Nigeria’s NEC Recommends Withdrawal of Tax Reforms Bill Seeking to Change VAT Distribution Model

The National Economic Council (NEC) has recommended the withdrawal of the Tax Reforms Bill currently under consideration in the National Assembly, which has been opposed by northern leaders.

Headed by Vice President Kashim Shettima and comprising governors from across the country, NEC’s recommendation comes amid heated debates and regional tensions surrounding proposed changes to the distribution model for Value Added Tax (VAT). The council has suggested that more engagement with stakeholders is needed to address these concerns before proceeding.

Oyo State Governor Seyi Makinde, speaking to journalists after an NEC meeting on Thursday, explained that the NEC decided to withdraw the bills due to the controversies they have sparked.

“We want stakeholders to be carried along,” he stated, emphasizing the need for more inclusive discussions around the proposed tax reforms.

Acknowledging the need to carry all stakeholders along, the Chairman of the Presidential Tax Reforms Committee, Taiwo Oyedele, said on Wednesday, “We share the sentiment expressed by the Northern Governors regarding the inequity inherent in the current model of derivation as a basis for distributing VAT revenue… We will collaborate with all stakeholders to address this concern with a view to finding a balanced solution that achieves a win-win outcome for all.”

This latest recommendation by NEC follows Sunday’s meeting of the Northern Governors’ Forum (NGF), chaired by Governor Inuwa Yahaya of Gombe State. The NGF openly rejected the derivation-based VAT model proposed in the bill, arguing that it would disproportionately disadvantage northern states. The north’s concerns about this model were further clarified by Nasarawa State Governor Abdullahi Sule, who explained that the proposed changes would place northern states at a significant disadvantage due to their comparatively low VAT revenues.

Sule, underscoring the unity among northern leaders, stated that their decision was not in opposition to President Bola Ahmed Tinubu, whose administration initiated the tax reforms.

“We can’t bring in President Tinubu and then oppose him,” he clarified. “If you look at the composition of the meeting, you’ll see people from different political backgrounds—some from APC, some from PDP, and others unaffiliated. We reached this decision collectively.”

Sule detailed the crux of the north’s concerns saying: “If we move forward with this derivation-based VAT model, states that generate little to no VAT will end up at a disadvantage. Northern states currently generate less VAT than the southern states, and altering the revenue-sharing model could reduce the already limited revenue flowing to these states.”

Drawing from his experience, Sule highlighted that VAT collection often takes place where products are processed or imported, such as ports in the south, rather than in the northern states that supply raw materials.

Earlier in the day, Bayo Onanuga, Special Adviser to the President on Information and Strategy, commented on the broader “misunderstandings and misgivings” surrounding the tax reforms. He reiterated that the changes outlined in the new VAT distribution model aim to promote a fairer system.

According to Onanuga, the current VAT system distributes revenue based on where the tax is remitted, not where goods and services are consumed or supplied. He argued that this model disadvantages states that supply goods consumed in other regions, as they do not receive a corresponding share of the VAT revenue.

“The reform seeks to correct this inequity,” Onanuga explained. “The new proposal considers the place of supply or consumption for relevant goods and services. Northern states that produce essential commodities, like food, should not lose out on VAT revenue simply because their products are VAT-exempt or consumed elsewhere. The model aims to create a balanced approach that reflects actual economic contributions across states.”

Concerns Over Derivation-Based VAT Model

The derivation-based VAT model has been a contentious issue, with stakeholders divided on its implications. Supporters of the new approach argue that it would allow states that generate more VAT to retain a larger share of the revenue, fostering economic accountability and encouraging self-sufficiency. This change could particularly benefit economically vibrant states like Lagos and Rivers, which generate substantial VAT from high levels of commercial activity and industrial output.

However, opponents contend that this model would create disparities among regions, exacerbating economic inequality across states with differing production capacities.

The VAT redistribution bill has been hailed as Nigeria’s closest step to fiscal federalism since the 1960s. However, the opposition from the northern states underscores a broader challenge in achieving a unified tax reform policy that equitably serves Nigeria’s diverse regions. Northern states rely heavily on federal allocations due to limited internally generated revenue, and a derivation-based VAT model could potentially shrink their revenue pool even further.

Under the current VAT model, all VAT collected across the country is pooled and redistributed according to a formula that allocates a higher percentage to states with higher populations, effectively subsidizing those with lower VAT revenues.

For the North, adopting a derivation model would mean sacrificing this redistribution advantage, potentially widening the fiscal gap between the regions. Many argue that this change would favor the southern states, as they host the country’s major economic centers where VAT collection is centralized.