Tax reform: Reps approve new VAT sharing formula for states

The House of Representatives, on Thursday, approved a new Value Added Tax sharing formula, allocating 55% to states and 35% to local government councils.

This decision followed the adoption of a report by the House Committee on Finance on four tax bills transmitted to the National Assembly by President Bola Tinubu in October 2024.

Presenting the report on Thursday, the chairman of the committee, Abiodun Faleke, summarised the extensive review process, which followed a public hearing held from February 26 to February 28, 2025.

The report was considered clause by clause and adopted in a session presided over by the Speaker, Tajudeen Abbas, on Thursday.

The committee made 19 key recommendations under the Nigerian Tax Administration Bill, including a revised VAT distribution framework that had been a contentious issue between state governors and the Presidency.

Revised VAT sharing formula

Section 77 of the report introduces a new VAT distribution structure.

For states, 50% of the revenue is to be distributed equally, 20% based on population, and 30% based on consumption.

The emphasis is placed on the actual place of consumption, regardless of where tax returns are filed.

Local governments will receive 35% of VAT revenue under a similar formula.

Additionally, the timeline for issuing Taxpayer Identification Numbers has been extended from two to five working days to accommodate possible administrative challenges.

Any refusal to issue a TIN must be justified and communicated to the applicant.

Corporate tax filing

The timeframe for companies ceasing operations to file tax returns has been reduced from six months to three months to mitigate revenue losses.

The committee also recommended that taxable supply consumption should determine tax allocation, ensuring fairness in regions where company headquarters are concentrated.

On fiscalisation, the Federal Inland Revenue Service will establish further regulations to enforce the newly introduced system.

Additionally, Section 74 mandates that any tax remission by the President or a governor must receive approval from the National Assembly or respective state Houses of Assembly.

 Tax exemptions

Section 75 provides that presidential tax exemptions must be approved by the National Assembly.

Meanwhile, Section 76 authorises the Office of the Accountant General to deduct unremitted taxes from Ministries, Departments, and Agencies at the source, subject to National Assembly’s approval.

To enhance representation, the committee proposed appointing six Executive Directors to the FIRS Board, one from each geopolitical zone, in a rotational order.

Additionally, a representative from each state and the Federal Capital Territory will be appointed to ensure federal character compliance.

The committee recommended a fixed 4% cost of collection for FIRS, to be appropriated by the National Assembly.

It also proposed funding the Tax Appeal Tribunal from the Consolidated Revenue Fund, eliminating its current dependence on FIRS to ensure judicial neutrality.

Nigeria Tax Bill

Under the Nigeria Tax Bill, Section 27 now requires a Certificate of Acceptance for companies enjoying priority sector incentives to claim capital allowances.

The Industrial Inspectorate Department at the Federal Ministry of Industry, Trade, and Investment will be responsible for certifying qualifying expenditures.

The committee also scrapped the previously proposed staggered reduction of the corporate income tax rate.

Instead, companies will continue to be taxed at 30%, while those in priority sectors will enjoy a reduced rate of 25% for five years.

Development levy adjustments

The revised bill also expands the beneficiaries of the Development Levy.

The Tertiary Education Trust Fund will receive 50%, the Nigerian Education Loan Fund will get 3%, the National Information Technology Development Fund will receive 5%, and the National Agency for Science and Engineering Infrastructure will get 10%.

The Defence Infrastructure Fund will receive 10%, the Nigeria Police Trust Fund 5%, the National Sports Development Fund 5%, the Social Security Fund 10%, the National Board for Technological Incubation 10%, and the National Cybersecurity Fund 1%.

The bills are expected to be read for a third and final time before being passed into law next week.