Opposition to Tax Reforms Reopens Debate on States’ Financial Autonomy

The unfolding drama, triggered by the opposition of the Northern States Governors’ Forum to the Fiscal Bills pending before the National Assembly has made it inevitable to revisit the issue of states’ financial autonomy, writes Festus Akanbi

With the groundswell of opposition trailing the Tax Reforms Bills recently forwarded to the National Assembly by President Bola Tinubu, economic analysts said the misgivings over what the Presidency described as a move to streamline Nigeria’s tax administration processes, enhance efficiency, and eliminate redundancies across the nation’s tax operations will continue to ruffle feathers until the issue of states’ financial autonomy is fully addressed.

Earlier in October, President Bola Tinubu sent four fiscal bills to the National Assembly for consideration. These include the Nigeria Tax Bill 2024, the Tax Administration Bill, the Nigeria Revenue Service Establishment Bill, and the Joint Revenue Board Establishment Bill.

One of the bills seeks to change the sharing formula of VAT and reduce the federal government’s share from 15 per cent to 10 per cent. However, the bill includes a caveat that the allocation among states will consider the derivation principle.

Northern Governors’ Reservations on VAT Sharing

The Northern Governors’ Forum, which fired the first salvo on Monday rejected some aspects of the new bills, calling on members of the National Assembly from the North to oppose the legislation and any other measures that jeopardise the interests of the people of the North.

A communique signed by the Chairman of the forum and Governor of Gombe State, Muhammed Inuwa Yahaya stated, “The Forum notes with dismay the content of the recent Tax Reform Bill forwarded to the National Assembly. The contents are against the interests of the North and other sub-nationals, especially the proposed amendment to the distribution of Value-Added Tax (VAT) to a derivation-based model. Companies remit VAT based on the location of their headquarters and tax offices, not where the services and goods are consumed. Given the foregoing, the Forum unanimously rejects the proposed Tax Amendments and calls on members of the National Assembly to oppose any bill that could jeopardise the well-being of our people.

This was the argument put forward by Governor of Abdullahi Sule of Nasarawa State and the senator representing Borno South in the National Assembly, Ali Ndume. While the former argued that the northern states would be at the losing end, insisting that states that have almost no VAT at the moment will end up actually with the shorter area of the stick,” the latter believed the north has more poverty, so it would be unfair to burden them with more taxes.

“Tax those people who can afford it. Those who can afford the taxes in Nigeria are not even paying for them. I’m going to start campaigning against the increase in tax for now because it doesn’t only affect the northerners, it affects the average Nigerian,” Ndume said.

NEC Calls for Review

As opposition mounts, the National Economic Council, on Thursday, asked President Tinubu to withdraw the controversial bills from the National Assembly to allow for wider consultations and consensus building.

Oyo State Governor, Seyi Makinde, said this formed part of resolutions reached at the 144th meeting of the National Economic Council (NEC) in Abuja.

Makinde told journalists that the council members agreed that it was necessary to allow for consensus building and understanding of the bills among Nigerians.

“NEC noted the need for sufficient alignment on the proposed reforms and recommended the withdrawal of the tax reform bills,” he stated.

Presidency: New Finance Bills to Modernise Tax Landscape

Meanwhile, President Tinubu has vowed not to withdraw the four tax reform bills from the parliament, contrary to the advice of the National Economic Council (NEC).

 Spokesperson for the President, Mr. Bayo Onanuga said on Friday that the President would instead allow the lawmaking process to take its course.

“He believes that the legislative process, which has already begun, provides an opportunity for inputs and necessary changes without withdrawing the bills from the National Assembly,” Mr Onanuga wrote.

The Presidency, while allaying the fears of the Northern Governors’ Forum and other interests, explained that President Tinubu and the Federal Executive Council endorsed new policy initiatives aimed at streamlining Nigeria’s tax administration processes, enhancing efficiency, and eliminating redundancies across the nation’s tax operations.

According to Onanuga, the proposed tax reforms emerged after an extensive review of existing tax law, adding the National Assembly is considering four executive bills designed to transform and modernise Nigeria’s tax landscape.

He added that the Nigeria Tax Bill aims to eliminate unintended multiple taxation and make Nigeria’s economy more competitive by simplifying tax obligations for businesses and individuals nationwide, while the Nigeria Tax Administration Bill (NTAB) proposes new rules governing the administration of all taxes in the country.

Speaking on the contentious issue of VAT sharing arrangement, Onanuga said, “The current model for distributing VAT is based on where the tax is remitted rather than where goods and services are supplied or consumed. The ongoing tax reform seeks to correct the inherent inequity in the current derivation model as a basis for distributing VAT revenue,” he stated.

He noted that the new proposal implies that states in the Northern region that produce food should not lose out just because their products are VAT-exempt or consumed in other states.

Oyedele: VAT to Be Shared Based on Derivation, Consumption

Meanwhile, in what looked like a clarification, the Chairman of the Presidential Fiscal Policy and Tax Reform Committee, Mr. Taiwo Oyedele explained that, according to the proposal in the Tax Bill before the National Assembly, VAT is to be shared based on derivation and consumption.

He defended the proposal in the bill, saying it will guarantee fairness and long-standing criticisms of the existing distribution formula.

Oyedele through his X(formerly Twitter) handle explained that “A state that produces food shouldn’t lose out just because its products are VAT-exempt or consumed in other states.”

He argued that VAT from services, including telecommunications, should also reflect the location of subscribers, thereby benefitting the states where goods or services originate.

Dismissing the fears raised by the Northern Governors’ Forum,  the Development Agenda for Western Nigeria (DAWN) Commission, hailed the proposed tax reform, saying that it would benefit the North more because of its land and population advantage.

The commission said in a statement by the Director-General, Dr. Seye Oyeleye, that the reform would provide the stimulus for productive activities in states and enhance genuine economic development.

“The policy will strengthen the link between ‘need’ and ‘contribution.’ The concern about headquarters-based remittance, while understandable, requires deeper examination in light of current economic realities. Recent data reveals a significant disparity in VAT generation across states, with Lagos alone contributing 50.5% of the total VAT revenue.

“Other significant contributors are Rivers, Oyo, Kano, and FCT (Abuja). These contributions reflect the intense economic activities in these states, which consequently attract large populations seeking economic opportunities,” the statement said.

It explains that these economic hub states face unique challenges that the current horizontal allocation formula does not adequately address. Their infrastructure bears the burden of serving not just their residents, but millions of Nigerians who migrate to or do business in these states.”

Rekindling Financial Autonomy Debate

In August 2021, the former Rivers State Government and the current Minister of the Federal Capital Territory, Nyesom Wike, signed into law, a bill that authorised the state government to collect VAT. His move was said to have been influenced by the judgment of the Federal High Court, Port Harcourt that ruled that the state has the mandate to collect VAT. However, the execution of the judgment was put in abeyance as a result of the decision of the High Court in Port Harcourt which quashed the earlier ruling.

With the arguments of the Northern State Governors’ Forum, analysts said the time has come to revisit the issue of fiscal federalism which enables states to focus on their comparative advantage and develop at their pace. Robust debates are also expected to address some fundamental issues around revenue generation and sharing.

According to analysts, Nigerians want to know how the national assembly will resolve the contradictions where states openly destroy alcoholic products but fight over the distribution of revenue paid in the form of taxes by producers of the same products forbidden in their jurisdiction.”

Definitely, the time to address this issue is now.