The Chairman of the Presidential Tax Reform Committee, Taiwo Oyedele, has announced that upcoming tax reform legislation will eliminate all subnational consumption levies, retaining only the Value Added Tax (VAT) as a national standard.
In a detailed FAQ released on Monday, Oyedele explained that these new bills are intended to simplify and resolve complexities within the current tax laws. He addressed concerns regarding the derivation model for VAT allocation to states, assuring that the reform will not disadvantage any state.
Oyedele clarified that the proposed law includes a provision for a 5% allocation dedicated to equalization transfers, designed to support states that might receive lower revenue under the new derivation model.
“There is an 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 discontinue all consumption taxes other than VAT,” Oyedele explained.
He continued, “The controversy has arisen from perceptions that the new formula could reduce revenue for certain states. However, the 5% allocation from the Federal Government will be set aside for equalization transfers to mitigate any shortfall for a state under the new model. This ensures that no state is disadvantaged in the short term, while significantly enhancing economic activity and revenue for all states over the medium to long term.”
Revenue Agencies to Retain Regulatory Mandates
Addressing concerns about the future roles of other revenue agencies, such as the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) and the Nigerian Customs Service (NCS), Oyedele confirmed that these agencies will neither be scrapped nor merged under the tax harmonization plan. Instead, they will continue their regulatory functions, with budgeted allocations for their operations. However, these agencies will no longer handle the collection of regulatory fees within their jurisdictions.
Key Points of the Proposed Tax Bills
The new tax legislation under consideration in the National Assembly introduces a derivation principle for the allocation of VAT revenues between the federal government and subnational entities. This has prompted debate, with some northern elites expressing opposition, fearing their regions may not benefit.
Under the current VAT Act (Section 40), VAT revenue distribution is structured as follows: 15% to the Federal Government, 50% to the States and Federal Capital Territory (FCT), and 35% to Local Governments, with a derivation principle of at least 20% factored into the allocation to states and local governments. Additionally, distribution factors include 50% based on equality and 30% based on population.
The act also directs 4% of VAT collections to the Federal Inland Revenue Service (FIRS) as a collection fee, and 2% to the Nigeria Customs Service (NCS) for import VAT collections. The new bill aims to unify these various taxes and resolve tax multiplicity issues nationwide.
