The derivation-based model for the distribution of Value-Added Tax (VAT) in the new tax bill that the National Assembly is considering has been rejected by the Northern Governors Forum, which the governor of Gombe state chairs.
Following the meeting between the elders and the governors of the Northern states, the forum scoffed at the proposal, noting that it was against the interests of the North and other sub-nationals, according to a statement signed by the forum’s chairman, Gombe state governor Muhammad Inuwa Yahaya.
The forum urged members of the National Assembly to oppose the measure and any others that endanger the interests of the Northern people.
The statement reads “Forum notes with dismay the content of the recent Tax Reform Bill that was forwarded to the National Assembly. The contents of the Blare against the interests of the north and other sub-nationals especially the proposed amendment to the distribution of Value Added Tax (VAT) to Derivation-based Model. This is because companies remit VAT using 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 National Assembly to oppose any bill that can jeopardise the well-being of our people.”
The new tax law, which is currently on the National Assembly floor, proposes a derivation approach for allocating VAT accruals between the federal government and subnational.
Nigerian VAT Distribution Formula
Section 40 of the VAT Act now states that the Federal Government receives 15% of revenue, the States and FCT receive 50%, and local governments receive 35%. The allocation to states and municipal governments reflects a minimum 20% derivation concept.
Other criteria affecting the distribution include 30% based on population and 50% based on equality, albeit not specifically mentioned in the VAT Act. In addition, the NCS receives 2% of the import VAT, and the FIRS receives 4% of the collection charge.
States’ Discontent With The Current VAT Allocation Method And Difficulties That Arise
Because they do not receive their fair share, some states, primarily in the South, have voiced their displeasure with the existing VAT allocation method.
The Rivers State administration was granted the right to collect VAT in Rivers State after it sued the Federal Inland Revenue Service (FIRS) in 2021 and won the case in the federal high court in Port Harcourt.
According to the ruling, each state would be in charge of implementing VAT on its soil. As a result, the Nigeria Customs Service would continue to collect import VAT on international trade. At the same time, the FIRS would supervise VAT administration in the FCT and non-import foreign transactions.
In the appeal court, the FIRS successfully challenged the Port Harcourt High Court’s ruling.
