Nigeria’s 2024 Tax Reform Bills: a bold step towards an Empowered Federalism (1)

One of the most fundamental tenets of federalism across jurisprudence is the imperative for the empowerment of various levels of government. This strong jurisprudence of “empowerment” as a rationale for federalism has long been one of the most defining precedents of more established federations as those of the United State of America.

Renowned Professor Chemerinsky’s thesis on the empowered federalism as the goal of the enduring federal state have found several judicial precursors in the US legal system over the decades solidifying a pre-emption of the empowered federalism.

The empowered federal state is nurturing of different levels of government giving each level of government the power to respond to the demand of citizens and bring valuable impact therein.

In the same vein, the empowered fiscal federalism portends one of the most portent expressions of this empowerment. This is one of the most riveting legacies of Nigeria’s Independence Constitution of 1960 which ushered in the unprecedented progress Nigeria witnessed until 1966.

The period 1960-1966 remains unarguably Nigeria’s era of the empowered federal state with sprawling developments across regions spurred by a healthy competition among regions.

This era has since faded into oblivion through the actions of successive draconian legislations and a tendency for centralization as a doctrinal spinoff of military rule. The new set of fiscal reforms of the current administration contained in the suit of bill currently before the National Assembly (NASS) is a is taking a bold step in the reversing this trend.

This suit of fiscal reforms is groundbreaking. They connote far-reaching implications for Nigeria’s fiscal federalism and fiscal incentives, and it should not be a surprise to any observer that the proposed reforms are making both negative and positive waves across the country. The bills will harmonise federally collectable tax and revenue collection processes, expand the tax net, alter the Value-added Tax (VAT)’s reporting and sharing formular, improve a wide range of processes in the tax administration of Nigeria, among other provisions. Every level of government in Nigeria will be served by the suit of reforms with a clear potential to both empower and incentivize states to chat the trajectory of their fiscal future. However, a major contention has ensued on one of the elements that point to a change in sharing formular – VAT collection and sharing. The rest of this article will focus on this bit.

VAT is a consumption tax charged at each stage of the supply chain of on goods and services where value is added. VAT is collected by the Federal Inland Revenue Service (FIRS) across the country which remits the proceeds to the Federation Account and the sharing is administered based on the 50:30:20 sharing ratio — where 50 percent of the VAT is shared equally among states, 30 percent is shared on the basis of population size, and 20 percent for derivation (i.e shared to states where the VAT is collected).

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The Nigeria Tax Administration Bill 2024 before the NASS is proposing to share 60 percent of the collected VAT among the states where the VAT is collected on the basis of derivation, while 20 percent will be shared on the basis of equality of state and 20 percent on the basis of population size (i.e 20:20:60 formular). The relevant part (Section 77) of the bill reads as follows:

“Notwithstanding any formula that may be prescribed by any other law, the net revenue accruing by virtue of the operation of chapter six of the Nigeria Tax Act shall be distributed as follows: (a) 10% to the Federal Government; (b) 55% to the State Governments and the Federal Capital Territory; and (c) 35% to the Local Governments. Provided that 60% of the amount standing to the credit of states and local governments shall be distributed among them on the basis of derivation.”

Without any deep analysis, it is easy to see that the major variation in the sharing formular is the increase from 20 percent to 60 percent in the derivation component of the VAT sharing ratio. Some people who have objected to this new ratio insists that the formular lacks ‘equity’. Others went to the extreme of insinuating that the proposed ratio will impoverish northern states in Nigeria on account of the notion that only Lagos and River States have the commercial engine to bring in large VAT collections. These two objections to the new ratio among other objections are any devoid of any comment on fairness and the empowering aspects of the proposed ratio.

The new proposal is a major step in the much-clamoured return to the empowered federal culture that Nigeria once experience in the few post-1960 years. It approaches the larger yearning for a federalism that works through empowerment in a rather fragmented manner. This approach does not any way deprive the effort of its merits. Over the past two decades, Nigeria’s political elite has consistently pushed against any wholesale effort to return to a federalism that empowered levels of government for reasons that may not be two different from those currently being adduced against the current fiscal reform bills. The fact remains that that the post-1966 federal Nigeria has failed to deliver the much-needed development and progress that Nigerans so dearly desire, and efforts to reverse that trend need to be supported by all well-meaning Nigerians.

We must look beyond the immediate and nearly obvious effect of the proposed reforms and embrace the more enduring and long-term benefit of the new fiscal reforms. We cannot hope for a more “large scale” improvement of Nigeria’s fiscal situation better than what the present reforms have proposed. Any delay in pursuing this reform is a luxury that we cannot afford at the movement considering the severe fiscal constraint that Nigeria is faced with. No doubt, Lagos will be the immediate single largest monetary beneficiary of the new VAT sharing ratio, but ultimately, the empowerment and incentives that the ratio provides will deliverer far more benefits across the country than the immediate pains that some states envisage.

Important and progressive conversation on the current bill should be focused on helping states to grow their commercial base and economic capacity for increased revenue generation. From new project approval to new licences for leading industries, to the reactivation of large and impactful infrastructure across the country, states need to place a demand on the federal government to open up the country for unprecedented progress across sectors rather than stand in the way of the new reforms.