President Bola Tinubu’s administration has made a bold move to overhaul Nigeria’s tax system with the introduction of the Tax Reform Bills. A key provision of these bills proposes that 55% of the country’s Value-Added Tax (VAT) revenues be allocated to state governments. This proposal marks a significant shift in the nation’s revenue-sharing formula, with far-reaching implications for both state finances and the broader economy.
A New Revenue Sharing Framework
The proposed change in Nigeria’s VAT revenue distribution is a stark departure from the current arrangement, in which the federal government retains the largest share. Under the new proposal, state governments will receive 55% of VAT revenues, while the federal government will retain 10%. This reform is expected to address the longstanding concerns of state governments, which have consistently pointed out the insufficient revenues available for local development and essential public services.
In 2022, the federal government collected N2.3 trillion in VAT, while state governments garnered only N643 billion. The new formula could increase state revenues by at least N500 billion annually, providing a substantial boost to local economies.
Rationale Behind the Reform
The Tinubu administration’s proposal is rooted in addressing the existing imbalance in Nigeria’s revenue allocation system. State governments have long argued that their limited resources hinder their ability to fund critical development projects and provide essential services to citizens.
A report from the National Bureau of Statistics (NBS) reveals that in 2022, state governments spent an average of N1.3 trillion on capital projects, which accounted for less than 20% of the federal government’s own capital expenditure in the same year. By increasing the VAT share for states, the reform aims to bridge this gap, empowering local governments to better address infrastructure needs and public service delivery.
Expected Benefits of the Reform
The proposed shift in VAT revenue allocation holds several potential benefits. First, it will enable state governments to boost their spending on vital development projects. For instance, Lagos State, one of Africa’s largest economies, collected only N144 billion in VAT revenues in 2022. Under the new system, the state’s VAT share could rise by at least N50 billion annually, enabling significant investment in critical infrastructure such as roads, bridges, and public transportation systems.
Additionally, the reform is poised to reduce Nigeria’s heavy dependence on oil revenues, which have been highly volatile in recent years. In 2022, oil revenues accounted for 70% of federal revenue. By increasing VAT allocations to states, the reform encourages economic diversification and aims to create a more resilient, non-oil-dependent economy.
Next Steps in the Legislative Process
The Tax Reform Bills have already passed their second reading in the Senate and will now proceed to public hearings and further debates. These hearings are expected to offer various stakeholders—including state governments, private sector representatives, and civil society organizations—the opportunity to voice their perspectives on the proposed changes. The federal government will also have a chance to address concerns and refine the bills accordingly.
Once passed into law, the new revenue-sharing formula is expected to take effect, significantly altering the financial landscape for state governments across the country.
Conclusion
In conclusion, President Tinubu’s Tax Reform Bills represent a landmark step toward reforming Nigeria’s tax system and stimulating economic development at the state level. The proposal to allocate 55% of VAT revenues to state governments is a bold and necessary move that will provide states with much-needed resources to fund their development projects and improve public services.
As the bills progress through legislative debates and public consultations, this reform is poised to have profound and long-lasting effects on Nigeria’s economic growth, fiscal stability, and governance. The proposed changes promise to empower state governments, foster economic diversification, and create a more equitable tax system for the country.
