Senior Advocate of Nigeria, Mike Ozekhome, has stated that the Federal Government’s Tax Reform Bills “make sense”; however, their timing is “problematic,” given the economic strain faced by many Nigerians.
He shared his views during an exclusive interview with Nairametrics on Friday.
Ozekhome advised the Federal Government to “stagger” the implementation of the tax reform bills (if passed into law), while urging aggrieved parties to approach the reforms with an “open mind,” particularly the Nigerian Tax Bill and the Nigerian Tax Administration Bill.
Nairametrics reports that President Bola Tinubu recently directed the Attorney-General of the Federation, Lateef Fagbemi SAN, to collaborate with the National Assembly to address “genuine concerns” associated with the Tax Reform Bills before they are passed into law.
This came weeks after the President rejected the National Economic Council’s (NEC) proposal to withdraw the tax reform bill, insisting that the Council, comprising governors, should follow the “legislative process.”
The Sense in FG’s Tax Reforms vis-à-vis Timing – Ozekhome
Nairametrics previously reported that the tax reform proposals have sparked controversy, with several northern elites, including some governors, openly rejecting them, arguing that the changes may not favor their region.
- However, Mr. Taiwo Oyedele, Chairman of the Presidential Fiscal Policy and Tax Reforms Committee has appeared at various forums, insisting that the reforms are for the benefit of vulnerable Nigerians.
- He also criticized the injustice in the current mode of VAT distribution, which considers the location where VAT is remitted, rather than where goods are supplied or consumed.
- In response to the development, Ozekhome stated that, according to the proposed bill, the oil-industry derivation model (based on the location of production or the head office of the producer of goods or services) would be discarded in favor of the location or places where the products are actually consumed (i.e., retail customers).
- He maintained that the new bill proposes a different model of derivation, which will attribute VAT to the place of supply and consumption, as opposed to the current system, which attributes VAT to the state where it is remitted.
He added that the current system has historically favored states where the corporate headquarters of producers of goods are located.
“Additionally, the new derivation model sets a much higher rate of 60%. This will theoretically ensure greater equity and that a much larger pool is available for distribution – albeit under a new consumption-based derivation formula.”
He explained that to start with, the current formula for distributing VAT, where 15% goes to the Federal Government, 50% to the states, and 35% to local governments, will only be slightly adjusted.
- He said the proposed change would result in the Federal Government receiving 10%, states receiving 55%, and local governments keeping 35%.
- He stated In terms of distribution, the present formula for sharing VAT among states is as follows: 20% for derivation, 50% for equality, and 30% for population.
“This makes sense, as VAT is, by definition, a consumption tax, and the existing interpretation of derivation has been based on a false model,” he added.
He stressed that statistics from August 2024 show, for instance, that Bayelsa State contributed ₦7.12 billion in VAT but received only ₦5.58 billion, while Katsina contributed just ₦1.68 billion and received a disproportionate ₦7.27 billion.
- He stated that this disparity in contributions and receipts makes the fears in some quarters understandable, given the mismatch between their VAT income and their contribution to the pool under the present system.
- He said that a closer look at the bills might show that these fears are exaggerated, if not outrightly unjustified, as the Presidential Fiscal Policy and Tax Reform Committee has assured that the 5% share of the Federal Government proposed to be ceded to the states will be set aside for what it calls “equalisation transfers” to cater for any shortfall to a state under the new model.
However, he added, “Time will tell” regarding the assurances made by the committee.
“To that extent, I believe that the change should be embraced by neutral parties who approach it with an open mind,” Ozekhome concluded.
More insights
The senior lawyer attributed the rejection in some quarters to a lack of perception management by the government that sponsored the bills.
He also pointed out that the timing of the reforms is problematic, given the rising cost of living for Nigerians.
“Overall, I believe we should give the government the benefit of the doubt and trust them. However, their timing is problematic, considering the economic challenges faced by Nigerians due to the rising cost of living, caused by the removal of fuel and electricity subsidies, as well as the flotation of the Naira.”
He advised the Federal Government to not only work hard to renew that trust but also to “stagger the reforms so that they are not perceived as all coming at once.”
He explained that, generally, there is little appetite for another dramatic shift in Nigeria’s economic and fiscal policy.
What You Should Know
The new tax bills under consideration in the National Assembly propose adopting a derivation principle in the allocation of VAT revenues between the federal government and sub-national entities.
- Under the current Section 40 of the VAT Act, VAT revenue is allocated as follows: 15% to the Federal Government, 50% to the States and Federal Capital Territory (FCT), and 35% to Local Governments.
- The allocation to states and local governments incorporates a derivation principle of at least 20%. Although not explicitly detailed in the VAT Act, other factors influencing distribution include 50% based on equality and 30% based on population.
Additionally, 4% of collections are allocated to the Federal Inland Revenue Service (FIRS) as a collection fee, while 2% goes to the Nigeria Customs Service (NCS) for import VAT.