By Muhammad Jibrin Barde
The ongoing Value Added Tax , VAT, debate serves as a microcosm of the broader challenges within the country’s federal structure and economic framework. While the push for fiscal federalism underscores the need for equity, any solution must balance constitutional realities, economic interconnectedness, and the imperative for sustainable development. The issue is not merely a fiscal matter but a pivotal test of our ability to balance regional aspirations with national unity. The complexities surrounding derivation—especially in the context of VAT as a consumption-based tax—highlight the need for systemic reforms and a departure from parochial and ethnic sentiments.
This article continues my discourse on the critical challenges facing Nigeria’s federal structure, building on my earlier publications, “The Nigerian Tax Reform Bill: A Slap in the Face of Federalism” and “VAT Debate, Oyedele’s Hypocrisy, and the Future of Nigeria’s Federalism.” In those articles, I emphasized the need to respect our federal principles as enshrined in the constitution and to confront the systemic issues undermining equity and sustainability in our nation.
Here, I delve deeper into the complexities of VAT allocation, highlighting why our approach must be firmly rooted in the principles of true federalism.
Revisiting the VAT Debate: The Federalism Lens
As highlighted in my earlier publications, the Nigerian federal structure is under siege. The push for derivation-based VAT allocation raises fundamental questions about the cohesion of our federation. While derivation is constitutionally recognized, its application is limited to natural resources. Attempting to extend it to VAT—a consumption tax—poses practical and systemic challenges.
VAT reflects Nigeria’s economic interdependence, with goods and services often originating in one state but consumed in another. The current revenue-sharing formula (15% to the Federal Government, 50% to states, and 35% to local governments) recognizes this interconnectedness. However, the growing clamour for derivation threatens to destabilize this balance, particularly for economically weaker states.
RMAFC’s Position and the Complexity of Derivation
The Revenue Mobilisation Allocation and Fiscal Commission (RMAFC), given its constitutional mandate, has reinforced the need for caution. Their memorandum underscores the impracticalities of applying derivation to VAT, given its consumption-based nature and the absence of robust mechanisms for tracking goods and services across states. Key complexities include:
Consumption vs. Point of Sale: VAT collected in Lagos on goods consumed in Kano challenges the derivation logic.
Without comprehensive tracking systems or digital infrastructure, determining the rightful allocation is unfeasible.
Infrastructure and Economic Disparities: States with better infrastructure naturally generate more VAT, creating inherent inequalities if derivation is prioritized.
Complexity in Taxpayer Residence Determination: Challenges arises when:
Goods are purchased in one location and consumed in another.
Sellers and buyer operate across state boundaries.
VAT reporting systems fail to track the end-use location effectively.
Significance of VAT Revenue: VAT is a critical revenue source for Nigeria’s three tiers of government, contributing substantially to the VAT pool Account.
Oyedele himself acknowledges this, noting its absence from the 1999 constitution.
Equity and National Cohesion:
Derivation-based VAT allocation risks exacerbating regional inequalities.
Leaving less economically developed states struggling to generate sufficient revenue.
A balanced approach is essential to support weaker economies and ensure harmonious functioning of the federation
Constitutional Mandate of RMAFC:
Section 162 (2) of the 1999 Constitution assigns RMAFC the arbiter of revenue allocation among the three tiers of government, a responsibility not envisioned for any Act of Parliament, such as the VAT Act.
These issues were central to my critique of the Nigerian Tax Reform Bill, where I argued that the bill undermines our federal principles by prioritizing sectional gains over national cohesion.
The Oyedele Hypocrisy and Regional Inequities
In “VAT Debate, Oyedele’s Hypocrisy, and the Future of Nigeria’s Federalism,” I highlighted the contradictions in arguments that seek to localize VAT derivation while ignoring the constitutional provisions and systemic inequities that disadvantage hinterland states. These inequities result from decades of underinvestment in infrastructure, particularly in transportation and logistics.
Beyond Parochialism and Ethnic Jingoism
The VAT debate transcends regional interests and ethnic sentiments. Nigeria’s federal structure must evolve to address systemic challenges while fostering national unity. The principle of derivation, while constitutionally recognized, must be applied thoughtfully to ensure sustainable development and equity.
It is deeply offensive when discourse around these reforms is reduced to divisive rhetoric about one region opposing progress. This perspective ignores the broader systemic and historical realities that must guide policy. The issue at hand is not about North vs. South but about creating a framework that works for all Nigerians. It is about:
Ensuring that economically disadvantaged states are not further marginalized.
Balancing derivation with redistribution to promote national cohesion.
Building an infrastructure of fairness and opportunity across all regions.
To those who propagate these reductive narratives: rise above petty sentiments. Addressing Nigeria’s challenges requires intellectual honesty, empathy, and a commitment to federal principles, not ethnocentric jingoism.
Infrastructure Deficits and Economic Disparities
The VAT debate also exposes deeper issues of economic imbalance. Infrastructure deficits, particularly in transportation networks, have concentrated industries and investments in coastal and urban areas. Hinterland states, lacking access to efficient infrastructure, remain economically marginalized.
Investing in infrastructure is non-negotiable and should be central to tax reform, if we are to create a level playing field. This must include:
Expanding road and rail networks to link all states.
Promoting industrial development in landlocked regions.
Promoting import substitution and export growth.
Broadening the tax base and increasing per capita incomes.
Facilitating equitable income redistribution and regional development.
Leveraging public-private partnerships to fund large-scale infrastructure projects.
The Broader Imperative for Constitutional Review
True federalism requires a constitutional framework that reflects Nigeria’s realities. As I previously argued, the ongoing VAT reform must be accompanied by a comprehensive constitutional review to:
Clarify revenue-sharing principles, balancing derivation and equity.
Strengthen institutional mechanisms to track and manage VAT effectively.
Addressing systemic barriers to tax reform, such as infrastructure deficits and regional disparities.
Ensure that less economically developed states are not left behind.
This aligns with my position in “The Nigerian Tax Reform Bill: A Slap in the Face of Federalism,” where I called for a transparent and inclusive process to redefine Nigeria’s revenue-sharing model.
Recommendations for a United Path Forward
Nigeria’s tax reform must transcend regional and ethnic divides, focusing on systemic solutions that promote equity and unity. The following steps are critical:
Constitutional Amendment: Establish a revenue-sharing framework that respects our federal structure while addressing economic disparities.
Systemic Infrastructure Investment: Commit to nationwide infrastructure development as the foundation for equitable economic growth.
Legislative and Policy Reforms: Develop policies that balance derivation with equity, ensuring no state is left behind
Economic Diversification: Encourage states to broaden their economic base, reducing reliance on VAT and federal allocations.
A National Dialogue: Convene a stakeholders’ summit to deliberate on systemic reforms beyond sectional interests.
Conclusion: A United Vision for Nigeria
The VAT debate is not just about taxation; it is a defining moment for Nigeria’s federalism. As I have consistently argued, respecting our federal structure is the only path to sustainable growth and unity. By addressing the systemic challenges that have been ignored for too long, we can chart a course toward a prosperous and equitable Nigeria.
As the discourse continues, I urge policymakers and stakeholders to embrace a long-term vision—one that transcends parochial interests and prioritizes the collective good of our nation. Only then can we build a federal system that truly works for all Nigerians.
By Muhammad Jibrin Barde
