Taiwo Oyedele, the Chairman of the Presidential Fiscal Policy and Tax Reforms Committee, has shed light on the reasons behind the controversy surrounding the Value Added Tax (VAT) distribution proposal currently before the National Assembly.
In a post shared on his X account, titled “10 Most Frequently Asked Questions About the Tax Reform Bills,” Oyedele pointed out that the existing VAT system is fragmented, with significant issues arising from disputes over VAT administration between certain states and the Federal Government, among other factors.
As reported by DAILY POST, President Bola Tinubu submitted four tax reform bills to the National Assembly for review on September 3. These reforms are based on recommendations from the Presidential Committee on Fiscal and Tax Reforms, which Oyedele leads, aimed at revising current tax laws.
Central to the ongoing debate is the proposed transition to a derivation-based model for VAT distribution. The bills have elicited mixed reactions nationwide.
In further elaboration on the benefits of the proposed tax reforms, Oyedele indicated that his committee’s analysis suggests that a centralized collection system would be more efficient and advantageous for all states. He also mentioned that the reform aims to eliminate all consumption taxes except for VAT.
Oyedele stated: “Why is the VAT proposal causing such controversy? Are we attempting to fix something that isn’t broken?
“The current VAT system is indeed fractured. The primary issues include:
“(i) Disputes over VAT administration between certain states and the federal government, leading to landmark judgments and ongoing court cases. This situation is exacerbated by the absence of VAT in the 1999 Constitution, creating a legal gap. Our analysis indicates that a centralized collection system is more efficient and beneficial for all. Once these contentious issues are resolved, VAT can be properly incorporated into the constitution. The existing revenue-sharing formula of FG 15%, States 50%, and LGs 35% is proposed to change to FG 10%, States 55%, and LGs 35%.
“(ii) The imposition of parallel consumption taxes in some states alongside VAT, which increases the tax burden on citizens and contributes to multiple taxation. The reform aims to eliminate all consumption taxes except for VAT.
“(iii) The basis of distribution – the current formula for sharing VAT among states is based on 20% derivation, 50% equality, and 30% population. The tax reform proposes a new derivation model that attributes VAT to the location of supply and consumption, rather than the current model that attributes VAT to the state where it is remitted, favoring states with corporate headquarters. Under the new model, derivation will account for 60% of VAT distribution to promote equity and discourage any state from attempting to administer VAT as a state tax, which would not only reduce revenue for all levels of government but also increase the burden on businesses.
“The proposed derivation model is outlined in Section 22(12) of the Nigeria Tax Administration Bill, which states that “For the purpose of attribution, any return under this section shall provide details of derivation of taxable supplies by location.”
“The controversy stems from the belief that the proposed formula may result in reduced revenue for some states. However, the 5% to be ceded by the FG can be allocated for equalization transfers to address any shortfall for a state under the new model. This ensures that no state is disadvantaged in the short term while significantly boosting economic activities and revenue for all states in the medium to long term.”
