Analysis: Why Northern Political Elite Are ‘Angry’ With Tinubu’s Tax Reform
A new tax bill, The Fiscal Responsibility and Tax Reform Bill, proposed by the administration of President Bola Tinubu, has sparked heated public debate among Nigerians.
Since the bill was read for the second time in both the House of Representatives and the Senate, and subsequently referred to committees for review, Nigerians, particularly the political class, have been divided over its potential effects if passed into law.
The proposed tax reform will repeal the Tax Administration and Revenue Act, introducing significant changes aimed at restructuring Nigeria’s tax system.
Key Provisions of the Proposed Tax Bill
The new tax bill offers several reforms. For instance, Nigerians earning the minimum wage (₦70,000) or less will be exempt from paying Pay-As-You-Earn (PAYE) tax. Additionally, the reform proposes a reduction in the tax burden for over 90 percent of workers in both the private and public sectors.
Other notable provisions include making essential items such as food, education, healthcare, rent, public transportation, fuel products, and renewable energy VAT-free.
However, one of the most contentious changes is the revision of the formula for sharing VAT revenues among the three tiers of government—Federal, State, and Local Governments—which has drawn significant opposition, particularly from the Northern part of the country.
Opposition from Northern Politicians
Key northern politicians have criticised the proposed reforms, arguing that the changes would further impoverish the region. Notable figures such as former Vice President Atiku Abubakar, Borno State Governor Babagana Zulum, former Sokoto State Governor Aminu Tambuwal, and Senator Ali Ndume have openly voiced their concerns.
Atiku Abubakar, in a statement on Sunday, emphasised the need for equity in the fiscal system:
“Nigerians are united in their call for a fiscal system that promotes justice, fairness, and equity. The fiscal system we seek to promote must not exacerbate the uneven development of the federating units by enhancing the status of a few states while unduly penalizing others.”
Governor Zulum expressed his dissatisfaction over the perceived haste in passing the bill:
“Why the rush? The Petroleum Industry Bill took almost 20 years before it was finally passed. But this tax reform bill is receiving legislative attention within a week. It should be treated carefully and with caution so that even after our exit, our children will reap its benefits,” he cautioned.
Similarly, Senator Ndume, a senior member of the All Progressives Congress (APC), threatened to leave the party during an interview on Channels TV.
The Controversy: VAT Sharing Formula
The most contentious issue in the bill revolves around the proposed changes to the VAT sharing formula. Currently, VAT collected is shared among the three tiers of government as follows:
- Federal Government: 15%
- State Governments: 50%
- Local Governments: 35%
In 2023, Nigeria generated ₦3.64 trillion from VAT. Using the aforementioned sharing formula, the Federal Government (15%) received ₦546 billion, the States (including the Federal Capital Territory, Abuja) (50%) received ₦1.82 trillion, while Local Governments (35%) received ₦1.274 trillion.
Among states, VAT allocation is further divided using a formula based on:
- Equality: 50%
- Population: 30%
- Derivation: 20%
For equality, this means that 50% of the VAT generated across the federation is shared equally among the 36 states and the FCT. 30 percent is allocated based on population, while 20% is reserved for VAT derivation, which is based on the state where the VAT is generated.
However, under the proposed reform, the sharing formula among the tiers of government will be adjusted to:
- Federal Government: 10%
- State Governments: 55%
- Local Governments: 35%
For states, the formula changes significantly:
- Equality: Reduced to 20%
- Population: Reduced to 20%
- Derivation: Increased to 60%
This shift places more emphasis on derivation, meaning states that generate more VAT would receive a larger share.
Why Northerners Are Opposing the Reform
Critics argue that the North benefits greatly from the current VAT-sharing formula due to its population and the equal distribution mechanism. For instance, in 2023, Lagos State generated ₦249.77 billion in VAT, the highest in the country, while Kano State, the only northern state in the top 10 VAT contributors, generated ₦4.65 billion. However, a look at how the states received VAT allocation, in comparison to what they contributed, shows an unfair disparity. While Kano contributed ₦4.65 billion, it received ₦9.71 billion, which is 108.82% more than what it contributed. Compare this to Lagos, which received ₦40.22 billion despite contributing a whopping ₦249.77 billion.
Under the new formula, northern states that generate less VAT will receive significantly reduced allocations, as the derivation component will increase from 20% to 60%.
Understanding VAT and Its Impact on Consumers
VAT, or Value Added Tax, is a consumption tax levied on goods and services at each stage of production or distribution. It is borne by the final consumer. For instance:
- A milk manufacturer buys raw materials worth ₦1,000,000 and pays ₦75,000 as VAT (7.5%).
- After production, the manufacturer sells to a supermarket for ₦2,075,000 (₦2,000,000 plus ₦75,000 VAT).
- The supermarket then sells a tin of milk for ₦430 (₦400 plus ₦30 VAT). This means that if you buy that tin milk, it is you who bears the VAT burden, not the manufacturer non the retailer.
Ultimately, the consumer bears the cost of VAT, as businesses add the tax to the price of goods and services.
Potential Benefits of the Tax Reform
Despite the opposition, proponents of the reform argue that it will incentivize states to develop their economies and boost internal revenue generation. The increased focus on derivation could encourage investments in infrastructure and business-friendly policies.
Taiwo Oyedele, Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, explained:
“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.”
The proposed tax reform has sparked valid concerns from northern politicians, who fear that the region may lose out financially. However, if implemented carefully, the reform could foster healthy competition among states, promote equity, and boost national development.
Due to pressure from Northern lawmakers and their Governors, the House of Representatives has suspended indefinitely the debate on the Tax Reforms Bills which was scheduled for Tuesday.
