Nigeria’s Tax Reform Bills Don’t Address Region’s Distinctive Economic Characteristics – SBM Intelligence

A recent survey by SBM Intelligence critiques the federal government’s proposed tax reforms, suggesting they fail to account for the distinctive economic characteristics of Nigeria’s regions.

While the reforms aim to alleviate the tax burden on citizens and streamline tax collection processes, as highlighted by Taiwo Oyedele, Chairman of the Presidential Fiscal Policy and Tax Reforms Committee, the report raises concerns about their potential to deepen existing regional disparities.

The survey, conducted across Nigeria’s geopolitical zones, underscores that overlooking regional peculiarities in tax policy could exacerbate economic inequalities and potentially necessitate intervention by the Supreme Court or constitutional amendments. These findings come amid ongoing debates about the fairness and effectiveness of Nigeria’s tax system, particularly surrounding the contentious distribution of Value Added Tax (VAT) among the 36 states.

Disparities in VAT Distribution

The report reveals that only five states—Anambra, Cross River, Lagos, Ogun, and Rivers—could sustain their financial obligations without the federally distributed revenue pool. It highlights the significant disparity between VAT contributions and allocations, which has become a recurring and contentious issue.

For example, between January and October 2024, Imo State received 1,715.9% of its VAT contribution as allocation. Similarly, states like Abia, Cross River, and Kebbi received over 700% of their contributions, while Lagos and Rivers, the largest contributors, received just 16.76% and 22%, respectively.

Lagos alone contributes approximately 55% of the total local VAT, yet it receives a disproportionately small share in return. The report notes that such discrepancies risk worsening economic divides, particularly between the North and the South. In the northeast, for instance, states received an average of 244.46% of their contributions, with Bauchi receiving 384.94% and Adamawa 165.69%. These figures, the report suggests, underscore structural inequalities embedded within the current fiscal framework.

Historical Context

Nigeria’s VAT system has long been a contentious component of the country’s fiscal architecture. Initially established to replace the Sales Tax Decree of 1986, VAT has been a source of litigation and debate, reflecting efforts to reconcile efficiency, equity, and state autonomy. Legal precedents, such as the Supreme Court’s affirmation of VAT’s precedence over state sales and consumption taxes, illustrate the struggle of balancing federal and state interests.

However, recent legal battles initiated by states like Rivers and Lagos underlines growing demands for greater control over locally generated revenues. These states argue for a revenue-sharing formula that better reflects their contributions, highlighting broader tensions in Nigeria’s fiscal and political landscape.

The proposed tax reforms aim to address some of these issues by revising VAT rates and exemptions, simplifying tax structures, and increasing derivation-based allocations. While these measures hold potential, the report cautions that resolving the VAT debate will likely require a definitive Supreme Court ruling or constitutional amendments to clarify the division of fiscal powers between the federal and state governments.

The discourse around VAT has also brought to light the persistent North-South divide in Nigeria’s economic and political frameworks. The report emphasizes that resolving these disparities will require careful negotiation and reforms that balance derivation, equity, and national cohesion. Without such measures, the tax system risks perpetuating regional underdevelopment and undermining unity.

Political Opposition

The introduction of the tax reform bills has sparked significant controversy. The Northern Governors Forum has openly opposed the reforms, urging lawmakers from the region to resist any provisions perceived to undermine northern interests. Similarly, the National Economic Council (NEC), comprising the 36 state governors and chaired by the Vice President, recommended the withdrawal of the bills for broader consultations.

Despite these objections, President Bola Tinubu has insisted that the legislative process proceed, allowing stakeholder input during public hearings. In a move reflecting the contentious nature of the reforms, the Nigerian Senate suspended hearings on the bills until the New Year to allow for further political engagements and negotiations.

The SBM Intelligence report, like others, highlights the urgent need for nuanced tax reforms that consider Nigeria’s regional economic realities. The reforms have been touted as key to regional development and national cohesion if they could address disparities in VAT distribution and foster an equitable fiscal framework.