Tax Reform: Will it be a repeat of the subsidy removal debacle?, by Yusuf Alhaji Lawan
The Tax Reform Bill, a contentious piece of legislation currently before the National Assembly, has been met with widespread criticism and skepticism from the Nigerian populace. Many have expressed concerns that the bill is designed to favour a particular section of the country, exacerbating existing economic inequalities.
At the heart of the controversy lies the proposed changes to the country’s tax administration, including the sharing formula for Value Added Tax (VAT) revenue. The bill proposes to allocate 55% of VAT revenue to state governments, 10% to the federal government, and 35% to local governments.
Proponents of the bill, including President Bola Tinubu and Senate Leader Bamidele Opeyemi, argue that the reforms are necessary to simplify the tax landscape, reduce the burden on small businesses, and streamline tax collection. They also point to provisions that exempt low-income earners and small businesses with annual turnovers of N50 million or less from paying taxes.
Despite these assurances, many Nigerians remain unconvinced, citing concerns about the bill’s potential impact on the economy and the lack of transparency in the reform process. As the debate rages on, one thing is clear, the fate of the Tax Reform Bill hangs in the balance, and its outcome will have far-reaching consequences for the Nigerian economy.
The proposed Tax Reform Bill has sparked intense debate, particularly with regards to the derivation revenue-based model of sharing tax. This model, as proposed by the Oyedele committee, suggests that Value Added Tax (VAT) revenue should be shared based on the derivation principle, which attributes VAT to the place of supply and consumption. Critics argue that this model will disproportionately favour Lagos State, which is home to many company headquarters, at the expense of other states, particularly those in the North.
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This concern is rooted in the fact that the current formula for sharing VAT among states is based on 20% derivation, 50% equality, and 30% population, which will be altered under the proposed reforms.
The proposed derivation revenue-based model of sharing tax is likely to have a significant impact on the revenue allocation among states in Nigeria. For example, Lagos State, being the commercial hub of Nigeria, it is likely to benefit significantly from the derivation principle, which attributes VAT to the place of supply and consumption. Lagos State may gain an additional N800 billion to N1 trillion annually, according to some estimates.
States like Rivers, Delta, and Ogun may also benefit from the derivation principle, although to a lesser extent than Lagos State. These states may gain an additional N100 billion to N500 billion annually. States in the North, such as Kano, Kaduna, and Sokoto, may experience significant losses in revenue allocation under the new model. These states may lose an additional N100 billion to N500 billion annually. It is essential to note that these estimates are speculative and based on various assumptions. The actual impact of the proposed tax reform on revenue allocation among states may differ significantly.
The subsidy removal saga is still fresh in our minds. After 12 long years of campaigning by successive governments of the huge positives it holds for the populace, the subsidy was finally removed in 2023. But what followed was a plethora of problems for the poor masses. Their purchasing power dwindled, the Naira weakened, inflation soared, poverty became more rampant, self-esteem hit rock bottom, and many were forced to migrate to foreign lands in search of a better life.
Now, with the current buzz around Tax Reform, it is natural to wonder if this new development will follow in the footsteps of the subsidy removal debacle. Will it bring about more economic hardship for the average Nigerian, or will it truly live up to its promise of boosting economic growth and development?
Historically, tax reforms have had mixed results. In some cases, like Ethiopia, tax reforms have led to increased revenue and poverty-reducing spending. However, the success of tax reform depends on various factors, including the design of the tax system, the state of the economy, and the government’s ability to implement and enforce tax policies effectively.
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In Nigeria’s case, the impact of tax reform on economic growth is still a topic of debate. While some studies suggest that tax reforms can stimulate economic growth, others argue that the benefits of tax reform may be limited by the country’s structural challenges, such as corruption, infrastructure deficits, and insecurity.
As we await the outcome of the Bill from the National Assembly, it is crucial to keep a close eye on its progress and ensure that whatever it is, it should truly benefit the Nigerian people, rather than exacerbating their economic woes.
Yusuf Alhaji Lawan writes from Hausawa Asibiti Ward, Potiskum Yobe State. He can be reached via nasidi30@gmail.com.
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