The proposed tax reform bills in Nigeria have ignited a firestorm of debate, pitting state governors against the federal government and raising concerns about fiscal autonomy and revenue allocation. At the heart of the controversy lies the potential redistribution of Value Added Tax (VAT) revenue and the allocation of Electronic Money Transfer Levy (EMTL) proceeds. The bills, presented to the National Assembly by President Bola Tinubu in October 2024, propose a new derivation-based model for VAT distribution, a change that has been met with resistance, particularly from the Northern Governors Forum. They argue that this new model could negatively impact their regions’ financial independence. Adding fuel to the fire, the National Economic Council, comprising all 36 state governors, has urged President Tinubu to withdraw the bills for further consultation, highlighting the depth of the disagreement.
While the governors express apprehension, the presidency maintains that the reforms will ultimately benefit the states financially. According to a presidential spokesperson, the proposed changes will see the Federal Government cede five percent of its current 15 percent VAT share to the states. This transfer of revenue, coupled with the allocation of all EMTL proceeds to the states, is projected to significantly boost state coffers over the next three years. The proposed allocation of EMTL proceeds to the states represents a significant shift in revenue distribution. Currently, the EMTL contributes significantly to the federal government’s revenue stream. Under the proposed reforms, this revenue stream would be diverted entirely to the states, providing a considerable boost to their financial resources.
The financial projections underpinning the government’s argument paint a picture of increased revenue for the states. Based on the National Medium-Term Expenditure Framework and Fiscal Strategy Paper for 2025-2027, the VAT pool is estimated to reach N6.95 trillion in 2025. Of this amount, the federal government’s share is projected at N1.04 trillion, while the states are expected to receive N3.4 trillion. With the proposed five percent transfer from the federal government’s share, states stand to gain an additional N52 billion in 2025 alone.
Looking further ahead, the projections for 2026 and 2027 indicate a continued increase in VAT revenue. The federal government’s share is estimated at N1.206 trillion and N1.364 trillion, respectively, for these two years. The five percent transfer to the states from these amounts would total N128.5 billion over the two-year period. This incremental increase in revenue, coupled with the EMTL allocation, promises a significant boost to state finances.
The EMTL projections add another layer to the financial picture. Over the 2025-2027 period, the EMTL is projected to generate N228.85 billion, N263.67 billion, and N303.47 billion, respectively, totaling N795.99 billion. This entire amount, under the proposed reforms, would be transferred to the states, providing a significant influx of funds for development and other state-level initiatives.
In summary, if the tax reform bills are fully implemented, states are projected to receive an additional N976 billion over the next three years – N52 billion from the VAT transfer in 2025, N128.5 billion from the VAT transfer in 2026 and 2027, and N795.99 billion from the EMTL over the three-year period. This substantial increase in revenue, according to the federal government, justifies the proposed reforms despite the concerns raised by the state governors. The debate, however, continues, with the core question remaining: will the benefits outweigh the potential risks to state autonomy? The answer will likely shape the future of fiscal federalism in Nigeria.
