Resolving the Controversies around the Tax Bills
Postscript by Waziri Adio
There are many compelling reasons to significantly increase Nigeria’s tax revenues. We need to transit from an extractive economy to a tax economy. This will provide us a good cover against the volatility of commodity markets and further enhance the capacity and locus of citizens to hold those managing their common wealth to account. We need to optimise the size of our economy for revenue purposes. And crucially, we need to raise enough non-debt revenues to meet our mounting developmental needs.
These are not things we are doing well. According to the OECD, Nigeria’s tax-to-GDP ratio was 6.7% in 2021, lower than that of our poorer neighbours, and much below the African average of 15.6%. Our federal and state budgets, which are hardly fully-funded and rarely wholly-implemented, pale in comparison to the budgets of our peers, despite the fact that most of these comparator countries have much fewer populations to cater for. Also, we keep running larger budget deficits, depending increasingly on debt, devoting more budgetary allocation to debt service, and yielding more to the vicious and suffocating cycle of debt and debt service.
For these and other reasons, it is commendable that the President Bola Tinubu administration has prioritised tax reforms. On 7th July 2023, roughly a month and a week after assuming office, President Tinubu announced the formation of a fiscal policy and tax reform committee, headed by Mr. Taiwo Oyedele, then a partner at PriceWaterhouseCoopers (PWC) and a well-regarded tax expert. Tinubu inaugurated the committee on 8th August 2023, gave it a broad but one-year mandate, and charged it to, among other things, harmonise and transform our tax system, make the business environment more conducive and competitive, improve Nigeria’s tax profile, and achieve “a minimum of 18% Tax-to-GDP ratio within the next three years.”
The committee has been hard at work in the last 15 months. On 3rd October 2024, the president forwarded four executive bills, which emanated from the work of the committee, to the National Assembly for consideration. These are: The Nigeria Tax Bill 2024; the Nigeria Tax Administration Bill 2024; the Nigeria Revenue Service Establishment Bill 2024; and the Joint Revenue Board Establishment Bill 2024.
The tax bills have dominated political discourse in the last one month, generating a lot of heat and surfacing a lot of bad blood in the polity, both offline and online. It is probable that things could have turned out differently if more effort had been invested in political management. For bills with provisions that have revenue implications, one way or the other, for state governments, it is a bad look that matters had to get to the level where northern governors, the National Economic Council (NEC) and the president are not on the same page. On 28th October 2024, the Northern Governors’ Forum asked northern legislators to reject the bills because some provisions are deemed to be against the “interests of the north.” Three days later, NEC asked the president to withdraw the bills to allow for “wider consultations and consensus building.”
By the way, NEC is a constitutional body charged with advising the president on the economy and is a veritable platform for building political consensus on policies. It is headed by the vice president and its membership includes all the state governors, irrespective of party or region. On 1st November 2024, the presidency said thanks but no thanks to NEC. In a way, it reminded everyone that NEC is merely an advisory organ and announced that the president would not withdraw the bills and that the legislative process would continue. There is an exciting threat of a showdown between the governors and the president on the one hand and between the governors and the legislators on the other. I salivate for political drama, but it is clear that everyone involved should have acted differently: the reform team, the northern governors, NEC and the president.
A rash of explainers, claims and counter-claims, and clarifications have since rent the air. Insults, abuses and slurs have also become standard fare, further fouling the space and blocking reasoned discourse and necessary consensus-building on an important policy issue. This pass is totally avoidable. The political actors have many formal and informal platforms to raise objections, receive explanations, and achieve consensus. Clearly, such channels were not fully explored or utilised.
It is intriguing that NEC was briefed on the bills almost a clear month after the president had transmitted the bills to the National Assembly. It is not unreasonable for the governors to have been given draft copies of the bills for their inputs and for some consensus to have been brokered and achieved among the governors on the one hand and between the governors and the promoters on the other hand on the contentious areas. Asking governors to go to legislative public hearings to make their case is tad condescending.
This is a major failure in political management, and this is all on the president. If those he appointed do not know or are too carried away or are not attentive enough, the president who is an experienced politician should know that building and sustaining political consensus and a strong coalition around reforms is a critical success factor. Reform is not just technical, it is political. Also, presidential might is a precious commodity that retains its mystique when not tested.
I think there are many good parts of the tax bills that should not be put at unnecessary risk. The provisions on corporate tax amount to the most consequential reforms we have had in that area in 30 years. The Nigeria Tax Bill (NTB) proposes to reduce the tax that companies pay on their profits from 30% to 27.5% in 2025 then to 25% by 2030. The last time we had a major reduction in corporate tax was in the 1990s, from 40% to 35%, then to 30%. We have kept the 30% since 1996. The bill also proposes the consolidation of different taxes and levies paid by companies into one levy, and a reduction from 4% to 2% by 2030. This should increase the profitability of companies, enhance their capacity to create jobs and promote overall economic growth.
Also, I find appealing the provisions that have the potential to streamline and consolidate different taxes, eliminate multiple taxation, reduce the tax burden for those in the lower income brackets and make it more difficult for the rich to evade taxes, expand the possibility of getting tax refunds (through establishment and funding of refund accounts by tax types) and provide protection to tax payers (through the tax ombudsman).
I am equally well disposed to the idea of single revenue collection agency not necessarily because it is the global norm or a guarantee of efficiency but because it can help in reducing the cost of revenue collection to the Federation, the over-resourcing of certain super agencies and the perverse incentives and distraction that revenue-collection pose to regulators. Let organisations like Customs, NIMASA, NPA, NUPRC and others face their primary responsibilities and provide assessments that the tax agency can use for its work. However, it is important to put enough guardrails around the proposed Nigeria Revenue Service (NRS), ensure that efficiency is not sacrificed on the altar of consolidation, and that its operations are funded according to its need, rather than on a fixed percentage of its collections.
But there are some sections of the bills that will need another look. This is not just because of the needless heat being generated already but also because some of these provisions are either based on shaky assumptions or because some of these sections may lead to abuse, future disputes or may achieve the opposite of their intended goals. This set of questions should always guide designers of reform interventions: what problem are we trying to solve and why; what exactly will our intervention achieve; where is the evidence and how compelling is the evidence that the intervention will achieve the intended and not the opposite effect; who do we need to get on board, what will be their concerns and what do we say to get them onside; who is likely to lose out and how do we manage their loss? Reform, as stated earlier, is not just a technical exercise. And the more contentious an issue is or can get, the more time is needed on these questions.
The provisions on the Value Added Tax (VAT) have been the most contentious part of the tax reform bills so far. Sections 142 to 156 of the Nigeria Tax Bill (NTB) dwell on definitions and modalities of VAT while sections 187 to 189 spell out goods and services that are exempted from VAT or will attract zero VAT. Section 146 is on VAT rates and in Subsection C it states that VAT rate on taxable supplies will increase from the current 7.5% to 10% in 2025, then to 12.5% from 2026 to 2029 and to 15% in 2030. This has not generated so much debate or controversy, including among the populace, largely because of the spin that the bills are pro-poor. Also, Section 77 of the Nigeria Tax Administration Bill (NTAB) proposes a new sharing formula among the three tiers of government: FG’s share to decrease from 15% to 10%; states’ share to increase from 50% to 55%; and LGAs’ share to stay same at 35%. This has not been controversial either, and has been framed as FG’s magnanimity.
The sore point is in Section 22(12) of the NTAB which states that all VAT returns should attribute the “derivation of taxable supplies by location in a manner prescribed by the Service (the proposed NRS)” and the caveat to the proposed formula in Section 77 (c) which says “that 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.” The VAT due to states is currently shared this way: 50% on the basis of equality of states; 30% for population; and 20% for derivation. The proposal in the bills is to change the formula to: 20% for equality, 20% for population and 60% for derivation (which will now be for where the taxable supply happened rather than the corporate office where the VAT was paid).
On the surface, there is nothing wrong with this. It has been argued by the proponents that this will ensure greater equity (as VAT is currently attributed to where the tax is paid and this arrangement disproportionately favours Lagos and four other states). It has also been argued that a more “equitable”, location-based definition of derivation would incentivise states to do more to improve economic activities and consumption in their domains. But it is also obvious why VAT is a sensitive issue and why these arguments are not very persuasive.
One, VAT is now the highest revenue item at FAAC in terms of net revenue and half of it goes to states. In the FAAC disbursement for the month of October 2024, for example, VAT accounted for N622.31 billion out of the total N1.41 trillion, meaning VAT alone accounted for 44% of the total revenue shared. For most states (except Lagos and the oil producing states), VAT is their major revenue source. So, states are very sensitive to VAT. Two, the current formula is not as unequitable as it has been made to appear. Only 20% of the VAT available to states is shared on the basis of derivation, and the remaining 80% is shared equally (50%) and by population size (30%).
Of the N266 billion available for states to share for the month of August 2024, half of it or N133 billion was shared equally, meaning each state received N3.7 billion on the basis of equality. Sum of N80 billion (30% of the VAT for states) was shared on the basis of population of one state in relation to the total population of the 36 states. The only place where Lagos and four other states (Rivers, Oyo, Delta and Bayelsa) had an edge was in the distribution of 20% of the amount available to states, which came to N53 billion in August 2024 and was still shared by all though in proportion to the contributions.
The five top contributors to non-import VAT received considerably less than they contributed to the pool. Lagos, which has been made the strawman of this discourse, got N40 billion or 15% of the N249 billion attributed to it as its contribution to non-import VAT. But the 31 other states that contributed less to non-import VAT got considerably much more from the VAT pool available to the states. The 31 states are evenly spread across the country, but the real outlier is Imo State that contributed N235 million to the pool but received N6 billion or 2550% more than it contributed. It is not one of those states derisively tagged as parasites or lazy.
The point here is that even if location of consumption is misattributed in how derivation is currently defined, the formula has taken care of that and ensures that everything evens out in the sharing and all states get substantial revenues from the VAT pool. The current formula is by no means perfect and can be improved upon, but we shouldn’t make the perfect the enemy of the good.
The proponents of the change have argued that only Lagos and a few other states would be adversely impacted by the proposed change in attribution of derivation. This is not a strong argument. Revenue distribution is a zero-sum thing. There will be losers and winners. The way to make this case is to use actual numbers and compare what each of the 36 states will receive against what they current received in a particular month or a number of months and show the workings behind the simulation. I have looked closely at the current figures and I don’t think it is only northern states that will lose out, contrary to the claim by the northern governors. Osun, my state, contributed N1.81 billion to non-import VAT in August and received N5.91 billion from the VAT pool available to the states. I will like to see what Osun will get under the proposed formula and if it will be more than the N5.91 billion of the derided formula.
How do we expect states that will lose out to immediately bridge their budget gaps? Most of the things that have been recommended like enhancing consumption and economic activities at best have medium-term utility. If the presidency bullies its way through on this, please do not be surprised that states that have prepared budgets on the basis of the current formula will look for other ways to boost their revenues by looking for things to tax. If you insist that everyone must eat what they kill, then they will definitely look for what to kill. Beware of unintended consequences.
Even if there is a rationale for increasing derivation, why go from 20% to 60% in one stroke? What is that urgent problem we are trying to solve that is worth risking all for? If we want to use 60% for VAT derivation, what stops the oil-producing states from asking for 60% as derivation too since the constitution says minerals derivation should not be less than 13%? FG currently receives 15% of VAT, which the NTAB proposes should be reduced to 10%. So, why is FG the one leading the discussion on how the portion of the VAT for states should be shared? Why is this a hill that the FG is ready to die on? And, how did a tax reform effort suddenly veer into the volatile territory of revenue sharing?
Sharing revenue among and within tiers of government in a federal system is always a hot-button issue. This doesn’t mean it is a no-go area. But it requires less haughtiness and more inclusiveness. Each tier of government is usually invited to submit memoranda individually and jointly. Nigeria has a rich history and literature in this area, right from the Phillipson Commission of 1946 to the last iteration in the early 1990s. What our history shows is that derivation is always the most contentious bit, with entities changing their positions in an opportunistic way. While making submission to the Okigbo Commission of 1980, (old) Bauchi State described derivation as “diabolically against the principle of national interest” while (old) Oyo State submitted that derivation ran “counter to federal principles”. The progenitors of these states had a different position when produce was a major revenue earner.
And talking about federalism, it is important to balance the need for providing relief to low-income earners with the need not to constrain the taxing capacities of some states. Increasing non-taxable income to the first N800,000 will definitely affect what some states can make from PAYE, which is largely a state tax. Nigeria operates a progressive tax system It is wrong to assume that states are equal in terms of the size of their formal sector, how much their workers earn and their taxable income. FG can set a reasonable base after consultation with the states which should then set their tax income brackets based on their realities.
In summary, it is important to separate tax reform from revenue sharing, and let the latter be handled by the Revenue Mobilisation and Fiscal Allocation Commission (RMAFC), a constitutional body. It is also critical to put more store on prior consultation and consensus and always remember that we are a federal democracy. All the divisive and insulting talks on all sides need to stop. The president should take the lead in dialling down the heat by bringing the country together and brokering a middle-ground on the contentious areas. He should remember that those opposed to a legislation have less work to do to frustrate it. He shouldn’t take it for granted that this goodwill with the legislators will survive all tests. This is the time to play the good politics to save his important reform agenda.
