The Tinubu-led administration has introduced comprehensive reforms to overhaul Nigeria's tax system. However, one major point of contention is the proposed revenue-sharing formula for Value Added Tax (VAT) collection, which has sparked significant debate. This article explores the concerns raised by stakeholders and advocates for a balanced compromise to address these issues.
The Tinubu-led administration has unveiled a turning point in the Nigerian tax system with the introduction of the Nigeria Tax Reform Bills (the Bills). The proposed four-pronged legislation comprises the Nigeria Tax Bill, Nigeria Tax Administration Bill, Nigeria Revenue Service (Establishment) Bill and the Nigeria Joint Revenue Board (Establishment) Bill. Altogether, they seek to effect a flurry of landmark changes aimed at transforming tax administration, alleviating the tax burden on the population, and encouraging growth and innovation among businesses. Many of the intended changes have been met with growing applause and appreciation but the revision of the revenue-sharing formula for Value Added Tax remains a bone of contention.
It sparked widespread controversy among Northern leaders, key stakeholders, and the general populace, with some South West and Eastern states expressing reservations. The lingering dissent is anchored on the perceived disadvantage that the new formula could potentially occasion for less-industrialised Northern states with minimal economic activity. Oppositions to the Bills have necessitated strategic consultations in a bid to make clarifications and reach compromises that will allow the successful passage of the Bills into law.
Key Changes And Impact
The purported reforms are long overdue and necessary to address bottlenecks that have for many years impeded tax administration and compliance in Nigeria — the major one being the multiplicity of taxes.
Currently, Nigeria’s tax legislative framework is made up of several disjointed laws scattered across different statutes, with several conflicting provisions. The Bills aim to eliminate obsolete laws, erase conflicts, and consolidate relevant statutes into a single piece of legislation, thus streamlining tax compliance and administration processes. To this end, the Nigeria Tax Bill specifically repeals 11 tax statutes, amends 13 other tax laws, and modifies two subsidiary legislations. A new, single tax code — the Nigerian Tax Act — will emerge and exist as the major point of reference for everything tax in Nigeria. This framework aligns with international best practices.
Important changes are also intended for Nigeria’s Personal Income Tax (PIT), Companies Income Tax (CIT), and Value Added Tax (VAT) landscape. Currently, individuals earning N300,000 annually (less than minimum wage) pay PIT. To alleviate the pain of low-income earners — especially in light of the current economic context characterised by dwindling purchasing power and increased cost of living — the Bill increases the exemption threshold. Only persons with an annual income exceeding N800,000 will be subject to PIT. A progressive rate is maintained, as high-income earners are subject to higher PIT rates.
The CIT exemption threshold for small businesses will be increased, rising from N25 million annually to N50 million. This expansion allows for a larger pool of small businesses to enjoy tax-free operations, creating more room for growth. Large corporations are not left out. The CIT rate for large companies is expected to decrease from 30% to 27.5% in 2025, then 25% in 2026. And when companies declare loss rather than profit, they cease to be obligated to pay a 1% minimum tax. Topping it all, allowable deductions from gross earnings have been expanded, enabling companies to reduce their taxable income.
Under the current tax regime, companies pay various levies at varying rates in addition to CIT, including the Tertiary Education Tax, National Agency for Science and Engineering Levy, and National Information Technology Development Levy. These multiple levies can be frustrating for companies. Thankfully, the Bills provide a solution by harmonising them into a single levy called the Development Levy at the rate of 4%. By 2030, this rate will reduce to 2%.
Another key change is the proposed increase of VAT from 7.5% to 10%, rising to 15% by 2030. Meanwhile, essential goods and services such as food, education, and healthcare, will remain VAT-exempt, continuing the existing regime. The Nigerian Revenue Service replaces the Federal Inland Revenue Service (FIRS) as the central revenue authority for the federation with a broader administrative role. Similarly, the Joint Revenue Board will displace the deficient Joint Tax Board. A Tax Ombudsman will also be established to address taxpayer complaints regarding the Board’s operations.
VAT Revenue Distribution Under The Tax Reform Bills
It is no surprise that there is much fuss about the proposed change to the VAT-sharing formula. The Federal Government collects VAT but distributes 85% across states and local governments. With the passage of the Bills, this figure is expected to increase to 90% as more allocation is going to states. Of course, states are satisfied with the new figure, the problem lies in how it is expected to be shared among them.
The present sharing formula is as follows: 20% is allocated based on derivation (disbursed according to states' VAT contribution), 50% on equality (shared equally among states), and 30% on population (states with larger populations get a larger cut). A new formula is proposed in the Bills: 60% derivation, 50% equality, and 30% population. Beyond the figures, the derivation model is modified.
Derivation is redesigned to favour the location where the goods and services were consumed rather than where the VAT is remitted, as is the extant case. This revision addresses imbalances and unfairness plaguing the current framework, ultimately promoting national unity and engendering fiscal equity.
Under the current model, states with a high concentration of company headquarters contribute more to the national VAT pool because companies typically remit VAT to the government where their headquarters are located. This approach overlooks other parts of the country where the goods and services were sold, depriving those states of recognition for economic activity in their regions. As a result, a few states disproportionately benefit from VAT returns and receive the majority of the revenue distributed based on derivation. For example, Lagos, Rivers, and Abuja, which receive 42%, 16%, and 9% of the national VAT revenue, respectively.
In contrast, states like Borno and Bauchi, despite their large population, collect less than 0.5% due to fewer number of company headquarters in their respective states
In the proposed system, VAT returns will be attributed to where goods and services were supplied and consumed, preventing companies from redirecting VAT proceeds to their headquarters. With the increased 60% derivation allocation, more states will benefit from a larger share of the VAT generated within their borders. This change is expected to boost revenue for states that were previously sidelined.
The irony is that the states purported to benefit from this revised model were the ones championing the opposition to the Bills. Their primary reservation is that the new derivation framework is disproportionally favoured to the south, thus leaving them at a disadvantage. According to the critics, most of the consumption occurs in the South. Consequently, the South will enjoy the greater chunk of the VAT revenue, worsening economic disparities between the South and North. Meanwhile, the Bill’s supporters have suggested the Northern leaders inadvertently conjured a misconstrued view of the Bill’s provision or the oppositions were merely political antics aimed at negotiating political interests.
However, opposition seems to be dwindling as the Fiscal Policy and Tax Reforms Committee (the Committee) pioneering the Bills, is tirelessly working to dispel the growing concern about its perceived disadvantage to Northern states.
Following consultations and stakeholder engagements, a breakthrough emerged when the Nigerian Governors Forum (NGF) endorsed the Bills however with crucial recommendations for its amendments. The Forum suggested a revision to the sharing formula, requesting that 30%, as opposed to 60%, be allocated based on derivation, with 20% and 50% for population and equality respectively.
Going Forward
It is accepted that a compromise must be reached for the Bills to progress. Nonetheless, the Committee and the lawmakers should strike a balance between reaching a compromise and protecting the original purpose of the initially proposed changes. The NGF-recommended 30% is considerably low and may make little difference in the long run. Besides ensuring equitable distribution of resources, a major intent of the initial 60% and revised derivation model is to encourage states to take the initiative of developing production and economic activities within their regions, thereby increasing their internally generated revenue and reducing reliance on federal allocations for sustainability.
Admittedly, it may be overly optimistic to assume that a change in the law is the single magic wand that would render these states economically viable — infrastructural deficits, insecurity, and poor governance remain underlying issues. However, it is arguably a step in the right direction, with potentially long-term benefits. Complementary efforts such as strategic investments, infrastructural development, and good governance must be encouraged to cushion the impact of the revised policy in the short term.
Moreover, Nigerian leaders’ disposition towards revenue generation needs a paradigm shift: many states need to switch from being consumption-focused to production-based. The “give-me give-me” approach is unsustainable. Untapped potential and resources exist in several regions because those at the helm of affairs have failed to utilise them to promote economic advancement. Therefore, increasing the percentage of VAT proceeds states get to retain for themselves could potentially encourage domestic production, incentivise states to implement policies to stimulate economic activities and attract private-sector investments. All of these would result in an enlargement of government coffers in undeveloped states, improving the overall welfare of its people.
Another concern is the position of states on monopolising VAT administration within their regions. Prominent states like Lagos and Rivers, which generate large amounts of VAT, have explored judicial means of achieving exclusive control of VAT. A case in point is the extant suit between Rivers State and the FIRS currently on appeal at the Court of Appeal following the Federal High Court’s decision which affirmed that states have the exclusive constitutional right to administer VAT within their regions. The increased derivation percentage is a subtle means of settling the score between these agitated states and the federal government. The idea is that if states can retain more of the VAT proceeds remitted by them, they might refrain from seeking full control of their VAT. If lawmakers proceed with the recommended 30%, this discontent among these states may linger, threatening the Federal Government’s powers.
In reaching a middle ground, the Committee and lawmakers should consider pegging the derivation quota at 40%, allocating 40% to equality, and 20% to population. This maintains a balance that addresses the concern of unfair distribution, dissuades the agitation for exclusive control, and most importantly, encourages states to stimulate economic activity in their regions.
Author
Olayinka Shado / Research Analyst, Fiscal Policy / o.s@borg.re