Northern Governors Reject (VAT) distribution model
In a heated development in the ongoing tax reforms, Taiwo Oyedele, Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, has voiced his concerns over the Northern Governors Forum’s opposition to the derivation-based Value Added Tax (VAT) distribution model proposed in Nigeria’s new finance bill. The Northern Governors, led by Gombe State Governor Muhammed Inuwa Yahaya, argue that this derivation-based model disregards the welfare of northern states and other sub-national regions, appealing for it to be scrapped.
The VAT distribution model, historically designed to allocate revenue based on VAT remittance locations, has been under scrutiny as it often favors economically advanced states where VAT is collected, rather than where goods are consumed. According to Oyedele, this current model introduces fundamental inequities, disadvantaging multiple states across Nigeria’s geopolitical zones and distorting the true purpose of tax revenue distribution.
Oyedele’s committee proposes a shift in VAT distribution that would factor in the place of supply or consumption, ensuring states benefit from taxes on goods and services consumed within their borders. He highlighted telecommunications as a prime example, suggesting that taxes should reflect the location of the subscriber, not just where the services are technically provided. “Our proposal aims to create a fairer system by devising a different form of derivation,” he explained, “which takes into account the place of supply or consumption for relevant goods and services, whether they are zero-rated, exempt, or taxable at the standard rate.”
Despite these proposed changes, the Northern Governors are unyielding. Following a meeting with northern elders, they released a communiqué condemning the derivation model, arguing it marginalizes the North. They urged the National Assembly to dismiss the finance bill and any related legislation, saying that it threatens the region’s economic stability.
The Current VAT Allocation Model
Under Section 40 of Nigeria’s VAT Act, revenue distribution currently assigns 15% to the Federal Government, 50% to the States and the Federal Capital Territory (FCT), and 35% to Local Governments. Additionally, 50% of the VAT revenue allocated to states and local governments is distributed based on equality, 30% is population-based, and 20% is based on derivation principles, where VAT is typically allocated to where it is collected.
While the proposed reforms could benefit less industrialized states by reflecting consumption across Nigeria, opposition from the Northern Governors highlights the ongoing challenge of balancing federal and regional interests. This conflict sheds light on the broader debate over Nigeria’s tax allocation system and whether the current centralization hinders equitable national development.
With the Northern Governors’ opposition, Oyedele’s team now faces an uphill battle in implementing reforms meant to correct deep-seated revenue disparities. As the National Assembly deliberates on the finance bill, the outcome will likely set a crucial precedent for fiscal reform and regional equity in Nigeria. for fiscal reform and regional equity in Nigeria.
Reference
Taiwo Oyedele reacts to Northern Governors’ opposition to derivation model of VAT distribution