In Nigeria, the way Value Added Tax (VAT) is collected and shared has been a longstanding issue. At the moment, VAT is allocated based on where businesses make their payments—typically where their headquarters are located.
This doesn’t always reflect where goods or services are actually consumed. As a result, some regions contribute a large amount of VAT but don’t see a fair return, while others that contribute much less end up receiving more.
For example, Lagos State contributes N249.77 billion in VAT, but only receives N40.22 billion back, while Kano State contributes N4.65 billion but gets N9.71 billion, according to data shared by TheCable for the month of August, 2024.
This creates a system that appears unfair, where the areas generating the most tax revenue don’t benefit from it, and others get more than they deserve. It’s no wonder many are calling for change.
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The new proposal seeks to address this imbalance by distributing VAT based on where goods and services are actually consumed, not just where businesses pay their taxes. This is a significant shift, aiming to ensure that areas with the most economic activity—where people are spending money and buying goods—reap the benefits. Instead of tax revenue flowing to the headquarters of businesses, it will stay within the regions where consumption happens, helping to improve local infrastructure and public services.
At the heart of this proposal is fiscal federalism, the idea that tax revenue should be shared based on each region’s economic contribution. In simpler terms, the areas driving the most economic activity—those where people spend money—should get a fair share of the revenue. The idea is to ensure that the money generated through VAT stays in the communities that contribute to it, rather than benefiting a few wealthy areas.
Equity in taxation is another key principle of the reform. Right now, the system isn’t fair. Regions making large VAT contributions don’t receive a proportional share of the revenue. The new system aims to fix this by making sure regions contribute similarly to the VAT pool and receive similar returns. This would prevent situations where some regions continue to thrive while others struggle.
Another important idea behind the reform is the benefit principle of taxation, which suggests that taxes paid by a region should benefit that region. If a region is contributing a large amount to the VAT pool, it’s only fair that those funds are used to improve the local area— infrastructure, schools, roads, and services. Taxes should work for the people who pay them, not just for a select few. For example, Lagos State is contributing the majority of VAT, so should see more of that money reinvested in the community.
While the proposed reform promises a fairer system, there are challenges ahead. Taiwo Oyedele, tchairman of Nigeria’s Fiscal and Tax Reforms Committee, has pointed out that businesses will now need to report where their taxable supplies are actually coming from in their VAT filings. This will make the system more transparent and accurate but will also require businesses to adapt and governments to enforce the new rules.
There are also concerns about the complexity of the VAT system. Anwenwillie Fru Ndenge, the owner of Professional Business Solutions, expressed his frustration on social media, saying, “The policy of VAT is much more complicated than it should be—why is this so? VAT should be the simplest and most profitable tax for any nation to implement.
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“I never knew it could be so complicated to manage and collect such a profitable tax. What is wrong with us Africans? Things that can be made much simpler and more profitable for everyone, if only there was more willingness on our part.”
However, the new VAT system has the potential to create a fairer, more transparent tax structure—one that helps regions develop based on their economic contributions. However, the real test will be the political will and effective implementation of the reform.
The government’s commitment is evident in President Tinubu’s firm stance during his visit to French President Macron, where he emphasised that there would be no turning back on Nigeria’s economic reforms, including tax reforms. If successfully implemented, the system could bring much-needed fairness and development. But if it falters, it will highlight just how difficult it is to implement meaningful change in a complex economic system.
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