Chairman of the Federal Inland Revenue Service (FIRS), Zacch Adedeji, has disclosed that Lagos and Rivers states, as well as the Federal Capital Territory (FCT) are the major beneficiaries of the current tax law, with over 70 percent of all Value Added Tax (VAT) collections going to them.
He said with the current arrangement, the remaining 34 states of the country are left with little to nothing.
Adedeji stated this in his presentation at a public hearing on the tax reform bills held at the House of Representatives in Abuja.
He explained that the current VAT sharing arrangement primarily benefits those states because that is where most corporate head offices are located.
The FIRS Chairman further noted that the proposed reforms aim to address this imbalance by introducing a derivation principle model, which would ensure a more equitable distribution of VAT revenues to all states, regardless of their economic status.
Giving a breakdown for the month of October 2024, which he had just approved, he said “Lagos will take 42% of the VAT. Rivers will take 16%. Oyo State will take 5.2%, FCT will take 9%. If you take those 3 States, they are taking more than 70% of the tax.”
“Why? Because those are the places where the head offices of those places are. And we know that 70% of consumption is not happening in those three states. So, in whatever way you look at it, there is no way every other state apart from Lagos, Rivers, FCT, benefits from the proposed tax bill.
“If you look at it, MTN contributed highest, but because MTN headquarters is in Lagos, all the allocation from MTN is being accrued to Lagos. So, when this bill is passed, all states will benefit irrespective of the kind of economic situation that is happening in Nigeria,” Adedeji said.
In addition, the FIRS Chairman clarified that the derivation principle model applies specifically to consumption tax or VAT.
He cautioned that the model should not be mistaken for the derivation principle applied to oil-producing states, which is based on the location of production, explaining that in the case of consumption tax, derivation means the funds will be allocated to the states where the commodity is consumed, rather than the states where corporate head offices are situated.
“On derivation, I see there is a mix-up here. We have the oil and gas. If you look at the oil and gas, where they produce is where we sell and collect money from the oil. That’s why it is limited to their States.
“VAT by definition is a consumption tax. If you use derivation in VAT, what it means is that where is it consumed. Where do you make the call? Where is the bank transaction done? What the bill seeks to correct is that the existing structure we have does not represent the intent of Nigeria,” Adedeji added.
The new tax bills under consideration in the National Assembly propose adopting a derivation principle in the allocation of VAT revenues between the federal government and sub-national entities.
