BY SIMON KOLAWOLE
It’s been very difficult for me to comment on the VAT component of the tax reform bills because of lack of data. President Bola Tinubu has proposed to increase VAT derivation from 20 percent to 60 percent. This has led to political pushbacks and media war. Proponents argue that the bill is so good it will incentivise states to become more productive to benefit from derivation payments. That easy? Opponents, particularly from the north, say it will cripple every state, apart from Lagos. That bad? As with many things in Nigeria, many commentators and opinion leaders have automatically taken default positions, usually built on ethnic and regional sentiments as well as received wisdoms.
Dr Rabiu Musa Kwankwaso, former governor of Kano state, claimed that the reform is an attempt by Lagos state to colonise northern Nigeria using tax. “Today, as we have noticed, even the telephones that we make or register here in Kano, efforts are there to take all the taxes to Lagos,” he said. Ironically, this is the same anomaly proponents of the reform say they want to redress. Prof Babagana Zulum, governor of Borno state, told the BBC Hausa: “We reject the tax reform bill; it will bring backwardness to the north, and not only to the north, but also to the south-east, south-south, and south-west. Oyo, Osun, Ekiti, and Ondo will also have problems; it will only benefit Lagos.”
The North East Development Commission (NEDC) — of which Borno is the biggest beneficiary as a result of post-Boko Haram rehabilitation public works — receives 3 percent of VAT revenues as part of its funding. For the first 10 months of 2024, NEDC got about N156 billion from the VAT pool alone, in addition to other funding sources. Under the proposed reform, NEDC will no longer be funded from VAT. That is an average of about N15 billion per month, which will now be shared by the 36 states and FCT if the amendment passes. I do really understand why Zulum is unhappy and why Senator Ali Ndume (Borno south) has threatened to quit the APC. This is a huge amendment.
Not every northerner is against the bills, though. Mr Muhammad Nami, former chairman of the Federal Inland Revenue Service (FIRS), said the reform will put an end to VAT manipulation. “VAT returns by companies are not filed on the basis of the place of consumption but reported based on the head office locations of these companies,” he said. “This means that a whopping 20% of VAT returns are distributed back to states where these head offices are located — whether consumption took place there or not; it explains why Lagos, FCT and Rivers always take the largest chunk of VAT under the current regime.” The proposed reform will emphasise fairness and equity, he argued.
Hon Abdulmumin Jibrin, representing Kiru/Bebeji (Kano state) in the House of Reps, also countered the critics, suggesting that 99 percent of those against the reform have not even read the bills. He criticised northern pressure groups for their critical position. “When President Tinubu introduced the bills, there was initial excitement, but unfortunately, some people rushed to conclusions without properly reading the bills or seeking clarification,” he said, insisting that the advantages of the bills surpass “whatever you’re going to lose from the disadvantages”. He added: “I have never had any doubt about the consideration and passage of the tax reform bills. We will pass the tax reform bills.”
I will, however, still find it very difficult to take a position on the proposed derivation formula until I see the workings. Thanks to the boffins at Agora Policy, one of the nation’s leading policy think tanks, I am well informed about the aggregate figures of the current VAT distribution formula dating back to 10 months (January to October 2024). Contrary to the received wisdom that one part of the country is a parasite sucking the blood of the other, the data is damning. Of the 36 states of the federation, 32 got more from the VAT pool than they “contributed”. Let me say that again. Only four states got as much as they “contributed” to the pool — the rest are parasites in varying degrees. I love data.
Nevertheless, these data sets are based on the current formula which calculates derivation on the basis of where the companies are headquartered. But VAT, by nature, is supposed to be paid at the point goods or services are consumed. As things stand, if you buy a recharge card in Ilorin, the VAT derivation is attributed to Lagos where the telcos have their headquarters. If you do a banking transaction in Ibadan, the VAT derivation is attributed mostly to Lagos where almost all the banks have their head offices. Clearly, the biggest “contributors” to the VAT pool enjoy the “headquarters effect”. The data is in the public domain. I am delighted Agora Policy did an amazing work on that.
This, for me, is the problem to be tackled: by the time we move from VAT attribution “by headquarters” to the proposed attribution “by point of consumption”, what will the data look like? The proponents are presenting it as “Lagos will be the biggest losers”. The opponents are saying “Lagos will be the only beneficiaries”. Both cannot be right. The best way to settle this argument is to give us raw data on what VAT “by point of consumption” will look like. This should settle the argument. Can we use December 2024 and January 2025 as a test-run before we go ahead with the amendment? Let all VAT remitters disaggregate their reporting based on the point of consumption.
There is too much emotion on display on a matter that can be settled by mathematics. My sense is that many who think they will lose may gain and many who think they will gain may lose. Just a hunch. I do not believe the entire south will gain or the entire north will lose as the narratives out there suggest. I do not see, for instance, a state like Kano losing more than it will gain, despite Kwankwaso’s claim. The volume of economic transactions in Kano may actually favour the state but Borno may not benefit much. The same scenario may apply to Oyo and Osun in the south-west. But we are so wired to reason along sectional lines that we do not have time for science on any issue.
Despite the raging controversy over the reform bills because of the VAT part, there are many provisions worth looking at. There are four bills in all: the Nigeria Tax Bill, the Nigeria Tax Administration Bill, the Nigeria Revenue Service Establishment Bill and the Joint Revenue Board Establishment Bill. Together, they are called the tax reform bills. They seek to improve on the current tax laws. The stated objective is to provide uniform procedures for a “consistent and efficient” administration of tax laws in Nigeria “in order to facilitate tax compliance by taxpayers and optimise tax revenue”. Many of the provisions are actually worth the paper on which they are printed.
For one, the federal government is shaving off some percentage of its share and giving it to the states. The current formula gives federal government 15 percent; states and FCT, 50 percent; and LGAs, 35 percent. States share theirs on a ratio of 50:30:20 — 50 percent for equality, 30 percent for population and 20 percent for derivation. The proposal is 10 percent for federal government, 55 percent for states and 35 percent for LGAs. States, under the proposal, will use the sharing ratio of 20:20:60 — equality, population, derivation. VAT has become the biggest revenue earner, hopping above crude oil. That is why all eyes are now on the tax, introduced in 1993 by Gen Sani Abacha.
The new bills provide exemption for individuals earning N800,000 or less per annum. Those currently earning N800,000 pay over 10 percent of that as personal income tax (PIT). The proposal is good for low-income earners; N84,000 means a lot to them. But while raising the threshold to N800,000 may sound good to them, it is a big revenue loss to some states where the bulk of the PIT comes from salaries. Moreover, can the federal government unilaterally take a decision on PIT? After all, federal government is allowed to collect PIT only from the armed forces, police force, foreign service officers, FCT residents and persons not resident in Nigeria but who derive income or profit from the country.
Small businesses — defined as those with an annual turnover of less than N50 million (up from the current N25 million) — will not pay company income tax (CIT). This will benefit thousands of businesses. Meanwhile, companies that do not declare a profit will no longer be mandated to pay a flat charge of one percent on turnover. Only actual profit will be taxed. For the big companies, CIT rate will be reduced from 30 percent to 25 percent within two years. Some basic goods and services consumed by low-income earners are also to be VAT-exempt. However, VAT rate will be increased gradually from the current 7.5 percent to 10 percent and later to 15 percent in years to come.
All said and done, there are many aspects of the bills that are necessary, beneficial and long overdue, and should help businesses — and, invariably, the economy — grow. If properly implemented, this reform has the potential to reduce the tax burden on individuals and businesses, eliminate multiple taxation, bring more people into the tax net and increase our tax revenue at all levels. However, no matter how wonderful a policy is, it can die on the altar of politics. The fight over VAT derivation is purely political. Policy makers always have a duty to take care of the political side of things if they really want to succeed. That is why we talk about stakeholder management and consensus building.
I have my own reservations about VAT derivation jumping from 20 percent to 60 percent in one fell swoop, but at least I read the bills. Many are commenting furiously without reading. This is not uncommon with us. Only very few people make comments based on knowledge. Some just parrot others because it feeds their biases and prejudices. Sadly, negative comments can do irreparable damage. I heard a respected employer saying the bills will impose more taxes on poor Nigerians. A senator said the bill proposes VAT exemption for those earning less than N800,000 per annum. Except there are two versions in circulation, there are no such provisions in the bills that I have read.
Ultimately, this one is on Tinubu. No matter how fantastic a policy is, it still has to be sold to the stakeholders, not presented to them as “take it or leave it”. You cannot set up a committee to develop a major policy on revenue sharing without involving the stakeholders at every stage. They have to make inputs. They have to comment, object, negotiate and reach a compromise. They have to see the drafts before you start announcing the details on TV. Without their buy-in, it would amount to force-feeding them with a fait accompli. The best of policies can die because of poor engagement and poor communication. I want to see how Tinubu will wriggle his way out of this.
