Why VAT proposal is generating controversy – Oyedele, Tax Committee Chair

Taiwo Oyedele, Chairman Presidential Fiscal Policy and Tax Reforms Committee, has explained why the Value Added Tax, VAT, distribution proposal before the National Assembly is generating so much controversy.

Oyedele stated that the current VAT system is fractured, with the major issues centred on disputes over VAT administration between some states and the Federal Government, among others.

He gave the explanation on Monday via a post on his X handle, titled, “10 most frequently asked questions about the Tax Reform Bills”.

DAILY POST reported that President Bola Tinubu had on September 3 transmitted four tax reform bills to the National Assembly for consideration.

The reforms stemmed from the recommendations of the Presidential Committee on Fiscal and Tax Reforms headed by Taiwo Oyedele, for the review of existing tax laws.

At the heart of the debate is the proposed shift to a derivation-based model for Value Added Tax distribution.

The Bills had generated mixed reactions across the country.

Giving further explanations on the gains of the proposed tax bills, Oyedele said his committee’s analysis showed that a central collection system is more efficient and benefits all states in the country.

He also stated that the reform seeks the discontinuation of all consumption taxes other than VAT.

Oyedele said: “Why is the VAT proposal generating so much controversy? Are we trying to fix what is not broken?

“The current VAT system is fractured. The major issues include:

“(i) disputes over VAT administration between some states and the federal government resulting in some landmark judgements and pending court cases. This is compounded by the fact that VAT is not stated in the 1999 Constitution thereby creating a lacuna. Our analysis shows that a central collection system is more efficient and benefits all. Once the contentious issues have been resolved, then VAT can be properly included in the constitution. The current sharing formula of FG 15%, States 50% and LGs 35% is proposed to become FG 10%, States 55% and LGs 35%.

“(ii) imposition of parallel consumption taxes in some states along with VAT which increases the tax burden on the people and contributes to multiple taxation. The reform seeks the discontinuation of all consumption taxes other than VAT.

“(iii) basis of distribution – the current formula for sharing VAT among states is based on 20% derivation, 50% equality and 30% population. The tax reform proposes a different model of derivation which will attribute VAT to the place of supply and consumption rather than the current model which attributes VAT to the state where it is remitted thereby favouring states with companies headquarters. Further, derivation under the new model will account for 60% of VAT distribution for better equity and to discourage any state from seeking to administer VAT as a state tax, which will not only result in much lower revenue for all tiers of government but will impose a higher burden on businesses.

“The proposed derivation model is contained under S.22(12) of the Nigeria Tax Administration Bill which states that “For the purpose of attribution, any return under this section shall provide details of derivation of taxable supplies by location.

“The controversy has arisen from the perception that the proposed formula would lead to lower revenue for some states. However, the 5% to be ceded by the FG can be set aside for equalisation transfers to cater for any shortfall to a state under the new model. This ensures that no state is worse off in the short term while significantly enhancing economic activities and revenue for all states in the medium to long term.”