The Revenue Mobilisation, Allocation and Fiscal Commission (RMAFC) has opposed the provisions in the Value Added Tax (VAT) Bill now being deliberated upon by the National Assembly mainly based on the principle of derivation and advised the Presidency for its review.
The commission, in a nine-page memorandum signed by its chairman, Mohammed Bello Shehu, rejected the principle of derivation over the existing system of VAT as well as other legal, constitutional, and technical provisions of the Bill.
According to the Memo to President Bola Tinubu, the RMAFC chairman maintained that based on the provisions of Section 162(2) of the 1999 Constitution (as amended), empowered the commission to determine the formula for equitable revenue sharing among the three tiers of government and that the formula reflects principles of fairness and justice.
Bello pointed out that in view of the subsisting constitutional mandate of the RMAFC, it remained the final authority on matters of revenue allocation.
Specifically, he stressed: “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.”
The chairman of the commission further maintained that the RMAFC’s role as the exclusive arbiter in developing fair revenue allocation formulas must be respected, adding that any deviation from the constitutional roles of the commission could undermine its integrity and compromise the principles of fairness and justice in revenue sharing.
While canvassing for an approach to Value Added Tax (VAT) allocation that accounts for the unique nature of VAT as a consumption tax, Bello pointed out that on the issue of derivation, the existing VAT Act did not provide for that but indicated that VAT revenue should be shared among the three tiers of government with 15% allocated to the Federal Government, 50% to the states, and 35% to the local governments.
He clarified: “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 recognized, 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.”
Bello further pointed out that where goods purchased in Lagos (as a point of VAT collection) are consumed in Kano, the VAT laws in Nigeria did not provide a clear mechanism to track goods post-sale to the end-use location, adding that without efficient systems for monitoring consumption patterns, the allocation of VAT based on derivation will be contentious.
Similarly, while highlighting some systemic issues in VAT administration, the RMAFC chairman argued that the existing VAT system prioritized revenue pooling and formula-based distribution over strict derivation principles.
To address the growing opposition by some politicians and analysts against the VAT Bill now in the National Assembly, he canvassed a fiscal option that would make the commission to develop a sharing formula on the VAT distribution in line with its mandate to ensure equitable distribution of VAT collections among the three tiers of government
Bello stressed that given the dynamics, arbitrary apportioning of percentages for VAT allocation, whether vertically among the tiers of government or horizontally among states and local governments, the VAT Bill in its present form remained unconstitutional.
He stated: “There might be 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.”
On the way forward out of the fiscal logjam, the RMAFC chairman charged the Federal Government to empower the Commission to finalize a VAT allocation formula in line with its constitutional mandate.
According to him, this will reinforce the commission’s constitutional mandate by ensuring that VAT allocation strictly follows RMAFC’s framework and not arbitrary provisions in the proposed VAT Act
In addition, while also urging dialogue among federal, state, and local governments to consensually agree on the RMAFC’s formula, thereby reducing tensions and ensuring acceptance, Bello warned against adopting legislative or executive measures that undermine RMAFC’s authority.
