Taxing Nigeria to Poverty: A Critical Examination of VAT Distribution
Dr. Aiyeku Olufemi Samuel Global Human Capital & Energy Management
The recent revelation at the World Economic Forum in Davos that the US is offering manufacturers a 15% Corporate Income Tax (CIT) rate, coupled with robust infrastructure and access to a massive market, highlights the competitiveness gap between Nigeria and other nations. In stark contrast, Nigeria’s CIT rate stands at 30%, a figure that raises questions about the country’s ability to attract investments and foster economic growth.
The high CIT rate in Nigeria not only deters investors but also stifles the growth of local businesses, ultimately hindering the country’s progress towards prosperity. This criticism is exacerbated by the poor state of infrastructure and weak purchasing power in Nigeria, which further diminish the attractiveness of the country to potential investors.
President Tinubu’s administration has proposed tax reforms, including a reduction in CIT rates, but critics argue that these reforms do not go far enough in addressing the country’s economic challenges. The proposed reforms also introduce a more progressive tax system, with lower-income earners being exempt from paying taxes, but the impact of these changes on the broader economy remains uncertain.
Key Concerns with the Tax Reforms
- Inequitable Revenue Distribution: The proposed reforms have been criticized for favoring economically dominant states, potentially exacerbating regional disparities.
- Insufficient Consultation: The lack of inclusive consultation with stakeholders, including state governments, labor unions, and civil society organizations, undermines the legitimacy of the reforms.
- Regressive VAT Increases: The gradual increase in VAT rates could squeeze disposable income and dampen consumer spending, particularly among low-income households.
VAT Distribution in Nigeria: A Critical Analysis
The distribution of Value Added Tax (VAT) in Nigeria has been a subject of debate, with various states contributing differently to the VAT pool and receiving varying amounts in return. A recent analysis of the VAT distribution in 2024 reveals significant disparities in the contributions and receipts of different states.
According to the data, Lagos State contributed the highest amount to the VAT pool, with N2.75 trillion, but received only N460.11 billion, representing 16.74% of its contribution. Rivers State followed, contributing N832.69 billion and receiving N186.66 billion, representing 22.4% of its contribution.
On the other hand, some states received significantly more than they contributed. For example, Kano State contributed N77.76 billion but received N117.19 billion, representing 150.7% of its contribution. Similarly, Kaduna State contributed N30.30 billion but received N88.50 billion, representing 292.1% of its contribution.
Regional Disparities and Challenges:
A regional analysis of VAT contributions and receipts reveals significant disparities. The South-West region contributed N2.499 trillion but received only N685.91 billion, representing 27.5% of its contribution. In contrast, the North-West region contributed N161.75 billion but received N463.86 billion, representing 287% of its contribution.
The disparities in VAT contributions and receipts highlight several challenges. Firstly, the current VAT distribution formula may not be equitable, as some states receive significantly more than they contribute. Secondly, the formula may not incentivize states to generate more revenue, as they may receive more in receipts than they contribute.
To address these challenges, the Presidential Committee on Fiscal Policy and Tax Reforms has proposed a new VAT distribution formula, which would allocate 10% to the federal government, 55% to the states, and 35% to local governments.
The proposal also includes a derivation principle, which would allocate a percentage of VAT revenue to the state where it was generated.
Recommendations
To ensure a more equitable and sustainable VAT distribution system, we recommend the following:
- Review the VAT distribution formula: The current formula
may not be equitable, and a review is necessary to ensure that states receive a fair share of VAT revenue.
- Implement the derivation principle: The derivation principle would incentivize states to generate more revenue and ensure that they receive a fair share of VAT revenue.
- Increase transparency and accountability: The VAT distribution process should be transparent, and states should be held accountable for their VAT contributions and receipts. To address these concerns, the government must prioritize a more inclusive and equitable approach to tax reform. This includes establishing a robust framework for revenue redistribution, intensifying stakeholder engagement, and committing to phased implementation with regular reviews and adjustments.
In conclusion, the VAT distribution system in Nigeria requires urgent attention. The disparities in contributions and receipts highlight the need for a more equitable and sustainable system.
By reviewing the VAT distribution formula, implementing the derivation principle, and increasing transparency and accountability, we can ensure that the VAT system promotes economic growth and development in all states.
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