By Ayo Kehinde
The storm gathering over the tax reform bills introduced by President Bola Tinubu may linger, as the Revenue Mobilisation, Allocation and Fiscal Commission (RMAFC), has rejected the principle of derivation over the existing system of Value Added Tax (VAT) among other legal, constitutional, and technical objections to the proposed legislation.
According to Economic Confidential, the Commission, in a nine-page memorandum signed by its chairman, Mohammed Bello Shebi, emphasised that it has been constitutionally designated as the final authority on matters of revenue allocation.
Raising a number of legal, constitutional, and technical issues against the proposed legislation, RMAFC said it was empowered by Section 162(2) of the 1999 Constitution (as amended) to determine the formula for equitable revenue sharing among the three tiers of government. This mandate also includes ensuring that the formula reflects principles of fairness and justice.
The Commission noted that “as such, no Act of Parliament, including the VAT Act, can infringe upon this constitutional responsibility. Any such attempt would constitute a violation of the Constitution.”
It further maintained that its role as the exclusive arbiter in developing fair revenue allocation formulas must be respected, arguing that any deviation from its constitutional duties could undermine the integrity of the Commission and compromise the principles of justice in revenue sharing.
The Commission, however, called for an approach to Value Added Tax (VAT) allocation that accounts for the unique nature of VAT as a consumption tax.
It noted that VAT revenue is shared among the three tiers of government with 15% for the Federal Government, 50% for the States, and 35% for Local Governments. It added that VAT is consumption-based, unlike oil revenue, where 13 percent is returned to the producing states.
“Derivation in fiscal federalism refers to the principle where revenue generated from a specific resource or activity is allocated to the jurisdiction (state or region) where it originated.
“In Nigeria, this principle is constitutionally recognised, notably in the allocation of oil revenues where 13% of revenue derived from oil is returned to oil-producing states, though different from the VAT derivation. It aims to ensure fairness and economic equity by compensating resource-originating regions for their contributions to the national purse”, the memorandum added.
While highlighting systemic issues in VAT administration, argued that the existing VAT system prioritises revenue pooling and formula-based distribution over strict derivation principles. It maintained that VAT as a critical source of revenue for the three tiers of government, is a centralised tax collected for redistribution across the Federation, making it crucial to allocate revenues equitably.
Proposing a formula developed by the commission, the RMAFC said this would ensure equitable distribution among federal, state, and local governments.
“Given the dynamics, arbitrary apportioning of percentages for VAT allocation, whether vertically among the tiers of government or horizontally among states and local governments, is both impractical and unconstitutional.
There might be a Public perception of skewing the law to favour states with higher production or corporate presence, regardless of where consumption occurs. Ignoring the need to support less economically developed states and regions and undermining national unity and equity in revenue-sharing.”
Among several recommendations in its memorandum, the RMAFC called on the federal government to empower the Commission to finalise a VAT allocation formula in line with its constitutional mandate.
The Commission also cautioned legislative or executive measures that undermine its authority and advocates implementing systems like electronic invoicing to tag VAT collections to end-user locations, enhancing transparency and accuracy.
President Tinubu had on October 13, transmitted four tax reform bills to the National Assembly for consideration, following the recommendations of the Presidential Committee on Fiscal and Tax Reforms headed by Taiwo Oyedele, for the review of existing tax laws.
The four bills include ‘A Bill for an Act to Establish the Joint Revenue Board, the Tax Appeal Tribunal and the Office of the Tax Ombudsman for the harmonisation, coordination, and settlement of disputes arising from revenue administration in Nigeria and for related matters, 2024’; ‘A Bill for an Act to Repeal the Federal Inland Revenue Service (Establishment) Act, No.13, 2007 and enact the Nigeria Revenue Service (Establishment) Act to Establish the Nigeria Revenue Service, charged with powers of assessment, collection of, and accounting for revenue accruable to the Government of the Federation, and for related matters, 2024’; ‘A Bill for an Act to Provide for the assessment, collection of, and accounting for revenue accruing to the Federation, Federal, States, and Local Governments; prescribe the powers and functions of tax authorities, and for related matters, 2024’ and ‘A Bill for an Act to Repeal certain Acts on taxation and consolidate the legal frameworks relating to taxation and enact the Nigeria Tax Act to provide for taxation of income, transactions, and instruments, and for related matters, 2024.”
Although the Tax reform bills have been passed for a second reading at the Senate, it announced plans on Wednesday, to convene a special meeting to address all areas of disagreement in the bills.
While the bills have polarised the country as well as the National Assembly. The northern governors and other stakeholders have raised voices against the bill.
RMAFC said the proposed tax bills threaten national unity and constitutional harmony.
