Northern Governors Reject VAT Derivation Proposal

The Northern Governors Forum, headed by Gombe State Governor Muhammed Inuwa Yahaya, has opposed the proposed derivation-based model for Value Added Tax (VAT) distribution in the new tax bill currently under review by the National Assembly. 

In a statement released after a meeting with Northern elders and governors, Yahaya criticized the model, arguing that it would disadvantage the North and other regions.The forum called on National Assembly members to reject this bill and any other measures that may compromise Northern interests.

The Forum is closely reviewing the recent Tax Reform Bill submitted to the National Assembly, raising concerns about its potential impact on the interests of the North and other subnational regions.

Specifically, there are apprehensions regarding the proposed amendment to the Value Added Tax (VAT) distribution based on a derivation model. 

Currently, VAT is collected based on the location of companies’ headquarters and tax offices, rather than where goods and services are consumed. In light of this, the Forum suggests reevaluating the proposed amendments to ensure they benefit all communities and promote their well-being.

The new tax bill proposes shifting VAT distribution to a derivation principle shared between the federal government and subnational entities.

VAT Distribution Formula in Nigeria

As outlined in Section 40 of the VAT Act, the current revenue allocation is structured as follows: 15% to the Federal Government, 50% to states and the Federal Capital Territory (FCT), and 35% to local governments. 

This distribution incorporates a derivation principle of at least 20%. While not explicitly stated in the VAT Act, other factors influencing distribution include equality (50%) and population (30%).

Concerns Over VAT Distribution

Some states, particularly in the South, have raised concerns about the current VAT distribution formula and are advocating for a fairer allocation.

In 2021, Rivers State challenged the FIRS in the Federal High Court in Port Harcourt, winning a ruling that affirmed the state’s right to collect VAT locally. 

This judgment allowed states to manage their own VAT administration, with the FIRS overseeing VAT in the FCT and on non-import foreign transactions, while the NCS continued to handle import VAT.

Therefore, the forum encourages ongoing dialogue among stakeholders to address these concerns and seek equitable solutions for all regions.