Oyedele says current VAT sharing formula disproportionately benefit States

The Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, Taiwo Oyedele, yesterday argued that derivation formula in the tax reform will reduce inequitable distribution of resources. He stated that some states pushing back on the proposed 60 per cent Value Added Tax (VAT) derivation formula may end up with 100 per cent if the courts eventually decide so.

The Senate proceeded to set up a 10-member committee of ‘elders’ led by Senate Minority Leader, Abba Moro to meet with Attorney General of the Federation’s team on areas of concerns in the bills to douse the lingering tension of the tax reform.

Speaking on Arise Television, Oyedele said that it was surprising that the same states for which the committee was fighting were the ones kicking against the passage of the tax reform bills.

The tax expert’s remarks came as the Senate yesterday directed its committee on Finance to stop further action on the landmark tax reform bills, pending when grey areas of concern raised on the proposed legislations by stakeholders are properly addressed.

But Head of Tax, PwC Nigeria Oyedele explained that the current VAT allocation formula, based on 20 per cent derivation, 50 per cent equality of states, and 30 per cent population, was flawed.

He cited litigation initiated by Lagos and Rivers States, in which they argued that VAT collection should be under state control, since it is not explicitly mentioned in the constitution, arguing that if the case goes their way, it will mean that VAT will be based on 100 per cent derivation, further deepening the current inequity among states.

He defended the urgency of the tax reform bills, emphasising the need to address economic challenges, promote fairness, and ensure equity in revenue sharing, outlining how the reforms aim to resolve systemic issues in the VAT system and provide relief for struggling Nigerians.

He said: “Most likely, if we get the judgement from the Supreme Court, it will say states should administer it. When a state administers VAT, then it becomes 100 per cent derivation.

“It is important for us to understand that our proposal to move derivation to 60 per cent is actually a middle ground. If we lose the opportunity of getting this 60 per cent derivation, we are likely to end up with 100 per cent derivation, which, to be honest, is not bad but is going to create a lot of problems for businesses and economic growth.”

Asked why the federal government was in a rush to ensure that the bills were pushed for emergency passage, Oyedele maintained that the challenge of streamline Nigeria’s tax system was indeed an urgent matter.

“We are at a stage today where the majority of people are struggling. Small businesses face over 60 official levies and taxes, over 200 unofficial ones. If you want to provide relief for your people, you should do it in a hurry because it’s urgent; it’s an emergency,” he pointed out.

According to him, the current system which attributes VAT revenue to states where payments are made rather than where consumption occurs, disproportionately benefits Lagos State and to a lesser extent Rivers state.

In 2023 alone, Oyedele said that Lagos accounted for over 80 per cent of VAT revenue, despite its economy being about 30 per cent of the national total, urging those opposed to the current bills to imagine a situation where Lagos collects all its VAT.

“To promote equity and stimulate economic activities across the country, the reform proposes attributing VAT to where consumption takes place and increasing the share of VAT revenue states retain,” he stressed.

Oyedele, who also responded to insinuations that adequate consultation was not carried out by the committee, said that there were at least four meetings with finance commissioners as well as revenue service chairpersons, and with governors, to a lesser extent.

“We also had engagement with the governors themselves, but you would imagine that if you manage to get the airtime to speak to governors, either through the governors’ forum or the national economic council, they are unlikely to give you one hour or two hours, so there was a particular meeting where we got 15 minutes,” he disclosed .

He added: “We understand they have a very busy schedule. We also recognise that they may not be in the best place to deal with the technicalities of what we were dealing, that is why we spent more time with their finance commissioners and with the revenue service chairpersons across Nigeria.”

Stressing that Tinubu has never interfered in the work of the committee, he said that the body was able to convince the federal government to reduce its share of VAT from 15 per cent to 10 per cent, reallocating the remaining 5 per cent to states.

“This amount exceeds what states currently collect from multiple consumption taxes and ensures efficient, centralised tax collection,” Oyedele argued.

He also dismissed allegations of third-party involvement in tax administration, especially consultants, noting that the bills explicitly prohibit the use of such consultants for tax collection or assessment.