NASS Can Jack Up VAT Derivation Formula Every Two Years — Alaje

Paul Alaje, an economist, believes that the new formula enshrined in the new tax laws in Nigeria for determining Value Added Tax (VAT) revenues for sub-nationals is a positive step.

Before the new tax laws, states retained 20% of the VAT revenue collected within their borders or by derivation, 30% of the VAT was distributed based on the population of the states, while the remaining 50% was shared equally among all states.

However, with the new tax laws, states will retain 30% of the VAT revenue collected within their borders, 20% of the VAT is distributed based on the population of the states, while the remaining 50% is shared equally among all states.

Alaje described as a good start, the new VAT sharing formula, saying that a 60% derivation formula, as was initially proposed before the bills were signed into law, would have cost the ruling All Progressives Congress (APC) its popularity, especially among states with lesser consumption.

The economist said, “The current state is very good; derivation at 30% is a good way to start because if you push it straight away to 60%, some of the states, and I dare say that 30 of our states, are not prepared.

“Apart from Lagos, Rivers, the FCT and a few other states that might be somewhere in the middle, most of the states will be at a disadvantage. It does not mean that the 60% formula in itself is wrong, but we need to look at the environment for which we are making this policy.

“That is why our recommendation to the National Assembly is that start with 30%, and review it after two to three years. As the states come up because we expect that the entire fiscal system we are changing to work well, we need more education at the subnational and local level.”

Alaje said with an increase in revenue by states, the percentage per derivation could also be jacked up by the National Assembly (NASS).

He said, “From 2026, 2027, we can test if the states’ revenue will increase. As it increases, as we have jacked up derivation by 10%, from 20% to 30%, we can say, look at the output of a 10% increase, revenues have increased by 5%, 10%, so, it’s time for us increase theses derivation by another 10% because we have a law that has combined several bills and acts here and there. But now that we have this, we can then say it is important for us to review.

“I don’t think we have lost anything. I think if we had decided that we were going to go on with the 60% as against what the governors were saying, as against what economists were saying, it might have had a political cost on the ruling party.

“I am particularly happy that the government listened very carefully. It’s not all the case that we have our way. What is important is the voice of the people, and I don’t see this as a sign of weakness or disadvantage to this Act in any way. I think at the end of the day, it is the people that win, and it is always good to stay with the people.”

Before they were passed and assented to, the tax laws were enveloped in widespread controversy and sparked scathing criticisms and stiff opposition from many, including some governors who believed that some states wouldn’t be able to pay staff salaries if some sections of the bills made it into law.

However, the Presidency and the National Assembly said stakeholders had been engaged across the country, and the fears of the governors had been allayed.
Tinubu on Thursday signed into law the four new tax bills recently passed by the National Assembly, describing the new laws as pivotal to the success of the administration’s reforms and the country’s prosperity.

The bills are the Nigeria Tax Bill (Ease of Doing Business), which aims to consolidate Nigeria’s fragmented tax laws into a harmonised statute; the Nigeria Tax Administration Bill, to establish a uniform legal and operational framework for tax administration across federal, state, and local governments.

Others are the Nigeria Revenue Service (Establishment) Bill, which repeals the current Federal Inland Revenue Service Act and creates the Nigeria Revenue Service (NRS); and the Joint Revenue Board (Establishment) Bill.