The chairman of the Presidential Tax Reform Committee, Taiwo Oyedele, has stated that the proposed tax reform bills will eliminate all subnational consumption levies, except for Value Added Tax (VAT).
In an explainer on ten different FAQ released on Monday, Oyedele noted that the new bills aim to resolve certain complexities in the existing tax laws.
Addressing the controversy surrounding the derivation model for VAT allocation to states, Oyedele assured that no state would be left at a disadvantage.
He explained that the law provides for a 5% allocation dedicated to equalisation transfers to compensate states that might collect less under the derivation model.
“Imposition of parallel consumption taxes in some states along with VAT which increases the tax burden on the people and contributes to multiple taxation. The reform seeks the discontinuation of all consumption taxes other than VAT.
“The controversy has arisen from the perception that the proposed formula would lead to lower revenue for some states. However, the 5% to be ceded by the FG can be set aside for equalisation transfers to cater for any shortfall to a state under the new model.
“This ensures that no state is worse off in the short term while significantly enhancing economic activities and revenue for all states in the medium to long term,” Oyedele said.
No Revenue Agency will be Scraped or Merged
Oyedele also addressed questions regarding other revenue agencies, including the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) and the Nigerian Customs Service (NCS), and whether they might be scrapped or merged under the tax harmonization plan.
The tax expert clarified that this is not the case. Instead, these agencies will continue to focus on their regulatory mandates, with their allocations provided through the budgetary process.
He further noted that these agencies will no longer retain the responsibility of collecting regulatory fees within their respective jurisdictions.
What you should know
The new tax bills currently under consideration in the National Assembly propose a derivation principle in the allocation of VAT revenues between the federal government and sub-national entities.
- These bills have sparked controversy, with northern elites outrightly rejecting them on the grounds that they may not benefit their region.
- Under the existing Section 40 of the VAT Act, VAT revenue is distributed as follows: 15% to the Federal Government, 50% to the States and Federal Capital Territory (FCT), and 35% to Local Governments. The allocation to states and local governments incorporates a derivation principle of at least 20%.
- Although not explicitly stated in the VAT Act, additional factors influencing the distribution include 50% based on equality and 30% based on population. Furthermore, 4% of collections are allocated to the Federal Inland Revenue Service (FIRS) as a collection fee, while 2% goes to the Nigeria Customs Service (NCS) for import VAT.
The proposed bill seeks to harmonize these taxes and address the issue of tax multiplicity across the country.
