Tax Bills: Battle shifts to NASS over Northern govs opposition

Ahead of Tuesday, November 19 when the National Assembly is billed to resume sitting, governors of Northern states have rallied lawmakers from the region to unite against the Tax Reform Bills sent by President Bola Tinubu, even as more controversies have continued to trail the bills.

President Tinubu had last month forwarded to the National Assembly four tax bills, which stemmed from the recommendations of the Presidential Committee on Fiscal and Tax Reforms headed by Mr. Taiwo Oyedele. Among the bills are the Nigeria Tax Bill 2024, which is expected to provide the fiscal framework for taxation in the country; the Tax Administration Bill, which will provide a concise legal framework for all taxes in the country and reduce disputes; the Nigeria Revenue Service Establishment Bill, which will repeal the Federal Inland Revenue Service Act and establish the Nigeria Revenue Service, and the Joint Revenue Board Establishment Bill, which will create a tax tribunal and a tax ombudsman.

The bills, which among other things, seek to introduce an equitable basis for Value Added Tax (VAT) revenue sharing by ensuring that states without many headquarters companies are fairly treated and rewarded for their economic contributions, reduce the corporate income tax rate from 30% to 25% over the next two years and eliminate earmarked taxes on companies to be replaced with a harmonized single levy at a reduced rate, and give exemptions for small businesses with an annual turnover of N50 million or less including withholding tax, value added tax, and 0% corporate income tax rate, have been hailed by analysts as being forward thinking and progressive.

The bills also seek exemption from PAYE (personal income tax) for minimum wage earners and reduced tax burden for over 90% of all workers in the private and public sectors;  VAT at 0% for food, education, and healthcare, and the exemption for rent, public transportation, fuel products, and renewable energy; elimination of minimum tax on loss-making companies and those with low-profit margins, among others.

But of particular concern to the North is the proposed removal of VAT from the Federal Account Allocation Committee (FAAC). VAT, which is a tax charged on the consumption of goods and services, is under the current system, distributed 20 percent based on derivation; 30 percent based on the population of the states, while the remaining 50 percent is shared equally among all states.

The sharing formula means that while Lagos generates more than half of the total at 55 percent, it gets almost the same share as Kano, which on paper has more population, but generates only 1.4 percent of the VAT. The bills, thus seek to correct this presumed anomaly by ensuring that 60 percent of the VAT will go the state of collection, as a way of rewarding states for generating more economic activities.

But this proposal has come with its own controversies. In a piece that went viral last week, a certain Chris Okafor argued that while ceding 60% of the VAT to the state of collection sounds attractive, it gives undue advantage to Lagos and Ogun States, where most companies are headquartered, to the detriment of other states.

“The registered address of First Bank in CAC or FIRS is 35 Marina Lagos. However First bank has 15 branches in Anambra. In the course of rendering bank services, First bank collects VAT from its branches. But the way it is right now, the VAT collected from the 15 branches of First bank in Anambra is credited to Lagos because it is the registered office of bank. Thus, if First bank collects N500m as VAT from Anambra, 60% of it under derivation will go to Lagos. And this is replicated in the other states in Nigeria,” he had argued in the piece.

“MTN has its registered office in Lagos. But as at 2021, it had about 3m voice subscribers in Anambra. MTN collects VAT from the telecom services rendered to about 3m subscribers in Anambra on daily basis. Let’s say it collects N700m monthly from Anambra subscribers, MTN credits this amount it collects to Lagos state. And by the reform bill, Lagos will collect 60% of it.

“Now apply the principle to all the banks, breweries and mineral water bottling companies. You should be able to understand what the tax reform bill plans to do.”

However, Mr. Oyedele, chairman of the reforms committee, explained that under the proposed formula, VAT will be remitted to states where consumption takes place, not where the headquarters of the company that produce the consumed goods is located, as is currently the case, which explains why Lagos, which hosts most of the manufacturing companies in the country, accounts for more than half of all VATs generated.

“Take for instance, almost all the banks are headquartered in Lagos.  They pay the VAT in Lagos. The beverage companies: Nigeria Breweries, Coca-Cola and so on, sell beverages across Nigeria, but they file in Lagos. VAT that is remitted in Lagos is attributed to Lagos as being derived from Lagos, but it’s not derived from Lagos,” Oyedele explained during an appearance on Channels TV Hard Copy last week.

“When you make calls, it is derived from across Nigeria, which was why we thought that the hard conversation we were going to have was convincing Lagos State to accept this our new method that says, ‘move away from where VAT is remitted to where the consumption takes place.’

“Every state in Nigeria would use mobile phone. They will use airtime. They will buy soft drinks. They will use cement. They’re building houses everywhere. Dangote will remit the VAT in Lagos. So we said, let’s correct this distorted derivation, so it reflects economic activities everywhere those activities take place for the purpose of sharing.”

Oyedele further noted that reverting to the proposed new system will not be as complicated as it may appear because before now, companies were filing returns everywhere, and those companies within their system can tell you where the transactions are taking place.

“MTN will tell you where the subscribers are based,” he said. “If you have Coca-Cola – and it can be any company – in five minutes, they can tell you where their distributors are based and how much goods they’ve sent to them. So, rather than saying, because the company producing the beverages is headquartered in Lagos, that’s where we derive all this stuff from in Nigeria, we’ll say, where did you send them to? The one you sent to Ekiti, to Zamfara, to Kebbi , to Abia. Let them take credit for their economic activities.”

Oyedele argued that apart from Lagos, every other state ought to welcome the new proposal. However, his argument has not convinced everyone, particularly northern governors, who fear, regardless, that removing 60 percent of VAT from FAAC, if the proposal scale through, could lead to reduction of the revenues they collect from the federal pool, and thus, have begun to mobilize lawmakers from the region to reject the proposal when sitting resumes from Tuesday.

Although the new proposal seeks to address the anomaly of crediting Lagos for VAT generated from consumption in other states of the federation, the governors argue that allowing states to retain 60 percent of VAT generated from their domains would still favor states with more economic activities and remove a substantial amount of what comes into the federation account for the benefit of all the states.

“Let me clarify. We are not against the tax reforms. There are so many good things about the tax reforms that Mr. President is putting forward. We just selected an item out of the tax reforms. We are discussing the VAT, which would be removed from the FAAC. That is why we are calling for a review of that position,” said Nasarawa State governor Abdullahi Sule, while clarifying the position of the northern governors during the launch of a new digital tax code by the Nasarawa State Board of Internal Revenue Services (NSBIRS) in Lafia on Friday.

Gov. Sule contended that removing VAT from FAAC would redirect 60 per cent of VAT revenue to derivation, affecting states reliant on FAAC for their budgets, while raising concerns about how VAT would be collected based on consumption, sharing an example from his time as managing director in the private sector.

“A customer from Maiduguri would order 200 trucks and pay VAT accordingly, but only request delivery of 10 trucks to Maiduguri while distributing the rest from Ilorin to Sokoto. This would make it difficult for states to understand actual consumption,” he noted.”

Northern govs mobilize

Business Hallmark, in the meantime, gathered that, while the President Tinubu government has made efforts to get the buy-in of stakeholders, particularly from the North, after its initial grandstanding of rejecting calls for their withdrawal and asking them to introduce their objections at he public hearing, the governors have refused to shift ground and are actively rallying lawmakers from the region to reject the bills in their present form.

Inuwa Yahaya, Gombe State governor and chairman of the Northern States Governors’ Forum, for instance, maintained on Friday, that the position of the state chief executives on the Tax Reform Bills remains unchanged because the proposed law would have dire economic consequences for the region.

“Any tax policy should be fair, inclusive, and considerate of the diverse economic realities across the country,” Gov. Yahaya, his spokesperson,  Isma’ila Uba Misilli, told The Leadership Newspaper.

“Recall that in the communiqué issued after the Kaduna meeting, and read by Gov. Inuwa Yahaya, it was clearly stated that the forum notes with dismay the contents of the recent Tax Reform Bills forwarded to the National Assembly.

“The proposals are seen as detrimental to the interests of the North and other sub-national entities, especially the proposed shift to a derivation-based model for distributing Value Added Tax (VAT). This is because companies remit VAT based on the location of their headquarters or tax offices rather than where goods and services are actually consumed.”

The Gombe Chief executive expressed the confidence that their representatives at the National Assembly would thoroughly examine those bills and give due consideration to the concerns raised.

“We trust that the members of the National Assembly will take the necessary actions to protect the interests of our states and the citizens.”

Business Hallmark gathered at the weekend that despite efforts to allay fears, key stakeholders in the North, including governors and national assembly members, have maintained their stance against the bills and will vote against it if presented in its present from.

“Well, like I said previously, the sentiments against the bill is still strong here in the North,” Hussaini Mohammed, a Borno-based analyst told Business Hallmark. “I don’t see it passing unless there are some amendments that address the concerns that have been raised.

“Yes, you could argue that under the bill, VAT will be remitted to where consumption takes place, but a lot of the consumption still takes place in places like Lagos. So, if you say they should take 60 percent of that for themselves, it is still something substantial.”

North’s argument short-sighted – Aja

Meanwhile, Kalu Aja, an author and financial expert, has argued that the proposed bills are a welcome development that would, ultimately, benefit everyone, while noting that the argument of the northern governors is short-sighted.

“I think in one of those bills is the suggestion by the President that we should increase derivation. The way it works in Nigeria is that when we get N100, we share out N50 based on the principle of equality, then N30 goes in principle of population. Derivation is just N20,” he said in an interview with News Central.

“Mr. President is now saying that it’s going to increase the share from the federal to the state. So, the state will get more money. But in return, he wants to increase the proportion of derivation from the current 20 to 60 percent. So, the states get more money, but the derivation percentage rises in the formula to calculate and share out the federal allocations, what we call FAAC.

“I think the governors or the ‘north’ are basically worried that their current revenues is going to go down because it’s going to be based on the derivation and not on population and equality. I think that’s not really fair because what this does is that it opens up commerce for the states. The more you make, the more you keep. This is how Nigeria was way back in the ’70s. I think it’s a bit short-sighted. They are looking at the current and not the future.

“If you take the derivation up to 60 percent and you can VAT the goods and commerce in your state and local government area, of course, you can retain more and you can basically make your state more viable as a business entity. They have been a bit too quick to say no to it. They haven’t read the four bills, I would say, in particular. They’re picking up just one particular part of the bill. When you read the whole four, you see the derivation part comes in line with allowing you get more revenues.”

Speaking further, he said, “I’ll give you a good example. Most of the yams in Nigeria, the largest yam farm in Nigeria, our largest market for yams in Nigeria is in Benue State. When you pay VAT in Nigeria, you are paying to the company where the company is headquartered. If at the yam company, the yams in Benue are linked to Lagos for processing but are sold in Benue, the VAT goes to Lagos State, not to Benue, where the yams are grown, sold, and consumed, more or less.

“So, VAT is paid where the head office of the company is domiciled and makes its remittances to the Federal Inline Revenue Service.

“This bill is saying that VAT should be calculated where the consumption actually takes place. What that means is that, say, if you have MTN or you have Coca-Cola, you have any industry, say, food, consumption tax, you pay that tax where it is consumed or where the service is enjoyed, not where the head office is located.”