Taiwo Oyedele, Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, addresses the Northern Governors Forum’s opposition to the derivation-based model of Value Added Tax (VAT) distribution outlined in the new finance bill.
In a statement on his official X account, Oyedele expresses agreement with the concerns raised about the current VAT distribution approach, which allocates funds based on the location where VAT is remitted rather than where goods are supplied or consumed. He emphasizes that this model is inequitable not just for Northern states but for states across all geopolitical zones.
Oyedele explains that the committee proposes a more equitable system that considers the location of consumption or supply for goods, regardless of their VAT classification. He states, “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. This issue affects many states across all geopolitical zones.”
He adds that the proposal aims to establish a derivation system reflecting where goods and services are supplied or consumed, including considerations for zero-rated and exempt items.
Background
The Northern Governors Forum, led by Gombe State Governor Muhammed Inuwa Yahaya, currently rejects the derivation-based VAT distribution model proposed in the ongoing tax bill discussions in the National Assembly. In a communiqué, the forum critiques the proposal, stating it undermines the interests of Northern states and calls on National Assembly members to oppose the bill and any similar legislation that could adversely affect the welfare of the Northern populace.
Current VAT Allocation
As it stands, Section 40 of the VAT Act allocates VAT revenue as follows: 15% to the Federal Government, 50% to states and the Federal Capital Territory (FCT), and 35% to local governments. At least 20% of the allocation to states and local governments is based on a derivation principle. While not explicitly stated in the VAT Act, other distribution factors include 50% based on equality and 30% based on population. Additionally, a 4% collection fee is designated for the Federal Inland Revenue Service (FIRS), and 2% is allocated to the Nigeria Customs Service (NCS) for import VAT.
