A recent survey by SBM Intelligence alleges that the federal government’s proposed tax reforms fail to account for the unique characteristics of certain Nigerian regions.
The report, however, admits that the reforms aim to reduce the tax burden on citizens and improve the efficiency of tax collection, as outlined by Mr. Taiwo Oyedele, Chairman of the Presidential Fiscal Policy and Tax Reforms Committee.
The survey, conducted across Nigeria’s geopolitical zones, reveals that failing to address regional issues could exacerbate existing economic disparities in the country, potentially requiring intervention by the Supreme Court or a constitutional amendment.
The report is part of the broader conversation about Nigeria’s current tax system and the proposed tax reform bills, which have sparked intense debate, especially from northern elites, particularly regarding the distribution of Value Added Tax (VAT) among Nigeria’s 36 states.
Much Ado About Tax
- The report states that only five of the country’s 36 states—Anambra, Cross River, Lagos, Ogun, and Rivers—could fulfil their financial obligations if the federally distributed revenue pool did not exist.
- Based on this, the report notes that comparing how much VAT each state generates versus how much VAT revenue they receive at the end of each month has become a common and contentious issue.
“Between January and October 2024, Imo State received 1,715.9% of what it contributed to the VAT pool as its VAT allocation. Abia, Cross River, and Kebbi all received allocations above 700% of what they contributed.
“Lagos and Rivers received the lowest allocations, receiving 16.76% and 22%, respectively. Lagos contributes around 55% of local VAT.
“The proposed reforms, while aiming to reduce the tax burden on citizens and improve the efficiency of tax collection, fail to account for the uniqueness of certain regions.
“In the northeast, states received 244.46% of their VAT contributions. The highest was Bauchi, which received 384.94% of its VAT contributions, and the lowest was Adamawa, which received 165.69% of its VAT contributions. This could exacerbate existing economic disparities,” it added.
- The report further states that Nigeria’s VAT system remains a pivotal yet contentious aspect of the country’s fiscal framework and has often attracted litigation over the years.
- The report predicts that the Supreme Court may once again be called upon to intervene, particularly regarding the fiscal powers of the states and regions.
“The historical development of VAT, replacing the Sales Tax Decree of 1986, reflects the ongoing evolution of Nigeria’s tax system, driven by attempts to balance efficiency, equity, and state autonomy.
“Legal precedents, such as the Supreme Court’s affirmation of VAT’s precedence over state sales and consumption taxes, underscore the complexities of aligning federal and state interests.
“However, recent litigation from states like Rivers and Lagos highlights growing demands for greater control over the revenue generated within their territories and calls for a more equitable revenue-sharing formula.
“Proposed tax reforms aim to address some of these issues by revising VAT rates and exemptions, simplifying tax structures, and increasing derivation-based allocations.
“While these measures hold promise, the ultimate resolution of the VAT issue will likely require either a definitive Supreme Court ruling or a constitutional amendment to clarify the division of fiscal powers,” the report added.
The report also highlighted that the VAT discourse sheds light on the persistent North-South divide in Nigeria’s fiscal and political landscape, reflecting broader disparities in economic activity and development.
The report advises that resolving these tensions will require careful negotiation and reforms that balance the principles of derivation, equity, and national cohesion, ensuring that the tax system fosters regional development and unity.
What you should know
The tax reform bills have become controversial since their introduction, with different interests opposing various provisions.
- For instance, the Northern Governors Forum expressed opposition to the bill, urging legislators from the region to resist any legislation that undermines the interests of Northerners nationwide.
- Additionally, the National Economic Council (NEC), which comprises the 36 state governors and is chaired by the Vice President, called for the withdrawal of the bills to allow for proper consultations before proceeding to the National Assembly.
- However, President Tinubu disregarded the recommendations from both the Northern Governors Forum and the NEC, stating that the process is legislative and that inputs can be incorporated during public hearings.
- Meanwhile, the Nigerian Senate on December 4 suspended hearings on the bills until the new year, providing time for essential political engagements and negotiations to secure their passage.