cent by 2025, with further increases to 12.5 per cent from 2026 to 2029, and 15 per cent from 2030 onwards. It also introduces a derivation-based VAT distribution, a part of the bill that Northern governors are contesting.

Under the current law, VAT is allocated in a 15 per cent, 50 per cent, and 35 per cent split to the Federal Government, State Governments (including the Federal Capital Territory), and Local Governments, respectively.

For the portion attributable to states (and perhaps LGAs), states retain 20 per cent of the VAT revenue collected within their borders. Thirty per cent of the VAT is distributed based on the population of the states, while the remaining 50 per cent is shared equally among all states.

However, experts say this formula lacks consideration for the principle of derivation, leading to perceived inequities where regions contributing more to VAT might not receive proportional benefits.

The Presidential Fiscal Policy and Tax Reforms Committee, headed by Mr. Taiwo Oyedele, proposed the derivation-based model to address this issue of inequality.

Under the new proposal, the distribution would shift to 10 per cent, 55 per cent, and 35 per cent for the same respective tiers, with a critical twist: 60 per cent of the VAT revenue would be distributed based on derivation. This means that where VAT is collected becomes as crucial as the amount collected, potentially favouring regions where consumption activities are concentrated.

This is the bone of contention. VAT has become an important revenue source for governments. For instance, an analysis of Federation Account Allocation Committee (FAAC) revenue over the last 12 months shows that Value-Added Tax (VAT) revenue shared among the three tiers of government amounted to N5.96 trillion, over 31.7 per cent of the total revenue of N18.76 trillion.

In the first six months of 2024, the VAT revenue component of FAAC allocations was N2.92 trillion, about a quarter of the total revenue of N11.78 trillion.

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With over 50 per cent of VAT revenue collected in Lagos, the new formula will obviously weigh heavily in favor of Lagos and perhaps Rivers State.

In 2021, the Rivers State government, under the leadership of Barr. Nyesom Wike, the current Minister of the FCT, sued the federal government under President Muhammadu Buhari, seeking a declaration to collect VAT revenue within the state. Lagos State later joined Rivers in the suit.

The case reached the Supreme Court but was resolved politically. At that time, some Northern State governments publicly declared that they preferred the Federal Government to continue collecting and sharing the VAT to states.

As that case was not fully resolved, there is a perception in some quarters that the requests of Rivers and Lagos States are now being granted through the back door with this new sharing formula.

Another issue concerning the Northern governors is that some items generating substantial VAT revenues, such as alcohol, are, for religious reasons, not widely consumed in the North, while much of the region’s produce, mainly agricultural, is VAT-exempt.

However, the Chairman of the Presidential Fiscal Policy and Tax Reforms Committee, Taiwo Oyedele, said the new sharing formula was not intended to short-change anyone; instead, it aims to ensure fairness and equity.

VAT is based on consumption and not on production. It is levied at every stage of a product’s production but collected at the end of the supply chain from the ultimate consumers of the products.

Thus, VAT collection is from consumers and not producers.

According to tax experts, the producers that pay VAT claim the amount back as input VAT, deducted from Output VAT charged on sales before the net amount payable is remitted to the Federal Inland Revenue Service (FIRS).

From this perspective, the more VAT collected at the location of consumption, the more VAT is available for sharing among the three tiers of government. The goal of the rate change is to establish a derivation basis that recognizes the state of consumption rather than the place of production.

President of the Association of Certified Fraud Examiners (ACFE), Dr. Titilayo Fowokan, noted that under the new derivation-based arrangement, some states might receive more VAT allocation than Northern States due to limitations in consumption of certain products in those states.

She added that the Northern states’ concerns could be addressed without withdrawing the bills once the Legislature begins engagement sessions. Appropriate representations could be made for further review of the relevant aspects of the bills.

Professor Godwin Oyedokun, Professor of Accounting and Financial Development at Lead City University, Ibadan, remarked that it would have been preferable for the Northern Governors to request a presentation by the Tax Reform Committee to gain a better understanding of the issues. If they have reservations, they could submit a memorandum for the National Assembly’s consideration and possible inclusion in the bill before passage.

Meanwhile, Lead Director of the Centre for Social Justice (CSJ), Barr. Eze Onyekpere, warned that increasing a regressive tax like VAT, which is assessed regardless of income, is unsuitable, especially amid stagflation, marked by high unemployment, severe inflation, low economic growth, and declining productivity.

He noted that the five per cent telecom tax would also burden poor Nigerians. “Even though some goods will be exempted from VAT, this will not sufficiently lessen the harsh impact of the new VAT regime,” he said, adding that it is insensitive for the government to increase VAT amid severe inflation.

He cautioned that this move would likely drive inflation further up. “The cost of living will continue to rise, surpassing the affordability threshold for the majority of the population. This is not the pathway to recovery and would further deepen poverty and misery in Nigeria,” he said.