Value Added Tax (VAT) is to be shared based on derivation and consumption, according to the proposal in the Tax Bill before the National Assembly, Chairman of the Presidential Fiscal Policy and Tax Reform Committee, Mr. Taiwo Oyedele, clarified yesterday.
He defended the proposal in the Bill, saying it will guarantee fairness and long-standing criticisms of the existing distribution formula.
Oyedele was responding to the criticism to the VAT plan in the Tax Bill by the Northern State Governors’ Forum (NSGF) and Northern Council of Traditional Rulers and Chiefs at their joint meeting in Kaduna on Monday.
Also yesterday, the Development Agenda for Western Nigeria (DAWN) Commission also rejected North’s leaders complaint.
Oyedele on his X (formally twitter) handle, said: “A state that produces food shouldn’t lose out just because its products are VAT-exempt or consumed in other states.”
Oyedele argued that VAT from services, including telecommunications, should also reflect the location of subscribers, thereby benefitting the states where goods or services originate.
Acknowledging the governors’ concerns, he said the current VAT distribution is flawed.
He added: “Currently, VAT revenue is allocated with 15 percent going to the Federal Government, 50 percent to states and the Federal Capital Territory, and 35 percent to local governments.
“Although the VAT Act does not clearly outline specific distribution details, a minimum of 20 percent of VAT revenue to states and local governments is based on derivation, while additional distribution factors include equality (50 percent) and population (30 percent).”
The Northern Governors Forum, chaired by Gombe State Governor Muhammadu Inuwa Yahaya, had complained that the proposed distribution could undermine Northern interests.
The forum urged lawmakers to oppose the tax bill and any measures perceived as detrimental to the region.
However, Oyedele called for collaboration among stakeholders, stressing that the proposed model would establish a fairer VAT distribution system that would benefit states equitably based on their contributions and needs.
DAWN 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.
DAWN urged the National Assembly members to approach the bill from knowledge and patriotic perspectives.
According to the Commission, the North has nothing to fear because many benefits would accrue to the region in the course of distribution.
The statement reads: “A thorough analysis of the proposed reforms reveals that they present significant opportunities for sustainable development across all regions, including the North, which eventually stands to be the biggest beneficiary because it has two factors of production, land and population, in significant abundance compared to the southern states.
“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.
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.
“The current horizontal allocation formula, which returns only a fraction of generated VAT to these states, impairs their ability to maintain and expand critical infrastructure to meet these extraordinary demands. This creates a paradoxical situation where the states generating the most economic value for Nigeria struggle to maintain the very infrastructure that enables this value creation.
“The proposed reforms have strategically excluded several items from the VAT list, which will likely result in reduced VAT generation across all states, including top contributors like Lagos and FCT. This deliberate restructuring reflects a more focused approach to value-added taxation, targeting genuinely productive economic activities rather than broad-based consumption.
“This alone is an initiative worth applauding because it brings relief to the populace that the northern governors believe would be negatively impacted.
“This refinement of the VAT structure presents both a challenge and an opportunity. While initial VAT collections may decrease, the new system creates a more transparent link between economic productivity and revenue generation. The reforms focus on collecting VAT from truly value-a
“States are now encouraged to compete on the basis of economic productivity and innovation rather than static geographical or demographic factors, shifting the country’s productive gear from sharing equity to developmental equity. This aligns with global best practices in fiscal federalism and promotes sustainable economic development across all regions.
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“Rather than jeopardizing anyone’s well-being, these reforms would serve as a catalyst for enhanced development across all regions. The increased allocation to states and local governments would provide more resources for critical infrastructure, healthcare, and education – essential elements for the well-being of all Nigerians. This is not merely a regional agenda but a national imperative to ensure that all citizens have access to quality social services, regardless of their geographic location.
“The proposed reforms would enable high-contributing states to reinvest in their infrastructure, ultimately benefiting the entire nation.
“When Lagos can better maintain and expand its infrastructure, it enhances its capacity to generate even more VAT revenue, creating a positive cycle that benefits all states through increased national revenue. Similarly, as other states develop their economic potential under the new formula, they too can create such virtuous cycles of growth and development.”
“DAWN Commission calls on the National Assembly to approach this critical reform through constructive dialogue among all stakeholders. We believe these reforms, if properly implemented, will strengthen Nigeria’s fiscal framework while ensuring no region is left behind. The proposed transitional framework provides adequate time for all States to develop their economic bases, enhance their tax collection systems, and adapt to the new revenue sharing formula while maintaining essential public services. It is not a zero sum game for the high VAT-generating States, neither is it a north versus south agenda.
“It is a win-win policy to unlock Nigeria’s true economic potential. We call on all stakeholders to approach these reforms with an open mind, focusing on their long-term benefits for national development. Our shared goal remains the prosperity and well-being of all Nigerians, regardless of region or state of residence.”
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