By Olusegun Adeniyi
The controversy surrounding the proposed adjustment to the formula for sharing the Value Added Tax (VAT) among states in Nigeria, particularly the derivation component, has sparked heated debates. This stems from the tax reform bills presented to the National Assembly by President Bola Tinubu. What makes this even more intriguing is the historical context: Tinubu himself, during his tenure as Lagos State governor, laid the groundwork for this very VAT debate.
In 2021, I addressed this issue in my column, “Tinubu, Wike, and the Politics of VAT,” where I highlighted Tinubu’s pivotal role in challenging Nigeria’s fiscal framework. Now, as president, Tinubu finds himself on the opposite side of the equation. The big question remains: Is he handling this issue effectively?
Background to the VAT Dispute
The VAT battle has its roots in Lagos State under Tinubu’s administration. In its 1999 constitutional challenge, Lagos argued that it had exclusive authority to legislate and collect VAT within the state. Although the Supreme Court acknowledged Lagos’s argument, it advised a political resolution rather than a judicial one. The case was eventually struck out on technical grounds, leaving the matter unresolved.
Fast forward to 2021, Rivers State, under Governor Nyesom Wike, reignited the debate. A Federal High Court ruling affirmed the state’s right to collect VAT, prompting Rivers and Lagos to pass their own VAT laws. This sparked a nationwide conversation about fiscal federalism and revenue allocation.
VAT and Nigeria’s Fiscal Imbalance
VAT, a consumption tax levied on goods and services, has long been contentious due to its inequitable sharing formula. For instance, Rivers State generated ₦15 billion in June 2021 but received only ₦4.7 billion, while Kano, which generated ₦2.8 billion, got its entire contribution back. Lagos State, which produced ₦46.4 billion, was allocated just ₦9.3 billion. This system creates a sense of “robbing Peter to pay Paul,” fueling discontent among states that generate more VAT revenue.
Adding to the complexity, Nigeria’s tax framework centralizes VAT collection, with proceeds distributed among states and local governments. While this ensures that less economically robust states receive funds, it discourages states from generating their own revenue, perpetuating dependency on the federal government.
The Politics of VAT Reform
The proposed VAT reforms have exposed deep divisions between the North and South. Southern states, which generate the bulk of VAT revenue, demand a larger share based on derivation. Northern states, many of which rely on federal allocations, stand to lose significantly if the formula is adjusted.
Agora Policy, a think tank, analyzed the potential impact of the reforms. Its findings reveal that 14 states, mostly in the North, would face revenue deficits under the new formula, while 13 southern states would see significant revenue increases. For instance, Delta State could gain 86.17%, Ogun 62.43%, and Imo 53.58%.
The Path Forward
Nigeria’s VAT controversy underscores the urgent need for fiscal restructuring. While the current VAT system has its merits—such as centralized collection and standardized rates—it is flawed in its implementation. A possible compromise could involve:
- Increasing the Derivation Component: Allowing states to retain a larger share of VAT generated within their borders.
- Centralizing Certain Tax Items: Maintaining federal oversight for key sectors while decentralizing others like alcohol, which some states restrict.
- Improving Tax Administration: Enhancing the capacity of state revenue agencies to avoid chaos and inefficiency in tax collection.
President Tinubu must approach this issue with tact. His decision to dismiss the National Economic Council’s recommendation for broader consultations was ill-advised. The VAT reforms require buy-in from all stakeholders to avoid deepening Nigeria’s already fragile unity.
Conclusion
The VAT debate offers a unique opportunity to address Nigeria’s fiscal imbalance and promote economic self-reliance among states. However, rushing reforms without comprehensive dialogue risks exacerbating existing tensions. As the controversy unfolds, Tinubu’s leadership will be tested—not just on his ability to implement policies, but also on his capacity to unite a divided nation.
