Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, Taiwo Oyedele, in a statement released on Tuesday responded to the concerns raised by Northern States Governors’ Forum (NSGF) over the current model for distributing Value Added Tax (VAT) revenue, which relies on derivation.
Oyedele stated, “We share the sentiment expressed by the Northern Governors regarding the inequity inherent in the current model of derivation as a basis for distributing VAT revenue.
“Our proposal aims to create a fairer system by devising a different form of derivation which takes into account the place of supply or consumption for relevant goods and services.”
He explained that states producing VAT-exempt goods like food should not lose out in VAT revenue simply because their products are consumed in other states.
In response to the governors concerns raised in the meeting held in Kaduna that “no geopolitical zone should be short-changed or marginalised.”, Oyedele said the presidential committee “will collaborate with all stakeholders to address this concern with a view to finding a balanced solution that achieves a win-win outcome for all.”
The Chairman further explained that, the proposed model would also ensure that VAT from telecommunications services reflects where subscribers are based, aligning with the principle that states contributing to VAT should receive recognition in revenue distributions.
The statement reads, “This issue, in fact, affects many states across all geopolitical zones because the current derivation is mainly determined based on where VAT is remitted, rather than where goods or services are supplied or consumed.
“Our proposal aims to create a fairer system by devising a different form of derivation which takes into account the place of supply or consumption for relevant goods and services whether they are zero rated, exempt or taxable at the standard rate.
“For example, a state that produces food shouldn’t lose out just because its products are VAT-exempt or consumed in other states. The state where the supply originates should be recognised for its contributions.”
Whether this statement answers the concern of the 19 Northern governors or not will be determined by the response that will follow the Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms explanations.
Currently, according to Section 40 of the VAT Act, revenue is allocated as follows: 15% to the Federal Government, 50% to the States and FCT, and 35% to Local Governments. The distribution to states and local governments reflects a derivation principle of at least 20%.
Meanwhile, the Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms assures the governors that the new tax reform will be a win-win for all the tiers of government.