Nigeria has one of the world’s lowest tax to gross domestic product (GDP) ratio. For more than 30 years Nigeria’s tax to GDP ratio was coasting along at a miserable 6.5 per cent.
Three years ago, Mohammed Nami, the immediate-past executive chairman of the Federal Inland Revenue Service (FIRS), Nigeria’s inept tax collector, managed to push it to 10 per cent.
The low tax revenue explains why the federal government services its modest debt with 70 per cent of its revenue. In fact, in June 2022, government serviced its debt with 93 per cent of its revenue as tax revenue and proceeds from crude oil sales dipped precipitously.
The abysmal state of revenue generation is what informs the tax reform bill that President Bola Ahmed Tinubu recently sent to the National Assembly for passage into law. Ironically, the reform bill has sailed into stormy weather. The 36 state governors regard the bill as capable of robbing them of revenue from tax.
Perhaps the most turbulent aspect of the bill is the proposed reform in the sharing of the revenue from Value Added Tax (VAT). VAT is the most efficiently collected tax in Nigeria. By nature, VAT is supposed to be a consumption tax, but in Nigeria it is collected as a production tax and distributed on the basis of population.
That is primarily because of the convenience of collection and politics of distribution. The tax is levied on the manufacturers of goods and service providers on the basis of quantity of production.
That is because it is easier to collect the tax at the production point, than at the retail outlets where the tax collector would have to deal with millions of retailers.
There is no problem about the method of VAT collection. The problem which has been the bone of contention over the years is the distribution formula.
Currently, VAT revenue is shared on the basis of population while the source of production is given secondary consideration.
Consequently, Lagos state produces 60 per cent of the revenue from VAT while Kano state collects the biggest chunk of the revenue because the 2006 population census considers Kano the state with the highest population despite the millions that have fled to Lagos in the last 15 years.
While VAT is the most efficiently collected tax in Nigeria, its sharing formula rips off cruel injustice. It gives little consideration to the states hosting the firms producing the goods and services on which VAT is collected.
How the production state manages the wastes from the production of goods on which VAT is collected does not matter to architects of the distribution formula.
The distribution formula of VAT was so controversial that Nyesom Wike as governor of Rivers state in 2021 filed a suit in the Federal High Court in Port Harcourt where Justice Stephen Dalop Pam ruled that it was unconstitutional for the federal government to collect VAT. FIRS appealed the ruling. The Court of Appeal ordered the warring factions to maintain the status quo.
Besides, the current distribution formula does not encourage productivity because the states that benefit from VAT proceeds on the basis of perceived high population cannot lose anything even if it remains idle.
That is something that President Tinubu plans to correct by introducing derivation into the distribution of VAT revenue.
Northern governors are worried about the reform on the grounds that it would deprive them of cheap revenue.
The governors may not see the positive side of the president’s tax reform. It is designed to encourage every state to generate more goods and services through which VAT would be collected for the benefit of all.
The road from Kano to Dutse, the Jigawa state capital, is more than 200 kilometers. On that long stretch of idle road, there are portions one drives for close to 20 minutes without spotting a village.
The land stretches as far as one’s eyes could see. And it is fertile land. All that is needed to turn the vast land into thousands of hectares of rice farm is simple irrigation to water the crops.
The governors fighting the president’s VAT distribution reforms can simply end Nigeria’s shameful dependence on imported rice by converting the vast idle land into rice farms where VAT revenue would be generated and paid to them through the derivation formula.
They cannot plant crude oil in their soil to collect 13 per cent derivation. However, they can plant rice and maize in the vast fertile soil and earn more revenue from VAT through the president’s new distribution formula.
Northern Nigeria is probably the most blessed part of the artificial geographical contraption called Nigeria. It has vast fertile land.
Sir Ahmadu Bello, the first and only premier of Northern Nigeria, saw the riches bestowed on the region and invested heavily on it. He collected enough tax revenue from agrarian northern Nigeria to enable him build the Ahmadu Bello University, one of Africa’s most prestigious universities. That was when Nigeria’s economy was powered by agriculture. The groundnut pyramid was the envy of Northern Nigeria.
Today, the groundnut pyramids have disappeared not because the soil is no longer fertile, but because the dignity of labour is no longer the dogma.
Those who earn from hard labour, spend prudently. The governors spend recklessly because they did not toil for it. That is why 20 million children cannot find classrooms.
Tinubu wants everyone to labour for what he earns. That is the philosophy behind the derivation in VAT revenue distribution formula.
