By Michael Chibuzo
Following the insistence of President Bola Tinubu that he will not withdraw the tax reform bills he already sent to the national assembly for legislative action, many of those who were against certain provisions of the bills decided to engage in consultations that will yield their own recommendations especially in areas they disagree with provisions contained in some of the bills. This is far better than blackmail or rhetorical statements such as “the bills are dead on arrival”, “bills will have electoral consequences” or that “bills are anti-North”.
One of such groups is the Nigerian Governors Forum (NGF), who were among the first set of groups to ask the President to withdraw the bills for “more consultations” after a meeting of the National Economic Council that held on 31st October, 2024. Yesterday the Governors issued a communique saying that after engagement with the Presidential Tax and Fiscal Reforms Committee concerning the bills they have arrived at some resolutions/recommendations.
These recommendations include:
1. Revision of the VAT sharing formula. Instead of sharing 60% based on derivation and 20% apiece based on population and equality as contained in the Nigeria Tax Administration Bill, the Governors proposed sharing 30% based on derivation, 20% based on population distribution and 50% equal distribution among the 36 states.
2. No VAT rate increase
3. No reduction in company income tax (CIT) as proposed in the Nigeria Tax Bill from 30% to 25%.
4. TETFUND, NASENI and NITDA should continue to receive a share of the proposed development levy.
Among these four recommendations, it is clear that VAT sharing is the most important thing in the minds of many of the governors. I want to believe that the resolutions were not unanimously endorsed by all the 36 state governors but just a majority of the governors. This is not surprising to me because like I pointed out before now, VAT is the single biggest component of revenue that most states receive from the federation account.
VAT revenue that accrue to states in a year is more than the IGR of at least 33 states of the federation. VAT revenue grows significantly every year but the IGR of states appear stagnant or increases only marginally. So, it is understandable that the governors would be more interested in maintaining the level of VAT revenue they get annually than improving their internally generated revenue base.
NGF’S PROPOSED VAT SHARING FORMULA IS COUNTERPRODUCTIVE
I must state clearly that the VAT sharing formula that the governors are proposing is patently backward. First, it is not so different from the current sharing formula. The only change is swapping the percentage currently shared based on population distribution (30%) and that shared based on derivation (20%), leaving the elephant in the room – ‘percentage distributed equally’ intact at 50%. This is simply coming back to status quo or even worse considering how Lagos and Rivers would be affected.
It appears members of the NGF do not realise that the major reason for the revision of the VAT sharing formula in the Nigeria Tax Bill and the Nigeria Tax Administration Bill is to ward off a judicial challenge by Lagos and Rivers over the continued collection of value added tax federally. The bills sought to change the attribution of VAT revenue from place of remittance (which favours Lagos due to the headquarters effect) to the location of actual consumption, which spreads the pie across the country.
The amount of VAT revenue due to the states to be shared based on derivation was raised to 60%. Furthermore, as a compromise to ensure no state gets lesser VAT revenue than it used to get before the reforms, the federal government agreed to reduce its share from 15% to 10% so that the share accruing to the states can be increased to 55% while that of LGAs remains at 35%.
This should have been a very fair and equitable formula in which every party wins, except perhaps the FG. Unfortunately, the NGF chose the shortsighted path, obviously due to fear of experimenting a new model that may reduce their FAAC inflows.
Their recommendation to reduce the 60% derivation share contained in the Nigeria Tax Administration Bill to 30% will as a matter of fact, raise more questions than answers and more problems than solutions.
For example, apart from proposing reducing the derivation share to 30%, what VAT attribution model are they also recommending? If they recommend reducing the derivation share to 30%, for it to even make a little sense to Lagos and Rivers, the attribution should go back to being determined by headquarters remittance instead of the new model proposed in Section 22(12) of the Nigeria Tax Administration Bill.
If the NGF’s recommendation on VAT sharing formula is upheld by the national assembly while also retaining section 22(12) of the Nigeria Tax Administration Bill, it means that Lagos and Rivers State would certainly continue their case at the Supreme Court because the new VAT regime would lead to an even lower VAT revenue for them.
This is because with headquarter remittance model, Lagos State would still have at least 40% of the VAT revenue collected in Nigeria attributed to it and even if the derivation is just 20% as is currently the case, they will receive a sizeable share.
But if attribution changes to location of consumption as proposed in section 22(12) of NTAB (which the NGF does not object to), while share by derivation increases marginally to 30% as being proposed by the NGF instead of 60% in the bill, then it means that VAT revenue attributed to Lagos as per location of consumption would have reduced significantly and 30% of this sum will be far lower than the 20% it currently gets from over 40% of total VAT revenue attributed to it. Once that is the case, Lagos will simply tell FG, see you back in court!
WHY LAGOS WILL COMPLAIN
Let me borrow and tweak the VAT simulation earlier done by the Chairman of the Presidential Tax and Fiscal Reforms Committee, @taiwoyedele to buttress why the NGF proposal will be unacceptable to Lagos and to an extent, Rivers State. In his simulation, Mr. Taiwo Oyedele assumed a VAT remittance of N120 billion by MTN, Nigeria’s biggest VAT contributor.
Current sharing formula: Based on the current attribution model for the purpose of calculating derivation, the entire N120 billion remitted by MTN is attributed to Lagos state because MTN remits this amount in Lagos where its headquarters is located even though the VAT is deducted from its subscribers spread across the entire country.
Let’s assume the N120 billion is meant to be shared by states only, then during sharing by derivation, Lagos gets 20% of the entire N120 billion, which amounts to N24 billion. This leaves N96 billion (80% of the MTN VAT) for sharing to the 36 states including Lagos on the basis of equality and population distribution. 50% of the original N120 billion is shared equally, i.e. N60 billion to 36 states. Lagos will therefore get another N1.66 billion.
The remaining 30% (N36 billion) is shared on the basis of population distribution. Lagos according to the 2023 population census projections has 15.77 million inhabitants or 6.85% of Nigeria’s population just behind Kano. Therefore, 6.85% of N36 billion gives N2.47 billion. The total MTN VAT share of Lagos under the current sharing formula would therefore become N28.13 billion (or 23.44% of the overall VAT that MTN remitted).
Proposed sharing formula in the NTAB: Under the model proposed in the tax reform bills, attribution would be by location of consumption. 60% of VAT revenue due to states would be shared by derivation. Let’s assume that Lagos MTN subscribers account for at least 10% of the VAT revenue MTN collects.
This means under the new model of VAT revenue attribution proposed in Section 22(12) of NTAB, Lagos gets 60% of the 10% VAT revenue that MTN remits, assuming the entire N120B is to be shared by the 36 states only.
On this premise:
A) % of N120B to be shared based on derivation = N72B (60%)
B) % of N120B to be shared based on equality = N24B (20%)
C) % of N120B to be shared based on population = N24B (20%)
Lagos share by derivation = N7.2B (10% of the N72B)
Lagos share by equality = N667 million (N24 billion divided by 36 states)
Lagos share by population = N1.64 billion (6.85% of N24 billion)
Total Lagos share of VAT under this model = N9.51 billion (or 7.93% of the entire N120B).
NGF Proposed Model: The model proposed by the NGF is 50% equal sharing (N60 billion of MTN VAT revenue), 30% sharing based on derivation (N36 billion of MTN VAT revenue) and 20% based on population (N24 billion of MTN VAT revenue). Meanwhile, the governors did not kick against the attribution of VAT revenue based on location of consumption. So, to calculate what Lagos would get from the MTN N120 billion VAT remittance under the governors’ proposed model, we use the percentage of MTN consumption in Lagos, which I pegged at 10% for the purposes of attributing VAT revenue to Lagos.
Therefore,
Lagos share by derivation = N3.6B (10% of the N36B)
Lagos share by equality = N1.67 billion (N60 billion divided by 36 states)
Lagos share by population = N1.64 billion (6.85% of N24 billion)
Total Lagos share of VAT under this model = N6.91 billion (or 5.76% of the entire N120B).
From the foregoing, it is obvious that the proposal by the Nigerian Governors Forum on the VAT sharing forum instead of placating Lagos and of course Rivers State rather aggravates their discontent. The Governors’ proposal will benefit 35 states who will see more VAT revenue inflows while Lagos and Rivers will suffer tremendous reduction in their VAT inflows.
AND THREE OTHER THINGS…
1. The NGF proposal to expunge the provisions for VAT rate increase for some categories of items in the Nigeria Tax Bill may appear pro-masses but it is not. The many new items which were exempt from VAT or zero rated in the Nigeria Tax Bill would return to being VATable. The proposed progressive increase in VAT rate in the bill was to compensate for the potential loss of tax revenue due to the exemption of many new items which constitute over 70% of consumption spending of an average poor Nigerian.
2. The proposal by the NGF to keep CIT at 30% is very bizarre and probably shows that the NGF are not interested in making businesses thrive. They care more about revenue inflows into their state coffers from the federation account. How on earth would heads of governments who want to encourage investment kick against reduction of CIT? It doesn’t make sense and if NASS members agree to this proposal, it would send a very bad signal to businesses and would likely deter those hoping to invest in Nigeria or expand their business in Nigeria.
3. The TETFUND, NASENI and NITDA recommendation of the NGF is not forward thinking at all. These interventionist agencies should be funded through budgetary provisions and other sources and not through deductions from the profit of companies. It makes more sense to plough the harmonised development levy into funding the landmark student loans. The student loan scheme has more direct and visible impact to warrant taxing of companies’ profit.
In conclusion, I hold a strong view that basically all the recommendations made by the Nigerian Governors Forum are counterproductive to the major reforms envisaged in the tax reform bills especially as it relates to encouraging businesses and solving the VAT logjam. I am not sure the governors sat down for long to sufficiently look at all the possible consequences of their recommendations on the overall tax reform objectives. I urge the national assembly members to disregard these recommendations.