THE TAX REFORM CONTROVERSY

Consultation with stakeholders was inadequate. They need to know more to support the amendment

We fail to understand why President Bola Tinubu would jettison the well-considered recommendation by the National Economic Council (NEC) to withdraw the current tax reform bills before the National Assembly to pave the way for more comprehensive consultation with key stakeholders in the country. By asking the council, headed by Vice President Kashim Shettima and comprising all the 36 governors, to direct their reservations to the National Assembly, the president might be taking a needless gamble. The explanation by Oyo State Governor, Seyi Makinde, that NEC members concluded that it was necessary to allow for consensus building and understanding of the bills among Nigerians is in line with public mood.

The president had, on September 3, transmitted four tax reform bills to the National Assembly for consideration. They are the Nigeria Tax Bill 2024, which is expected to provide the fiscal framework for taxation in the country; the Tax Administration Bill, which will provide a clear and concise legal framework for all taxes in the country and reduce disputes; the Nigeria Revenue Service Establishment Bill, which will repeal the Federal Inland Revenue Service Act and establish the Nigeria Revenue Service, and the Joint Revenue Board Establishment Bill, which will create a tax tribunal and a tax ombudsman.

This is a bold policy initiative considering the different problems associated with tax administration in Nigeria. Unfortunately, because of the way the issue has been mismanaged, unhelpful narratives are playing out. At their meeting last week, governors of the 19 northern states, under the platform of the Northern Governors’ Forum (NGF), rejected the new derivation-based model for Value Added Tax (VAT) distribution in the new tax reform bills. The proposition, according to the communiqué read by NGF chairman, Governor Muhammed Yahaya of Gombe State, negates the interest of the north and other sub-nationals.

Tax administration in Nigeria has always been contentious and emotive. It has also played into the north-south divide. The major contentious part of the current proposal is that it aims to shift VAT distribution to a derivation-based model. According to the Northern leaders, companies remit VAT using the location of their headquarters and tax office and not where the services and goods are consumed. They further argued that the proposal would negatively impact the North and called on lawmakers from the region to oppose the bill in its current form, demanding that national policies should promote equitable distribution to avoid regional marginalisation.

We do not believe there is any sectional undertone to the bills. But the federal government should take the blame for the misgivings being expressed. Like it did with the removal of petrol subsidy and floating of the Naira, it seems the administration is, once again, jumping out without thinking things through. Otherwise, they would not have sent the tax bills to the National Assembly without inputs from the states, the key beneficiaries of VAT. It is strange and impolitic that a presentation would be made to NEC only after the bills that will impact the revenues of states have been submitted to the National Assembly. Most states rely on money from the Federal Account Allocation Committee (FAAC) to fund their budget, and VAT is a major component of the revenues shared at FAAC.

This whole problem started from the beginning. In July 2023, the president established a committee on fiscal policy and tax reforms with Taiwo Oyedele, a fiscal policy partner and Africa tax leader at PriceWaterhouseCoopers (PwC), as chair. The committee’s primary objectives include enhancing revenue collection efficiency, ensuring transparent reporting, promoting the effective utilisation of tax to boost citizens’ tax morale, and fostering a healthy tax culture by driving voluntary compliance. Ordinarily, a committee should submit interim or final reports to the appointing authority whose responsibility, after due consultation and reflection, is to decide and announce publicly the rationales and the next steps. But in the past one year, Oyedele has been making categorical statements on tax administration in Nigeria almost as if his word is law.

Another potentially contentious area of the bills is the provision on Pay As You Earn (PAYE), which is a state tax. Whatever the good intentions in this area, we should be mindful that we are operating a federal system and, in a democracy–not under military rule. Therefore, the federal government cannot be dictating the rates and bands in a way that assumes a uniformity of economic conditions in the 36 states. The proposals on PAYE are likely to negatively impact the revenue for some states based on the number of workers they have in the formal sector and how much they earn. This is another reason why prior consultations with the states were necessary.

Meanwhile, there is merit in many aspects of the proposed bills. But proposing changes on VAT and PAYE without getting the endorsement of the governors is wrong-headed. It is not just about making a presentation to them. They need to know and support the rationale for the change and should own the amendment. Nigerians also deserve to know the difference between the status quo and the proposed changes in terms of concrete numbers and see whether it is worth the trouble. Who will gain or lose, by how much and how do we manage that? These are important questions that should have been addressed. The whole issue has been muddled because of inadequate information and consultation.

Any proposed policy change should have an overarching positive narrative underpinning it. In the absence of none, the administration has put its tax reform bills in jeopardy.