Tax Reform Bills: A remedy for overdependence on FAAC allocations to states
The President, on September 3, transmitted four significant tax reform bills to the National Assembly for consideration. These include the Nigeria Tax Bill 2024, which is designed to provide a comprehensive fiscal framework for taxation in the country; the Tax Administration Bill, aimed at creating a clear and concise legal framework for all taxes and reducing disputes; the Nigeria Revenue Service Establishment Bill, which will repeal the Federal Inland Revenue Service (FIRS) Act and establish the Nigeria Revenue Service; and the Joint Revenue Board Establishment Bill, which seeks to create a tax tribunal and an ombudsman.
This is undeniably a bold policy initiative, especially considering the persistent challenges faced in Nigeria’s tax administration. However, the process has been marred by mismanagement, with unhelpful narratives emerging as a result.
At a meeting last week, governors from the 19 northern states, under the Northern Governors’ Forum (NGF), rejected the new derivation-based model for Value Added Tax (VAT) distribution proposed in the bills. According to the communiqué read by NGF chairman, Governor Muhammed Yahaya of Gombe State, the proposed model undermines the interests of the northern region and other sub-national entities.
Tax administration in Nigeria has long been contentious, often playing into the country’s north-south divide. The central issue in the current proposal is the shift to a derivation-based model for VAT distribution. Northern leaders argue that VAT should be remitted based on the location of a company’s headquarters and tax office, rather than where goods and services are consumed.
They contend that this change would disproportionately disadvantage the North, and have called on lawmakers from the region to oppose the bill in its current form, urging that national policies should ensure equitable distribution to avoid regional marginalisation.
While we do not believe the bills have a sectional agenda, the federal government must bear some responsibility for the current misgivings. As was the case with the removal of the petrol subsidy and the floating of the Naira, this administration appears to be pushing forward without sufficient consideration of the implications.
If the process had been properly thought through, the government would not have presented these tax bills to the National Assembly without consulting the states, the primary beneficiaries of VAT revenue. It is particularly surprising that such a presentation was made to the National Economic Council (NEC) only after the bills had already been submitted to the National Assembly.
With most states heavily reliant on revenue from the Federal Account Allocation Committee (FAAC) to fund their budgets, and VAT being a major source of FAAC revenue, this omission seems short-sighted.
Dr Olisa Agbakoba, SAN, former President of the Nigerian Bar Association (NBA), has attributed the ongoing opposition to the tax reform bills to the over-centralisation of power at the federal level. He advocates for a more balanced governance model, where power is more evenly distributed across the three tiers of government. Agbakoba suggests that such decentralisation would address the concerns raised by critics, particularly those from the northern states.
Economist Yusuf Muda has urged all parties involved in the controversy to maintain the existing VAT sharing formula, which allocates 50 percent based on population, 30 percent on equality, and 20 percent on derivation. Muda warned that the proposed derivation-based VAT model threatens to derail the entire reform process. He called on the National Assembly to reach a consensus, emphasising the importance of an inclusive and collaborative approach.
Muda also supported the bills, noting their potential to modernise the country’s outdated tax laws and provide numerous benefits, including the reduction of multiple taxation, lower income tax rates, improved tax administration efficiency, and a reduced tax burden on small businesses.
Meanwhile, Auwal Rafsanjani, Executive Director of CISLAC, expressed his support for the reforms, citing their potential to transform Nigeria’s fiscal landscape. However, he urged both the National Assembly and the Executive to address key gaps in the bills to ensure inclusivity and economic equity. Rafsanjani highlighted areas that require urgent attention, such as the VAT derivation model, revenue distribution, and strengthening VAT collection mechanisms, while also addressing the relationship between poverty and inflation.
Mr. Taiwo Oyedele, Chairman of the Presidential Advisory Committee on Fiscal Policy and Tax Reform, stated on Monday that the federal government has no plans to withdraw the controversial tax reform bills currently before the National Assembly. Speaking at a town hall meeting, Oyedele clarified that the committee was committed to further engagement with stakeholders.
He also addressed concerns that the bills would allow tax consultants to take over tax collection duties, emphasising that the Federal Inland Revenue Service (FIRS) would retain these responsibilities. Oyedele also refuted claims that state governors were not consulted during the bill’s development, acknowledging that while more consultation may be needed, the claim of a lack of engagement was inaccurate.
In the House of Representatives, a rowdy session occurred on Tuesday after Akin Rotimi, a member from Ekiti State (APC), made a comment in support of the contentious tax reform bills. The bills, which have sparked strong opposition from northern lawmakers, were the subject of a heated debate during an executive session last week.
It is becoming increasingly clear that, once passed, the tax reform bills could serve as a tool for governors in resource-rich states to reduce their dependence on monthly FAAC allocations by thinking more innovatively about their revenue generation.
