Northern Governors Oppose Proposed Tax Reform Bill Seeking to Change VAT Derivation Model

The Northern Governors Forum has come out strongly against a proposed Tax Reform Bill recently submitted to the National Assembly, citing that the changes would harm the interests of northern states and other sub-national regions.

Gombe State Governor Mohammed Yahaya, chairman of the forum, read a communique detailing the governors’ concerns over a proposed shift to a derivation-based Value Added Tax (VAT) distribution model. The governors argue this change would disproportionately benefit wealthier, high-consumption states while limiting revenue in regions with less economic activity.

“The 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 a threat to the interests of the North and other sub-nationals, especially the proposed amendment to the distribution of VAT to a derivation-based model,” Yahaya said, emphasizing that the northern governors view the proposal as potentially destabilizing for many northern states that rely on federal allocations.

“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 jeopardize the well-being of our people,” the communique said.

The proposed tax reform, widely viewed as the government’s most decisive move toward fiscal federalism, has raised concerns in several northern states that rely heavily on federal revenue. The reform aims to reallocate VAT proceeds based on where goods and services are consumed rather than where companies have their headquarters.

For many, particularly in the South, this shift is seen as a more accurate representation of VAT contributions, allowing states that generate higher consumption taxes to receive more significant shares.

However, the shift to a derivation-based VAT model has rattled northern states, which stand to lose out on significant VAT revenue they currently receive from companies headquartered in southern states. These concerns have exposed longstanding grievances about the structure of Nigeria’s fiscal policy, which, despite recent efforts toward decentralization, continues to distribute tax revenues centrally.

Controversy Over VAT from Alcohol Sales

Adding to the complexity of the issue is the unique situation surrounding VAT derived from alcohol sales in Nigeria. In 12 northern states where Sharia law has been adopted, the sale and consumption of alcohol are strictly prohibited. However, despite this ban, these states still receive a portion of the VAT collected on alcohol sales nationwide. Some Southern leaders and fiscal advocates have long argued that this system is inherently unfair, labeling it an “injustice” that allows certain states to profit from activities they have deemed illegal.

The proposed tax reform is expected to address this discrepancy, potentially cutting off VAT revenue from alcohol sales to states that ban its sale. The bill seeks to create a system where each state benefits primarily from the economic activities within its borders.

However, the debate surrounding the Tax Reform Bill has highlighted deep-seated issues related to resource allocation and economic self-sufficiency in Nigeria. Many southern states have argued that a derivation-based VAT model would allow states to become more economically accountable and incentivize local economic development. High-consumption states like Lagos and Rivers stand to gain from this approach, as it would mean increased revenue that reflects the higher level of economic activity within their jurisdictions.

For northern states, however, the shift represents a potential revenue shortfall that could impact essential services, including healthcare, education, and infrastructure. These states have historically depended solely on federal allocations, which means, a shift to a derivation-based model would erode their financial stability.

A Call for National Assembly Intervention

Faced with the potential impact of the tax reforms, the Northern Governors Forum has called on members of the National Assembly to oppose the bill. The governors argue that the proposed VAT distribution model could deepen economic divides, ultimately harming the welfare of their people.

The Northern Governors emphasized that the bill risks “jeopardizing the well-being of our people,” calling for “equity and farness in the implementation of all national policies and programmes so as to ensure that no geopolitical zone is short-changed or marginalized”.