A significant clash is unfolding in Nigeria over the control and distribution of Value Added Tax (VAT) revenues, pitting the Presidential Fiscal Policy and Tax Reforms Committee against the Revenue Mobilisation Allocation and Fiscal Commission (RMAFC). The heart of the dispute lies in the interpretation of the 1999 Constitution and its implications for revenue sharing among the federal, state, and local governments. While both bodies advocate for tax reforms, their fundamental disagreements on VAT administration and allocation have created a substantial legal and political impasse.
The RMAFC asserts its constitutional authority as the ultimate arbiter of revenue allocation, emphasizing the principles of fairness and equity. Citing Section 162(2) of the 1999 Constitution, the Commission argues that its mandate to determine the revenue-sharing formula supersedes any other legislation, including the VAT Act. It advocates for a distribution model that supports less economically developed states to ensure national cohesion and stability, cautioning against arbitrary changes that could disrupt the existing system. The commission views VAT as a crucial tool for equitable distribution of national resources and maintaining financial stability across the federation.
Conversely, Taiwo Oyedele, Chairman of the Presidential Fiscal Policy and Tax Reforms Committee, contends that VAT, introduced in 1993, predates the 1999 Constitution and therefore falls under the residual powers of the states. He argues that its nature as a consumption tax and the current allocation system, where 85% goes to states and local governments, further strengthens its classification as a state tax. Oyedele also points to stamp duties, another revenue stream belonging to states, as a comparable example where the RMAFC does not determine the sharing formula. He believes that respecting the pre-constitutional origins of VAT and its inherent link to consumption patterns should guide its administration and allocation.
The historical trajectory of VAT in Nigeria highlights its evolution into a major revenue source. Starting at 5% in 1993, the rate increased to 7.5% in 2020 to bolster non-oil revenue. Currently, the Federal Inland Revenue Service (FIRS) manages VAT centrally, distributing 15% to the Federal Government, 50% to states, and 35% to local governments. However, this arrangement has faced criticism, particularly from economically stronger states like Rivers and Lagos, which advocate for a derivation-based model aligning revenue allocation with consumption within their boundaries. This push for greater control over locally generated VAT revenue has further fueled the ongoing dispute.
The RMAFC, while backing the proposed tax reforms, expresses serious reservations about applying the derivation principle to VAT. The Commission argues for equitable sharing to support less developed states, cautioning that arbitrary changes could threaten national unity. It also raises concerns about the administrative complexities of tracking VAT consumption accurately across states, citing the lack of robust digital infrastructure. This highlights the practical challenges of implementing a purely derivation-based system and underscores the need for a balanced approach.
Oyedele challenges the RMAFC’s claims, clarifying that the horizontal distribution among states already incorporates a derivation component (20%), alongside equality (50%) and population (30%). He dismisses the need for advanced technology for consumption tracking, arguing that existing input-output VAT mechanisms are sufficient. He also warns that decentralizing VAT administration could lead to significant revenue losses for many states, disrupt interstate commerce, and increase fiscal risks. This emphasizes the potential economic consequences of a fragmented VAT system and the benefits of a centralized approach.
The path forward requires a comprehensive dialogue involving all stakeholders. Potential solutions include developing a balanced VAT formula that considers derivation, equity, and consumption patterns; engaging all levels of government in constructive discussions; amending VAT laws to eliminate ambiguities; and enhancing digital infrastructure to improve transparency and accountability in VAT collection and allocation. The recent surge in VAT revenue, driven by factors like naira devaluation, rising inflation, and improved tax compliance, further underscores the importance of resolving this dispute effectively to maximize the benefits of this crucial revenue stream for the nation’s development. A clear and legally sound framework for VAT administration and allocation is essential for ensuring fiscal stability and promoting equitable resource distribution across Nigeria.
