Nigeria’s proposed tax reform bill, introduced by the Presidential Committee on Fiscal and Tax Reform chaired by Taiwo Oyedele, has stirred widespread debate.
The reform bill, which aims to streamline the tax system, includes harmonising multiple levies, unifying revenue collection processes, and integrating technology for greater efficiency.
At the centre of the proposal is a plan to adopt the derivation principle for the distribution of Value Added Tax (VAT) revenues.
Under this principle, VAT revenue would be distributed based on where goods and services are consumed rather than pooled centrally and redistributed.
Federal Inland Revenue Service (FIRS) Chairman, Zacch Adedeji, explained the rationale by clarifying that VAT is fundamentally a consumption tax.
He stated, “On derivation, I see there is a mix-up here. We have the oil and gas. If you look at the oil and gas, where they produce is where we sell and collect money from the oil. That’s why it is limited to their States.
“VAT by definition is a consumption tax. If you use derivation in VAT, what it means is that where is it consumed. Where do you make the call? Where is the bank transaction done? What the bill seeks to correct is that the existing structure we have does not represent the intent of Nigeria.”
While the reform aims to ensure fairer revenue distribution, it has met strong opposition from northern states.
Some Northern stakeholders argue that the contents of the proposed bill are against the interests of the North and other sub-nationals.
They claim that switching to a derivation model would unfairly favour economically dominant states, particularly Lagos, where most companies’ headquarters are located.
Tribune Online reports that recent data from FIRS highlights the disparity in VAT contributions and allocations.
In August 2024, Lagos State alone generated more VAT (N249.77 billion) than the combined total of 35 other states and the Federal Capital Territory (FCT) but only received N40.22 billion in allocation.
Meanwhile, ten northern states, which contributed a combined N13.69 billion, received a staggering N59.17 billion in allocations.
For instance, Zamfara State contributed N432.80 million but received N5.65 billion, while Katsina generated N1.68 billion and received N7.27 billion.
Below is the full list of what some northern states contributed to the VAT pool and what they benefitted (August 2024):
1. Zamfara
Contributed: N432.80m
Allocated: N5.65bn
2. Kebbi
Contributed: N665.17m
Allocated: N5.66bn
3. Bauchi
Contributed: N691.28m
Allocated: N6.48bn
4. Nasarawa
Contributed: N1.47bn
Allocated: N4.97bn
5. Jigawa
Contributed: N1.59bn
Allocated: N6.42bn
6. Katsina
Contributed: N1.68bn
Allocated: N7.27bn
7. Yobe
Contributed: N1.71bn
Allocated: N5.26bn
8. Niger
Contributed: N1.73bn
Allocated: N6.12bn
9. Sokoto
Contributed: N1.84bn
Allocated: N6.07bn
10. Taraba
Contributed: N1.88bn
Allocated: N5.27bn
Total contribution: 13.69 billion
Total allocation received: 59.17 billion
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