Will NASS Pass the New Tax Bills?
The new set of Tax Bills pending at the National Assembly (NASS), have continued to be embroiled in controversy, with the Northern Governors’ Forum appearing to be vehemently opposed to some provisions in the Bills, particularly the Value Added Tax (VAT), its derivation and equitable distribution. In this Discourse, Tax Experts, Professor Abiola Sanni, SAN and Chukwuemeka Eze holistically scrutinise the Nigerian tax regime, how the grey areas can be addressed so that there’s a general consensus on the Bills and NASS can pass them timeously, as opposed to letting the Bills which may give Nigeria a better tax regime, end up being consigned to the legislative dustbin, because of a few unresolved controversies
The Rejection of Proposed Tax Bills: A Need to Separate the Baby from the Bathwater
Professor Abiola Sanni, SAN
Introduction
T
he breaking news on virtually all the social media platforms on Tuesday, 29 October, 2024 titled “Northern Govs, Emirs, Reject Tax Reform Bill” came with a bang. This was followed in quick succession by another report two days later, with a banner headline “LND endorses Northern Govs’ Rejection of Tinubu’s Tax Bills”. Perhaps, the greatest blow was the report on 1 November, 2024 that read thus: “NEC asked President Tinubu to Withdraw Tax Bills.”. For the Presidential Fiscal Policy Tax Reform Committee (PFPTRC), indeed, when it rains it pours. I, however, heaved a sigh of relief when the latest news broke late in the evening of 1 November, 2024 as I concluded this write-up that “Tinubu Rejects Shettima-led NEC Recommendation, Insists on Tax Reform Bill”. The President in that last report, “urged NEC to let the Tax Bills continue through the legislative pathways, emphasising that ample opportunity exists for modifications”.
This piece is an attempt to shed light on the issue of the VAT distribution formula, which I believe, is the root cause of the opposition, in order to promote better understanding and build consensus on the way forward. Thus, my focus is on the proposed VAT derivation formula, while acknowledging that there may be a few other provisions with equal potential to generate fiscal/political tension in the future.
A Snapshot of the PFPTRC Fiscal Reform
The ongoing initiatives of the PFPTRC attempts to reform the fiscal architecture of Nigeria, beginning with the National Tax Policy which will be replaced by a more robust ‘National Fiscal Policy on Fair Taxation, Responsible Borrowing and Sustainable Spending”.
The Tax Bills consists of four Bills vis: The Nigerian Tax Administration Bill 2024 HB No.1756, The Nigerian Revenue Service (Establishment) Bill 2024 No.1757, The Joint Revenue Board of Nigeria (Establishment) Bill 2024 Bill No HB. 1758 and The Nigerian Tax Bill HB No.1759. Broadly, the Bills set to reform the Federal Inland Revenue Service (FIRS) provide a uniform procedure for a consistent and efficient administration of tax laws to facilitate tax compliance, curb evasion, optimise tax revenue, establish a framework for the Federal and State revenue authorities to collaborate, especially in the area of exchange of information. The objectives include, providing a unified fiscal legislation governing the consolidation of all Federal and State taxes in Nigeria. Thus, rather than having each tax under a separate taxing statute, there will be a single tax legislation comprising all the taxes. By paragraph 197 of the Nigeria Tax Bill, the following 11 tax statutes are repealed: The Capital Gains Tax Act, Casino Act, Companies Income Tax Act, Deep Offshore and Inland Basin Act, Industrial Development (Income Tax Relief) Act, Income Tax (Authorised Communications) Act, Personal Income Tax Act, Petroleum Profit Tax Act, Stamp Duties Act, Value Added Tax Act (VAT Act) and Venture Capital (Incentives) Act.
By Section 198 of the Nigeria Tax Bill, the following 13 Acts of the National Assembly are amended to align with the proposed new fiscal order: The Petroleum Industry Act; The Nigerian Export Processing Zone Act; The Oil and Gas Free Trade Zone Act; The National Information Technology Development Agency Act; The Tertiary Education Trust Fund (Establishment, Etc.) Act; The National Agency for Science and Engineering Infrastructure (Establishment) Act; The Customs, Excise Tariffs, Etc. (Consolidation) Act; The National Lottery Act; The Nigerian Minerals and Mining Act; The Nigerian Start-up Act; The Export (Incentives and Miscellaneous Provisions) Act; The Federal Roads Maintenance Agency (Establishment, Etc.) Act and The Cybercrime (Prohibition, Prevention, Etc.) Act.
On VAT alone, the Nigerian Tax Bill proposes the following fundamental changes: inclusion of VAT on the Exclusive Legislative List, a review of the sharing formula, fiscalisation and electronic invoicing, full deduction of input VAT on all supplies, including services and assets, Zero-rating of more goods including agriculture, medical and educational and other basic consumptions, quick and efficient refund. The Joint Revenue Board of Nigeria (Establishment) Bill, inter alia, seeks to reestablish the Joint Tax Board and Tax Appeal Tribunal to make them vibrant and address some of the constitutional and fundamental administrative issues arising from the existing legal order, and undertake a more focused and effective tax amnesty.
In sum, the reform appears to be the most audacious and comprehensive in the annals of fiscal reform in Nigeria, so far.
Opposition to the Tax Bills: Focus on the Derivation Formula
What exactly is the grouse of those opposed to the Tax Bills? Is it about the entire 4 tax bills or an aspect of it? In this regard, the most relevant part of the Communiqué of the Northern Elders Forum stated that:
“Forum notes with dismay the content of the recent Tax Reform Bill that was forwarded to the National Assembly. The contents of the Bill 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 derivative-based model. This is because companies remit VAT using the location of their headquarters and tax office, and not where the services and goods are consumed. In view of the foregoing, the Forum unanimously rejects the proposed tax amendments, and calls on members of the National Assembly to oppose any Bill that can jeopardise the well-being of our people”.
While this is not a case of statutory interpretation, I will adopt the Rule in Heydon’s Case ((1584) 3 Co Rep 7a) which states that a statute should be interpreted by first identifying the problem that the statute was designed to remedy. Then, a construction should be adopted that will suppress the problem, and advance the remedy. Thus, what is the problem that the current law was designed to solve, and what remedies are proposed to address the problems?
Historical Context of the Current and Proposed VAT Distribution Formula
Prior to VAT’s replacement of Sales Tax (a State tax), the VAT revenue was meant mainly for the States, while the Federal Government was supposed to keep 10% as the cost of collection. Overtime, the Federal Government gradually increased its share to the detriment of the States, and eventually brought in the local governments in the sharing formula, a development which favoured States with more local governments. The unrelenting pushback by disadvantaged States, led to the adoption of derivation formula in the VAT revenue distribution in 1999.
The current position on the distribution of VAT revenue is contained in Section 40 of the VAT Act which provides as follows:
“Notwithstanding any formula that may be prescribed by any other law, the revenue accruing by virtue of the operation of this Act shall be distributed as follows-
(a) 15% to the Federal Government;
(b) 50% to the State Governments and the Federal Capital Territory, Abuja; and
(c) 35% to the Local Governments:
Provided that the principle of derivation of not less than 20% shall be reflected in the distribution of the allocation amongst States and Local Governments as specified in paragraphs (b) and (c) of this section”.
The concession of the derivation formula came a bit late, as the Lagos State Government (followed by a few States) had established a State-administered Hotel Occupancy and Restaurant Consumption Tax (Consumption tax) which was being administered simultaneously with VAT, thus, resulting in double taxation. Despite judicial pronouncements including that of the Supreme Court upholding the State Consumption Tax; this unsavoury situation has persisted up till now.
The current tax reform initiative seeks to make VAT a Federal-only administered tax, by amending the Constitution to expressly insert VAT and Consumption Tax in the Exclusive Legislative List. Furthermore, the Tax Bill proposed adjusting the formula for VAT revenue distribution. The Proposal is contained in Paragraph 77 of the Nigeria Tax Administration Bill 2024 (HBI756, p.C4706) which provides as follows:
“77. Notwithstanding any formula that may be prescribed by any other law, the net revenue accruing by virtue of the operation of chapter six of the Nigeria Tax Act shall be distributed as follows:
(a) 10% to the Federal Government;
(b) 55% to the State Governments and the Federal Capital Territory; and
(c) 35% to the Local Governments.
Provided that 60% of the amount standing to the credit of States and local governments shall be distributed among them on the basis of derivation”
While the wordings of Section 40 of the VAT Act and Paragraph 77 of the Nigeria Tax Administration Bill look almost the same, a calm review will reveal the following three differences:
(i) A reduction of Federal Government share by 5% from 15% to 10%
(ii) An increase of the States’ and FCT’s share by 5% from 50% to 55%
(iii) An increase of the percentage of derivation by 40% from 20% to 60%.
It is not fair to seek that the increase of the States’ portion of the revenue is predicated on the basis that Consumption Tax is a State tax ab initio, and 10% being the cost of collection to the Federal Government is fair enough. More fundamentally, the States should have compensated revenue to forego some of their nuisance taxes including Consumption tax. It is doubtful if those who are opposed to the Tax Bills, have any bone to pick with these two proposals. Time will tell if the Federal Government will not push back overtime on the retention of its take, or even make a case for an increase.
The tipping point, of course, is the ‘geometric increment’ of the percentage of derivation by 40% from 20% to 60%. It would appear that this is to achieve equity, by ensuring that the State where the consumption takes place gets more VAT revenue. While this may seem fair on the surface, it inexorably means that the States where less VAT revenue is generated would collect less revenue. The table below (June 2024) shows the 5 biggest and lowest revenue earners in the ladder of distribution .
Top 5 States:
1. Lagos ₦25,850,014,310.14
2. Rivers ₦12,637,951,215.18
3. Kano ₦8,852,793,906.45
4. Oyo ₦8,765,664,485.04
5. Katsina ₦6,357,034,600.56
Bottom 5 States:
1. Nasarawa ₦4,418,543,115.00
2. Yobe ₦4,619,445,518.88
3. Kwara ₦4,640,506,148.88
4. Gombe ₦4,665,480,284.57
5. Taraba ₦4,673,027,776.75
Table 1 above: Summary of Gross Revenue Allocation by Federation Account Allocation Committee for the Month of May, 2024 Shared in June, 2024. Source: National Bureau of Statistics. Available at
While it is certain that no State would get exactly what it is getting now in the post- reform era, the reality however, is that as the cake gets bigger the gulf between the top 5 and the lowest 5 will get wider. All the States at the bottom of the ladder are in the North, while 4 in the top 5 are in the South, except Kano State. This must have been the premise of the position of the Northern Governors’ Forum that “the contents of the Bill are against the interests of the North and its citizens can jeopardise the well-being of our people”.
Balancing the Reform with Equity and Regional Interests
I now turn to the argument on the headquarters effect on VAT revenue distribution. The Communiqué of the Northern Governors and Emirs Forum, stated that companies remit VAT using the location of their headquarters and tax office, and not where the services and goods are consumed, which is correct. The question is how did we get here? The administration of VAT in 1993 started with the establishment of a VAT Directorate as one of the then six Directorates of FBIR (as it then was), while Local VAT Offices (LVOs) were established in all the State capitals and some major towns in each State, with the ultimate plan to have an LVO in each of the 774 Local Government Councils. In terms of physical location, the LVOs were separated from the Income Tax Area Offices. Thus, VAT monthly remittances were done manually, on the basis of where the sale of goods or supply of services took place in different LVOs. A company which operated throughout the country, had to file monthly VAT return in each of the LVOs scattered around the palpably cumbersome country.
Following the reform of the FBIR under the establishment of the Federal Inland Revenue Service as a statutory body, LVOs collapsed into Integrated Tax Offices (ITOs) as one-stop shops for all tax payments including VAT. This development therefore, drew a curtain on the existence and functionality of LVOs. As tax administration improved through the deployment of technology, FIRS adopted the filing of a single return by the headquarter for all the country-wide operations. While this practice has continued since 2014, the Northern Governors appear to be making a case that it should be revisited on the basis of equity, as the VAT revenue gets bigger. This, in my view, is a valid point especially against the background of the proposal to geometrically increase the derivation component of the VAT revenue distribution formula from 20% to 60%. With the rate of technological development, achieving fairness is attainable through attribution of supplies of goods and services not to the headquarters of a company remitting VAT, but to the States where supplies actually took place. It should be possible to demonstrate different scenarios, of how the reform is likely to impact the revenue of each State.
Options on the Way Forward
Assuming the position of those who are opposed to the amendment of the derivative element of VAT revenue sharing statement is wholly correct, one option is to retain the extant Section 40 VAT Act, and forget the ideals behind the proposed changes. Another option is to work towards a compromise, by moderating the percentage of derivation on terms acceptable to both the protagonists and antagonists as stakeholders consider acceptable. Perhaps, the most radical option is for each State to exercise taxing power on intra-State supplies of goods and services under its laws concurrently and collaboratively with its local governments under a bottom up approach. Certainly, what is not an option, is for the entire Tax Bills to be left in the cooler for a considerable time and lose traction. That will be a great loss to the entire system. The tax reform initiative had kicked off with a number of Executive Orders and regulations, some of which have been gazetted. The aspects of the reform that require legislative backing may be delayed for good reasons to engage, debate, educate and reach a consensus. The train of progress should not be derailed on account of any disagreement, including the present one.
Making the Report of the PFPTRC public
The outright withdrawal of the Tax Bills is a step backwards; rather, going forward, I believe that time is ripe to make the report of the Committee public, for accurate information and scrutiny by broader stakeholders. This will enable the generality of the people to understand not just the highlights, but the arguments in favour and against each of the fundamental changes and the basis of the prevailing position. This will promote taxpayers’ education even ahead of the passage of the Bills and smoothen their implementation.
Therefore, a withdrawal should not be an option. The Northern Governor’s Forum unequivocally stated in its Communiqué, that it “is not averse to any policies or programmes that will ensure the growth and development of the country. However, the Forum calls for equity and fairness in the implementation of all national policies and programmes, so as to ensure that no geopolitical zone is shortchanged or marginalised”. The legislative process enshrined in Sections 58 & 59 of the Constitution of the Federal Republic of Nigeria, 1999 (as Amended) and House rules, practices and procedures accommodate critical review, especially at the Committee stage. Despite the fact that the PFPTRC had worked collaboratively, with the National Assembly, it is almost certain that the rigorous legislative procedure will prune or moderate a number of the proposals contained in the Bills.
Recommendations
To bridge the divide and foster greater national consensus on the proposed Tax Bills, the Government should establish a comprehensive Stakeholder Dialogue and Impact Analysis Programme. This programme will bring together representatives from all States, key stakeholders, and policy experts, to openly discuss each Bill’s implications. The programme would allow each region to present its unique economic concerns and needs, with a focus on quantifying the projected revenue changes under the new VAT distribution model. This proactive approach would ensure that reforms not only proceed with broad support, but also provide a basis for any necessary adjustments that could better align the reform’s objectives with equitable economic development across all regions.
As well as tax education seminars, as it shows this conflict stems solely from a misunderstanding of what the reformed Bill is meant to achieve. It is also my recommendation that quarterly reports are provided to the public through online and paper mediums, so the young and old are well versed on how each new reform affects them in the positive.
Conclusion
The proposed Tax Reform Bills represent a monumental step toward restructuring Nigeria’s tax system for enhanced efficiency, fairness, and revenue optimisation. So far, perhaps, the only possible ‘malignant’ portion of the Tax Bills identified, is the proposed derivation formula for distribution of VAT. On other proposed reform, the jury is out. As we know, the devil is always in the details. We should reasonably expect some other issues to erupt in future, like a volcano. When such happens, as it is bound to, the approach should be to separate baby from the bathwater and engage in meaningful dialogue to fashion a way out, in the interest of Nigeria. The opposition on the proposed new derivation formula for VAT revenue distribution, highlights a key challenge that warrants careful reconsideration. The reforms’ success lies in addressing these regional disparities without compromising national unity or progress. The call for transparency, equitable distribution, and an inclusive approach underscores the importance of accommodating diverse perspectives. By refining contentious provisions like the VAT derivation formula and fostering constructive dialogue among all stakeholders, Nigeria can pave the way for a more resilient and equitable fiscal system.
Therefore, a withdrawal of the Tax Bills should not be an option. The legislative process enshrined in Section 58 of the Constitution of the Federal Republic of Nigeria, 1999 and legislative rules, practices and procedures accommodate critical review, especially at the Committee stage. Despite the fact that the PFPTRC had worked collaboratively with the National Assembly, it is almost certain that the rigorous legislative procedure will prune or moderate a number of the proposals contained in the Bills. Without an open debate, understanding and the spirit of a compromise, even a constitutional amendment of putting VAT on the exclusive legislative list may never see the light of the day. It will be painful if the Tax Bills are consigned to the legislative historical dustbin like the constitutional reforms by former President Olusegun Obasanjo’s administration which failed to see the light of the day at the altar of a tenure elongation clause; hence, the need to separate the baby from the bathwater.
Professor Abiola Sanni, SAN, Dean, Law Faculty, University of Lagos
X-raying the Northern Governors’ Stance on the Four Tax Bills at NASS
VAT and its Equitable Distribution to all the States
Chukwuemeka Eze
Introduction
One of the pillars upon which the President Bola Ahmed Tinubu’s Government intends to drive the Nigerian economy, is rooted in taxation. His attention to tax matters since his assumption of office on May 29, 2023 is visible, even to the blind.
Less than two months after he was sworn in, precisely on 6th July, 2023, the President signed four executive orders, including the suspension of the 5% excise tax on telecommunication services, as well as the excise duties escalation on locally manufactured products; suspension of the import adjustment tax imposed on certain vehicles, and the green tax on single-use plastics.
In the same July 2023, the President appointed Mr Taiwo Oyedele, as the Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms. The President inaugurated the committee on 8th August 2023. The Committee was
responsible for various aspects of tax law reforms, fiscal policy design and coordination, harmonisation of taxes, and revenue administration. The Committee’s primary objective was to enhance revenue collection efficiency, ensure transparent reporting, and promote the effective utilisation of tax and other revenues to boost citizens’ tax morale, foster a healthy tax culture, and drive voluntary compliance.
After one year of rigorous work, the work of the Committee was approved by the Federal Executive Council in September 2024.
On 3rd October 2024, the media widely reported the transmission of four executive tax Bills to both Houses of the National Assembly, by President Tinubu. These fiscal Bills are as indicated below.
The Four Tax Bills
The first is the Nigeria Tax Bill 2024, which has 204 sections and 11 schedules. It has the largest contents of the four Bills. This Bill seeks to provide a consolidated fiscal framework, for taxation in Nigeria.
The second is the Joint Revenue Board of Nigeria (Establishment) Bill 2024, which has 60 sections and 3 schedules. The Bill aims to establish the Joint Revenue Board of Nigeria, the Tax Appeal Tribunal, and the Office of the Tax Ombudsman for the Harmonisation, Coordination, and Settlement of Disputes arising from revenue administration in Nigeria.
The third is the Nigeria Revenue Service (Establishment) Bill 2024, which has 43 sections and 3 schedules. The Bill seeks to repeal the Federal Inland Revenue Service (Establishment) Act, No. 13, 2007, and establish the Nigeria Revenue Service to assess, collect, and account for revenue accruable to the Government of the Federation.
The fourth is the Nigeria Tax Administration Bill 2024, that has 144 sections and 3 schedules. The Bill seeks to provide a clear and concise legal framework for the fair, consistent, and efficient administration of all the tax laws to facilitate the ease of tax compliance, reduce tax disputes, and optimise revenue.
Section 77 of the Nigeria Tax Administration Bill, 2024 (hereinafter called NTAB) contains. “Distribution of value added tax revenue” in its marginal note. The section provides:
“Notwithstanding any formula that may be prescribed by any other law, the net revenue accruing by the operation of Chapter Six of the Nigeria Tax Act shall be distributed as follows –
(a) 10% to the Federal Government;
(b) 55% to the State Governments and the Federal Capital Territory; and
(c) 35% to the Local Governments,
Provided that 60% of the amount standing to the credit of States and local governments shall be distributed among them on the basis of DERIVATION”.
This Proviso, which provides for derivation in the distribution of VAT, has pitched the Northern Nigeria Governors Forum (NNGF) and the National Economic Council, against the President’s desire to have these Bills passed by the National Assembly as proposed.
According to the NNGF, “Forum notes with dismay the content of the recent Tax Reform Bill that was forwarded to the National Assembly. The contents of the Bills are against the interests of the North and other sub-nationals, especially the proposed amendment to the distribution of Value Added Tax (VAT) to Derivation-based Model. This is because companies remit VAT using location of their headquarters and tax office, and not where the services and goods are consumed. In view of the foregoing, the Forum unanimously rejects the proposed tax amendments and calls on members of the National Assembly to oppose any Bill that can jeopardise the well-being of our people”.
NEC, on 31st October, recommended the withdrawal of the Bills from the National Assembly, while the President rejected NEC’s recommendation on 1st November.
Section 40 of the Value Added Tax Act, Cap. V1, LFN, 2004, as amended by the Finance Act 2019, adopted a distribution formula of 15% to the Federal Government, 50% to States, and 35% to local governments. The Northern Governors understand that, beyond the bare provisions of the law, the devil lies in the details.
Although not explicitly outlined in the current VAT Act, other factors that have influenced the VAT distribution are equality of States and population. The approach has been criticised, for not sufficiently accounting for contributions from the location of remittances.
Constitutionality of Derivation
Section 162 of the 1999 Constitution provides for the distributable pool account, which states in part:
(1) The Federation shall maintain a special account to be called “the Federation Account” into which shall be paid all revenues collected by the Government of the Federation, except ….
(10) For the purpose of subsection (1) of this section, “revenue” means any income or return accruing to or derived by the Government of the Federation from any source and includes
(a) any receipt, however described, arising from the operation of any law;
(b) any return, however described, arising from or in respect of any property held by the Government of the Federation;
(c) any return by way of interest on loans and dividends in respect of shares or interest held by the Government of the Federation in any company or statutory body.
Section 163 provides for allocation of other revenues:
Where under an Act of the National Assembly, tax or duty is imposed in respect of any of the matters specified in item D of Part II of the Second Schedule to this Constitution, the net proceeds of such tax or duty shall be distributed among the States on the basis of derivation and accordingly:-
Where such tax or duty is collected by the Government of the Federation or other authority of the Federation, there shall be paid to each State at such times as the National Assembly may prescribe a sum equal to the proportion of the net proceeds of such tax or duty that are derived from that State.
A combined reading of Sections 162 and 163 of the 1999 Constitution, expressly provides for the principle of derivation. The President is, therefore, standing on a firm ground in this matter.
The parties may end up adjusting the percentage of the VAT revenue that would be subjected to derivation.
The Status of Payment of Income Tax by Minimum Wage Earners
The zero tax on income of N800,000 of an individual as contained in the Fourth Schedule to the Nigeria Tax Bill, 2024, is a setback for minimum wage earners.
For States with minimum wage of N70,000 per month per worker, it means that N40,000 will be taxed out of the annual income of N840,000.
For a State like Lagos with minimum wage of N85,000 per month per worker, it means that N220,000 will be taxed out of N1,020,000 per annum.
Section 37 of the Personal Income Tax Act (PITA), as amended by Section 30 of Finance Act, 2020, provides that minimum wage earners are free from the payment of Personal Income Tax. It specifically provides that minimum tax under this section or as provided for under the Sixth Schedule to this Act, shall not apply to a person in any year of assessment where such person earns the National Minimum Wage or less from an employment.
A combined reading of Section 30 and 58 of, and the Fifth
Schedule to, the Nigeria Tax Bill, 2024, provides for zero tax on an income of N800,000, 15% tax on income of next N2.2 million, 18% tax on income of next N9 million, 21% on the next income of N13 million, 23% on the next income of N25 million, and 25% on income above N50 million.
In the absence of eligible deductions, a worker that earns N840,000 per annum will pay 15% of N40,000 as tax, which is N600.
For the worker that earns N1,020,000 per annum, the income tax payable will be 15% of N220,000, which will yield N33,000.
This writer suggests that, workers on minimum wage should be exempted completely from the payment of Personal Income Tax.
The current rates are as contained in the Sixth Schedule to the PITA:
* First N300,000 @ 7%,
* Next N300,000 @ 11%,
* Next N500,000 @ 15%,
* Next N500,000 @ 19%,
* Next N1,600,000 @ 21%, and
*Above N3,200,000 @ 24%.
Chukwuemeka Eze, Lecturer, Faculty of Law, Prime University, Abuja; Immediate Past Chairman, Tax Appeal Tribunal, South East Zone
