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The Proposed Tax Explained
This analysis explores the proposed changes to Nigeria’s VAT sharing formula, illustrating how the new framework could significantly alter revenue distribution among states. By examining a practical example with Kano, Lagos, and Rivers, we detail the implications of the proposed law compared to the existing framework, highlighting the potential to incentivize better performance among states.
In examining the proposed changes to the Value Added Tax (VAT) sharing formula, it’s essential to understand how these adjustments will impact revenue distribution among Nigeria’s states.
The new framework suggests a significant shift in the allocation of VAT, with implications for both the Federal Government and state administrations.
By using a practical example, we can illustrate the potential outcomes of this proposed law, highlighting the contrasts between the current and proposed systems.
This analysis will detail the VAT generated by specific states, the proposed sharing percentages, and the overall effects on state revenues, emphasizing the intention to incentivize improved performance among underperforming states.
Let me put figure to this VAT proposed formular and see how it is.
Take, for example, the following states
generates the below as VAT for a particular month.
Kano = N30b
Lagos = N100b
Rivers = N80b
Total = N210b
Based on the proposed law:
FG will take 10% = N21b
What remains is N189b shareable to state & LG (90%)
60% of the N189b to be shared based on derivation.
Based on the above, the derivation % is
(VAT generated by states/total VAT)
Kano = 14%
Lagos = 48%
Rivers = 38%
60% of N189b = N113b to be shared based on the derivatives % above, which will be:
Kano = N16b
Lagos = N54b
Rivers = N43b
Total N113b (this represents derivation, which is 60%)
The remaining VAT (40%), which is N189b – N113b = N76b, would be shared on the 5 principles of revenue sharing, otherwise called the horizontal sharing formula, which considers
1. Equality of states (currently 40%)
2. Population (currently 30%)
3. Landmass/terrain (currently 10%)
4. Social development (currently 10%)
5. IGR effort (currently 10%)
N76b would be shared based on the above principles
It means 40% of the N76b would be shared equally.
30% of N76b would be shared based on the total population.
10% of N76b would be shared based on landmass/terrain.
10% of N76b based on social development.
10% of N76b based on IGR effort.
For the sake of this illustration, let me adopt equality as 100%, i.e., sharing the N76b equally between the 3 states.
This means N76b divided by 3 states = N25.3b each.
Kano – N25.3b
Lagos – N25.3b
Rivers – N25.3b
Total – N76b
Now, the total VAT to be received by each state is
Kano = N25.3b + N16b = N41b
Lagos = N25.3b + N54b = N79b
Rivers = N25.3b + N43b = N68b
Total = N41b + N79b + N68b = N189b (representing 90% above)
When you bring the FG share of 10% (N21b) and add it with N189b, you will have N210b as illustrated above.
This is what the new law is proposing with respect to VAT.
Existing Framework.
The existing sharing formula currently active is FG 15%, while states/LG is taking 85%.
In that case, this means from the total VAT of N210b.
FG = N31.5b (15%)
States/LG = N178.5b (85%).
Then, the N178.5b would be shared based on the 5 principles of sharing as discussed above.
N178.5 divided by 3 states
Kano = N59.5b
Lagos = N59.5b
Rivers = N59.5
In summary:
Kano
Existing Framework = N59.5b
Proposed Framework = N41b
Lagos
Existing Framework = N59.5b
Proposed Framework = N79b
Rivers
Existing Framework = N59.5b
Proposed Framework = N68b
The intention is to encourage those underperforming states to do more.
There are complexities in determining derivation that would have to be handled by FIRS through the company.
For E.g, Telecoms, you reside in kano and work in Jigawa.
You make calls in both Kano and Jigawa, MTN should find a way to separate each call location and determine where VAT is applicable.
All these kinds of complexities are what need to be discussed and agreed upon.
By,
Habu Sadeik
@HabuSadeik