The Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, Mr. Taiwo Oyedele has reacted to the opposition of the Northern Governors Forum to the derivation-based model of Value Added Tax (VAT) distribution among the different tiers of the federation in the new finance bill.
In a statement on his official page on X, Mr. Oyedele shared the sentiments with regards to the injustice in the current mode of VAT distribution which takes into account the location where VAT is remitted rather than where goods are supplied or consumed.
According to him, the current VAT distribution model is not only unfair to Northern states but states across all geopolitical zones.
He explained that the committee’s proposal is to create a fairer system which takes into account where goods are consumed or supplied irrespective of their VAT status.
In his words, “We share the sentiment expressed by the Northern Governors regarding the inequity inherent in the current model of derivation as a basis for distributing VAT revenue. This issue, in fact, affects many states across all geopolitical zones because the current derivation is mainly determined based on where VAT is remitted, rather than where goods or services are supplied or consumed.”
“Our proposal aims to create a fairer system by devising a different form of derivation which takes into account the place of supply or consumption for relevant goods and services whether they are zero-rated, exempt or taxable at the standard rate.”
He referred to telecommunication stating that the state where the subscriber is located should be reflected in the VAT distribution.
The Northern Governors Forum, chaired by Gombe State Governor Muhammed Inuwa Yahaya, had rejected the derivation-based model for Value Added Tax (VAT) distribution proposed in the new tax bill under deliberation at the National Assembly.
In a communiqué signed by Governor Yahaya following a meeting between Northern governors and elders, the forum criticized the proposal, stating that it undermines the interests of the North and other sub-national regions.
The forum also urged members of the National Assembly to reject the bill and any similar legislation that could compromise the welfare of the Northern people.
Current VAT distribution model
Currently, under Section 40 of the VAT Act, VAT revenue is allocated as follows: 15% to the Federal Government, 50% to the States and FCT, and 35% to Local Governments, with at least 20% of the distribution to states and local governments based on a derivation principle.
While not explicitly stated in the VAT Act, other factors affecting the distribution include 50% based on equality and 30% based on population.
Additionally, a 4% collection fee goes to the FIRS, and 2% is allocated to the NCS for import VAT.
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