Taiwo Oyedele, the chairman of the Presidential Fiscal Policy and Tax Reforms Committee, said decentralisation of Value Added Tax (VAT) collection will lead to over 50 percent revenue loss for all states of the federation.
Oyedele said this in his response to the Revenue Mobilisation Allocation and Fiscal Commission’s (RMAFC) concerns regarding the VAT revenue-sharing formula outlined in the tax reform bills currently before the National Assembly.
In a detailed statement on Wednesday, Oyedele emphasised the necessity of the reforms to ensure Nigeria’s inclusive growth and addressed specific issues raised by the RMAFC.
He called for constructive engagement to resolve disputes surrounding VAT administration, particularly the ongoing legal battle between Rivers and Lagos states and the federal government over the control of VAT.
Oyedele highlighted that VAT, introduced in 1993 to replace sales tax administered by states, is collected centrally for efficiency but remains fundamentally a state tax.
“Moving away from the central collection of VAT will not only lead to significant revenue loss of over 50% for all the states, they will also face challenges in collecting VAT as evident from the old sales tax regime administered by states and the consumption tax being collected currently by some states,” the tax chairman said.
Currently, 85% of VAT revenue is allocated to states, with the federal government retaining 15%, despite generating a significant portion through import VAT and collections in the Federal Capital Territory (FCT), Oyedele noted.
VAT is not explicitly mentioned in the 1999 Constitution, making it a residual matter under states’ purview. This has led to disputes over its administration and revenue-sharing formula.
Oyedele also clarified that VAT revenue is held in a special pool account separate from other federation revenues and distributed without the involvement of the RMAFC, similar to stamp duties, which are allocated based on 100% derivation to states.
He noted that the tax reform bills aim to resolve longstanding inequities in VAT distribution and address legal and practical challenges.
According to Oyedele, there will be significant consequences if the Supreme Court rules in favour of Rivers and Lagos states to allow VAT collection at the state level.
He pointed out that while RMAFC previously conducted nationwide consultations on revenue-sharing formulas, VAT was excluded from these discussions despite its inequities. He urged the commission to join the ongoing consultations with key stakeholders to develop a workable solution.
Read the full statement below.
RE- RMAFC POSITION ON PROPOSED VAT DISTRIBUTION FORMULA
CONTEXT
We are pleased to note the support of the Revenue Mobilisation Allocation and Fiscal Commission (RMAFC) for the four tax reform bills presently before the National Assembly and the acknowledgement that the reforms are necessary to set our country on an inclusive growth trajectory for the benefit of all Nigerians.
Regarding the RMAFC’s position on the proposed VAT sharing formula, it is important to provide some context and highlight the issues which the reforms seek to address.
1. VAT was introduced via a decree in 1993 to replace the sales tax which was being administered by states at the time. While it is being centrally collected to ensure better efficiency and manage the intricacies of the multi-layered nature of VAT, there is a recognition that VAT remains a state tax.
2. Hence, 85% of the revenue is distributed to states with the federal government retaining only 15% which is a fraction of the VAT generated by the FCT and import VAT that ordinarily belong to the federal government. The sustained central collection and sharing formula therefore reflect this understanding among the tiers of government.
3. The tax predates the 1999 Constitution and despite having been in operation for over 5 years, the tax is not mentioned in the 1999 Constitution making it a residual matter within the purview of the states.
4. As a result of the above, VAT is paid into a special pool account and not treated along with the other revenues accruable to the federation for which the RMAFC is expected to play an advisory role regarding the sharing formula as contained in section 162 of the 1999 Constitution. A similar revenue item is stamp duties which also belong to states and it is meant to be shared among them based on 100% derivation without any requirement for the RMAFC to be involved in determining the sharing formula.
THE KEY ISSUES
The proposed VAT revenue sharing formula in the tax bills along with the other VAT reform proposals are meant to address key issues which are existential to the VAT regime as currently operated. There is a pending case by Rivers and Lagos states seeking to administer VAT as a state tax in view of the perceived inequity in the current distribution formula. In addition to the perceived unfairness of the distribution formula, the current derivation model is skewed in favour of head office locations, which mainly benefits Lagos and Rivers state.
If the case, which is pending at the Supreme Court succeeds:
1. States will lose the opportunity to share VAT revenue among themselves as any revenue generated by each state will be retained 100%, i.e. 100% derivation model.
2. Import and international VAT will become the sole revenue of the federal government along with FCT VAT, which altogether account for more than 50% of the current VAT revenue compared to the 15% being shared by the federal government that is proposed to reduce to 10% under the tax bills in favour of states.
3. Moving away from the central collection of VAT will not only lead to significant revenue loss of over 50% for all the states, they will also face challenges in collecting VAT as evident from the old sales tax regime administered by states and the consumption tax being collected currently by some states.
4. This will make states and local governments vulnerable and further increase subnational fiscal risks with the attendant economic and social consequences.
5. There will also be challenges to commerce and interstate trade in addition to the cascading effect on inflation.
THE ROLE OF RMAFC
We note without conceding to the view expressed by the RMAFC regarding the proposed sharing formula. We believe that the focus should be on the ongoing engagements with key stakeholders to reach an acceptable position as a matter of priority.
From the Commission’s statements, it is clear that more understanding of the issue is required to enable more constructive contributions to the debate towards an effective resolution. Some of the concerns expressed which are either not applicable or only require some clarifications include:
1. That VAT consumption needs to be determined based on taxpayer residence. This is not the case with VAT or any consumption tax unlike income tax.
2. The illustration regarding the purchase of an asset in Lagos for use in Kano does not pose any difficulties as VAT has an inbuilt mechanism for input and output VAT where only the VAT related to incremental value added in a jurisdiction will be attributed to such location with production treated as intermediate consumption at each stage of the production process prior to the final consumption.
3. There is no need for any technology to track the location of consumption, every eligible business will simply be required to indicate the location of sales in its VAT returns as stipulated under section 22(12) of the Nigeria Tax Administration Bill. It is not necessary to tag VAT collections to end-user locations from sale to consumption, neither is it practical to do so. Afterall we may not be able to tag services or creative work that are digitally delivered as intangible goods.
4. The horizontal distribution of VAT revenue among states is not based on a formula of 50% derivation, 35% population and 15% equality as stated by the Commission but rather 20% derivation, 50% equality and 30% population.
We are aware of various efforts by the RMAFC over the past decade including the nationwide consultation exercise on the review of the federation revenue sharing formula 3 to 4 years ago. Not only was VAT excluded from this exercise despite the apparent inequity in the distribution formula, the outcome of the revenue sharing consultation is yet to be concluded many years after. VAT administration is already under dispute, therefore seeking a political solution to avoid the risk of the tax being adjudged as a tax to be administered by states requires urgent action.
THE WAY FORWARD
We look forward to the RMAFC joining the ongoing effort including consultation with key stakeholders to arrive at a generally acceptable outcome. This moment calls for a constructive and objective approach focusing on finding a workable solution, avoiding further controversies and working together in order to move our nation forward.
Taiwo Oyedele
Chairman, Presidential Fiscal Policy & Tax Reforms Committee
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