I have spent quality time reading President Bola Tinubu’s tax reform bills aimed at bringing everything about collection and administration of tax in Nigeria under four different pieces of legislation – Nigeria Tax Bill, Nigeria Tax Administration Bill, Nigeria Revenue Service Establishment Bill and the Joint Revenue Board Establishment Bill. I agree that the bills will largely transform tax administration and collection in Nigeria, leading to greater efficiency and higher revenue for government at all levels. Majority of Nigerians will also benefit. However, there are some parts of the bills that must be expunged in the interest of the poor and working class.
The anger from many Nigerians over some sections of the VAT reforms is justifiable. For example, a section of the Nigeria Tax Bill is proposing a review of the VAT revenue sharing formula; states would take 55% instead of the current 50% while the federal government’s share of VAT revenue would shrink from the current 15% to 10%. The share of LGAs would remain 35%. It’s good that the federal government wants to reduce its share of VAT to 10%. This is not a problem. The problem in this section of the second bill called the Nigeria Tax Administration Bill, which recommended an amendment of the sharing method for the proposed 55% VAT for states, is that “derivation” will now take 60%.
The current sharing formula for states’ share of VAT is 50 percent for equality, 30 percent for population and 20 percent for derivation (50:30:20). Under Tinubu’s the proposal, the sharing ratio would be 20 percent for equality, 20 percent for population and 60 percent for derivation (20:20:60). So, “derivation” will jump to 60%. This is preposterous. It is like asking for the “derivation” in the oil and gas revenue sharing formular to be moved to 60% from 13%. Most of those quick to back this proposed 60% derivation for VAT sharing will stand against any 60% derivation proposal for oil and gas revenue sharing.
Lagos, FCT, Rivers and Kano take the largest chunk of VAT under the current sharing formula. Forget about the argument that the 60% VAT derivation proposal will put more VAT money in the pockets of other 33 states, at the expense of Lagos, Rivers, Kano and the FCT. The calculation based on consumption is a ruse. These three states and the FCT will always take the largest chunk, even with 60% VAT derivation. In any case, the other states are not complaining about the current VAT sharing formula. So, 50:30:20 should be retained. The proposed 60% VAT “derivation” should be deleted from the Nigeria Tax Administration Bill.
Another drawback in the Nigeria Tax Bill is the proposal to end the funding of federal intervention agencies with VAT revenues and other taxes from companies. Agencies like the North-east Development Commission (NEDC); National Information Technology Development Agency (NITDA); Tertiary Education Trust Fund (TETFund) and the National Agency for Science and Engineering Infrastructure (NASENI) will be badly hit. The Nigeria Tax Bill is also proposing the harmonisation of 2.5% education tax, 1% NITDA tax and 0.25% NASENI tax that many firms pay, in addition to their company income tax, annually into a single Development Levy of 2% that will be used exclusively to fund student loans from 2030. The likes of NEDC, NITDA, NASENI, TETFund will now be funded exclusively from federal budget. Foe me, it’s a big NO to this proposal.
Relying on budget is not that palatable. The intervention agencies will clearly not get as much as they are getting from direct tax funding. For example, NEDC currently receives three percent of VAT proceeds as part of its funding. For the first 10 months of 2024, NEDC got about N156 billion from the VAT pool alone. Under the proposed reform, NEDC will no longer be funded from VAT. If the Nigeria Tax Bill is passed fully as proposed, NEDC will lose about N180 billion annually. Can the agency get this back from federal budget? It will be very difficult.
So, I’m proposing that the proposed Development Levy of 2% in the Nigeria Tax Bill be deleted. Intervention agencies should continue to enjoy funding from VAT and other taxes, so that these agencies will continue to deliver on their mandate.
I’m also not in agreement with the proposed amendment to Personal Income Tax (PIT) in the Nigeria Tax Bill. The proposal is for individuals earning N800,000 or less per annum to be exempted from paying PIT. Currently, Nigerians earning N800,000 pay 10 percent as PIT. If passed as proposed, this aspect of the Nigeria Tax Bill will be a huge income loss to 33 states where the bulk of their PIT comes from wages. Besides, the federal government has no business singly taking a decision on PIT. It is the 36 states that are responsible for the collection of 98% of PIT. The federal government only collects PIT from the military and paramilitary personnel, FCT residents, foreign service officers, and people not resident in this country but derive income from Nigeria.
The PIT reform proposed in the Nigeria Tax Bill should be deleted. For me, the status quo should be maintained.
The Nigeria Tax Bill is also proposing that VAT rate be increased gradually from the current 7.5 percent to 10 percent and later to 15 percent in years to come. According to the Bill, it will a progressive increase from 7.5% to 10% in 2025; 12.5% between 2026-2029 and to 15% from 2030. It proposed the exemption of many basic items consumed by the poor from VAT such as food, medical services/ pharmaceuticals, education, electricity etc.
I did not see my good old Coca Cola on the list. It means VAT on soft drinks will eventually hit 15%. Beer and Stout are not on the list. These are drinks consumed largely by the poor and working use. Many Nigerians use Beer and Stout to mitigate sorrows created by our failed leaders. The point I’m making here is that some of the goods listed as luxury, and to be subjected to the proposed VAT increase, are in the true sense, not luxury goods. This is where beer, stout, soft drinks, and a number of other goods come in. So, there is the need for a holistic review of the goods and services to be subjected to the increase in VAT.
My conclusion? The Executive should withdraw the tax reform bills and amend them thoroughly as suggested in this piece. Apparently, there is need to do more work on them. The bills can then be re-presented to the National Assembly. This is really not the time to arbitrarily disrupt the revenue collection and allocation of the federation.
