The VAT reforms under the tax reform bills: separating fiction from facts

By: Abdulrahman Yusuf Muhammad

On 3rd October, 2024 President Bola Ahmed Tinubu transmitted the tax reform bills to the national assembly for consideration and passage into law.

The bills, a product of months of work by the Presidential Committee on Fiscal Policy and Tax Reform seek to significantly reform the Nigerian tax landscape, eliminate multiple taxes, simplify tax compliance, foster the ease of doing business and improve efficiency in tax administration in Nigeria.

The four bills under the tax reform bills are; the Nigerian Tax Bill, the Nigerian Tax Administration Bill, the Nigerian Revenue Service Bill and the Joint Revenue Board Bill. This article will focus concentration on the Nigerian Tax Bill and make some reference to the other bills where necessary.

The Nigerian Tax Bill seeks to consolidate all taxes within the providence of the federal government which were previously administered under the separate tax laws into one piece of legislation. In doing so the bill proposes to repeal eleven (11) tax laws and one (1) subsidiary legislation and amend thirteen tax laws and two subsidiary legislations.

If passed into law, the Nigerian Tax Bill will usher a significant change to the tax rate for various classes of taxes. Income taxes for both individuals and companies will witness a significant reduction.

The threshold for income tax liability has now been increased to N800,000 per annum as opposed to the present N300,000 per annum. In the same vein, the turnover threshold for small companies for income tax liability has been increased to fifty million Thus, companies with a turnover of fifty million are exempted from paying income tax. Under the extant tax regime, the minimum threshold is twenty-five million. Also, the company’s income tax rate will regress gradually from the present 30% to 27.5% in 2025 to end at 25% by 2026.

The Nigerian Tax Bill seeks to eliminate certain special deductions such as the NITDA levy, the NASENI Levy and the TETFUND Tax and consolidate them into a single Development levy. Equally, the bill proposes to make changes to the VAT rate, VAT sharing formula among the tiers of government and even attribution for the purpose of derivation, the VAT rate will witness a progressive increase from the current 7.5% to 10% then 12.5% in 2025 and 2026 respectively to then culminate at 15% in 2030 in line with ECOWAS recommendation for VAT rates for member states.

The VAT sharing formula among the tiers of government which used to be 15%, 50% and 35% to the Federal, state and local governments respectively will now change to 10% to the federal government, 55% to the state governments and 35% to the local government.

Under section 40 of the extant VAT Act, 20% of the VAT generated is shared based on derivation 50% based on equality and 20% based on population. The new model proposes that 60% will be shared based on derivation.

Even before the transmission of the bills to the National Assembly, the bills have suffered stiff opposition. First, the National Economic Council (NEC) chaired by the Vice President advised the president to withdraw the bills and engage in wider consultation. The president ignored the NEC’s advice and refused to withdraw the bills from the National Assembly. Then the Northern Governors Forum in a terse statement opposed the bills claiming that the bills if passed into law would put the North at a disadvantage. The forum then called for wider consultations on the bills. Other socio-political organisations have raised their voices against the tax reform bills. It is surprising that neither the National Economic Council, the Northern Governors Forum nor other opponents of the bill have advanced plausible and constructive reasons for opposing the tax reform bills.

Judging however from all the statements that have been issued the key problem is on the VAT reform. The grouse of the opponents of the bill is anchored on the VAT sharing formula under the bill which prescribes that 60% of VAT generated shall be shared based on the derivation as provided under section 77 of the Nigerian Tax Administration Bill.

The opponents of the bill have heavily objected to this provision of the bill because the 60% derivation is skewed for the benefit of Lagos which is the major contributor to the VAT pool. For example, data from the National Bureau of Statistics showed that Lagos State’s contribution to the VAT pool in August 2024 is a humungous 56% of the VAT generated. By this argument, Lagos State will be entitled to take a significant chunk of the VAT generated in the VAT Pool. By the time Lagos State takes its deep bite into the VAT pool on account of derivation. The remaining thirty-six states including the FCT will be left with crumbs and peanuts when what is left in the VAT pool is shared among the remaining states.

But this argument could have been true if derivation is considered under the extant dispensation, where derivation is attributed to the location where the VAT return was filed and not the actual location where the VATABLE supply is consumed. It is because of the operation of the present model that Lagos State gets the highest VAT contribution because a good number of the major companies in Nigeria are headquartered in Lagos and their VAT returns are filed centrally through Lagos State regardless of the place of actual consumption of the VATABLE supply.

However, the conclusion of the opponents of the VAT reform is incorrect. Under the new derivation model, VAT derivation will be attributed to where the VATABLE supply is consumed. Section 22 (12) of the Nigerian Tax Administration Bill provides that for attribution; “all VAT returns shall provide details of derivation of taxable supplies by location in a manner prescribed by the service.” It is clear from this provision of the Tax Administration Bill that regardless of where the VAT return is made, for the purpose of derivation, attribution will be to the location of consumption of the VATABLE supply. Thus, states will now enjoy all VAT paid in their location returned to the state where the VATABLE supplied was consumed.

The only way to understand whether the proposed sharing formula under the tax reform bills is to the disadvantage of other states is to gather the data of the actual VAT consumption of all the states in the country and do a mock distribution using the proposed formula, compare with what the states are receiving under the present sharing formula. It is only through this comparative analysis that states can ascertain whether they would be better off or worse off under the old mode and vice versa. Anything short of this can only be bogus and baseless.

While the opponents of the bills especially the governors of the Northern States have concentrated their attention on the VAT reform, my candid view is that the area of great worry and concern to the Northern governors and indeed other states should be the income tax reform which has the effect of taking out a good number of eligible income taxpayers from the personal income tax net.

This will significantly reduce the revenue generated by non-commercially viable states that are mostly populated by salary earners whose salary/income is below the threshold for personal income tax liability under the Nigerian Tax Bill. States in this category will lose the revenue once generated from the personal income tax stream.

A community review of the tax bills submitted to the National Assembly indicates that the positives of the bills outweigh the negatives and any perceived shortcomings. Especially considering thus far no constructive criticism has been proffered to highlight any shortcomings in the bill.

The federal government must however soften its pedals on the bills given that many states have raised concerns regarding the bill it is better to take a strategic pause to address any genuine misgivings about the bills to obtain the buy-in of all the stakeholders for the interest of the effective implementation of the bill than to proceed with a hurry that may derail all the positives that the bill may yield in the politics that may play out in the process of passing the bill into law.

Abdulrahman Yusuf, ACArb, ACTI is an Associate in the Kano office of Dikko and Mahmoud Solicitors and Advocates and can be reached via 08038450886 or abdulrahmanyusufmuhammad@gmail.com.