The Chairman of the Federal Inland Revenue Service (FIRS), Dr. Zacch Adedeji, has disclosed that under the current VAT law provisions, three of the 36 states currently get over 70% of the collections from the revenue source on monthly basis.
The foremost tax administrator, who made this disclosure during the ongoing public hearing on the tax reform bills now before the National Assembly at the House of Representatives, pointed out that the current VAT sharing formula had been largely benefitting Lagos State, the Federal Capital Territory (FCT) and Rivers State, where majority of the headquarters of corporate entities are located.
According to him, one of the provisions of the new VAT Bill now before the Legislature is to address this imbalance by introducing, among others, a derivation principle model that will ensure a fairer distribution of VAT revenues to sub-national governments irrespective of their economic performance level.
He clarified: “Today, I reeled out of the data on this month of October sharing I just signed on Friday. Today Lagos will take 42% of the VAT, Rivers will take 16%, Oyo State will take 5.2% and FCT will take 9%. If you take those three states, they are taking more than 70% of the tax. Why? Because these are the places where the head offices of those companies collecting the VAT are and we know that 70% of consumption is not happening in those three states.
“So, in whatever way you look at it, there is no way every other state apart from Lagos, Rivers and FCT benefit from the proposed tax bill.
“If you look at it, MTN contributed highest but because MTN headquarters is in Lagos, all the allocation from MTN is being accrued to Lagos. So, when this bill is passed, all states will benefit irrespective of the kind of economic situation that is happening in Nigeria”, the FIRS boss added.
While clarifying that the derivation principle model specifically applies to consumption tax or VAT, Adedeji said this should not be mistaken for the derivation principle applied to the oil-producing states, which is based on the location of the oil and gas produced.
According to him, in consumption tax derivations means that the fund will be allocated to where the commodity or service is consumed rather than the states where corporate offices are situated.
Adedeji, who pointed out that there seemed to be a mix-up in the application of the derivation principle, noted that in the oil and gas industry, where Nigeria produces is where the commodities are sold, hence the limitation of the derivation principle to the oil producing states.
He clarified: “VAT by definition is a consumption tax. If you use derivation in VAT, what it means is that where is it consumed or where do you make the call? Where is the bank transaction done?
“What the VAT bill seeks to correct is that the existing structure we have does not represent the intent of Nigeria”, the tax administrator added.
Under the current VAT sharing formula as provided for in Section 40 of the VAT Act, the Federal Government gets 15% as collection charge, 50% is shared to the 36 states and the FCT while 35% is distributed to the Local Governments.
The new VAT Bill is proposing the adoption of the derivation principle in the allocation of VAT collections to the federal and sub-national governments
