The Nigerian tax reform bill: A slap in the face of federalism

The proposed Nigerian Tax Reform Bill, currently under scrutiny in the National Assembly, has sparked widespread debate. While the federal government has promoted it as a catalyst for economic growth, the bill poses a grave threat to the principles of federalism, undermining the fiscal autonomy and sustainability of Nigeria’s states. Recently, the National Economic Council (NEC), chaired by state governors, urged President Bola Tinubu to reconsider the bill, identifying it as a covert effort to centralise fiscal control and hinder states’ ability to serve their citizens effectively.

A dangerous precedent in revenue allocation

One of the bill’s most concerning provisions is its proposed approach to revenue distribution, which would change how federally collected taxes are allocated to states. Equitable revenue distribution is fundamental in any federal system, allowing federating units to fulfil their responsibilities to citizens. Under the guise of reform, however, this bill threatens to consolidate fiscal power within the federal government, reducing states’ capacity for financial independence. If passed, it risks steering Nigeria toward a centralised control model that undermines the federal structure meant to empower each region.

A betrayal of federal principles

Federalism relies on the distribution of power and resources between national and state governments to foster local growth and development. This bill disrupts that balance. Instead of empowering states, it could subordinate them, stripping them of control over essential resources needed for self-governance. Imagine states relegated to mere bystanders, dependent on federal allocations for critical expenditures—this bill threatens to create precisely such a scenario, contradicting Nigeria’s constitutional commitment to federalism and local autonomy.

Implications for our federal structure

The implications for Nigeria’s federal system are profound. While a derivation-based VAT model might promote regional development, it also risks contravening federalism’s core principles of equitable sharing and collaboration. By shifting VAT allocation focus to the states where it is generated, the bill could deepen existing disparities between states, disadvantaged those with lower industrial capacity, and exacerbating historical inequalities.

Redirecting VAT revenues back to their generating states is, at first glance, a fair approach. However, states with lower industrial activity—often due to historical underinvestment or geographic limitations—would face substantial disadvantages under this model. Without federal redistribution, these states may struggle to attract the investments needed to expand their VAT base, perpetuating a cycle of limited development and resource scarcity. A federal system should prioritise balanced development across all states; penalising regions based on factors beyond their control risks fragmenting Nigeria’s unity and prosperity.

The VAT allocation controversy

Another contentious element of the bill is its Value Added Tax (VAT) allocation framework. Currently, VAT is collected centrally and distributed according to a federal formula that ensures each state receives a fair share, regardless of economic size. However, the bill’s proposal to let each state retain 100 percent of its VAT risks exacerbating regional economic imbalances, as wealthier states would accumulate more revenue while less economically active states struggle to fund basic infrastructure and services. Such a structure undermines the collaborative spirit of federalism, which relies on equitable wealth distribution to promote unity and progress.

New Excise Duties: Burdening the economy and citizens

Adding to these concerns is the bill’s reintroduction of a 5 percent excise duty on services such as telecommunications, gaming, and gambling. In a country already burdened by record-high living costs, this tax would impose an additional financial load on both businesses and consumers. Far from fuelling growth, it risks stalling Nigeria’s emerging digital economy and could stymie one of its most promising sectors.