The Revenue Mobilisation, Allocation and Fiscal Commission (RMAFC) has opposed President Bola Ahmed Tinubu’s controversial tax reform bills currently before the National Assembly for consideration.
RMAFC, in a comprehensive nine-page memorandum signed by its chairman, Mohammed Bello Shebi, rejected the principle of derivation over the exisitng system of VAT pooling among other legal, constitutional, and technical objections to the proposed legislation, reports Nigerian Tribune.
According to the document obtained by the Economic Confidential, RMAFC emphasized that it was empowered by Section 162(2) of the 1999 Constitution (as amended) to determine the formula for equitable revenue sharing among the three tiers of government. This mandate also includes ensuring that the formula reflects principles of fairness and justice.
“The Constitution designates RMAFC as the final authority on matters of revenue allocation,” the memorandum stated.
The Commission noted that “As such, no Act of Parliament, including the VAT Act, can infringe upon this constitutional responsibility. Any such attempt would constitute a violation of the Constitution.”
It further maintained that its role as the exclusive arbiter in developing fair revenue allocation formulas must be respected, arguing that any deviation from its constitutional duties could undermine the integrity of the Commission and compromise the principles of justice in revenue sharing.
The Commission, however, called for an approach to Value Added Tax (VAT) allocation that accounts for the unique nature of VAT as a consumption tax.
Reacting to the issue of derivation, the commission noted that VAT revenue is shared among the three tiers of government with 15% for the Federal Government, 50% for the States, and 35% for Local Governments.
It added that VAT is consumption-based, unlike oil revenue, where 13 percent is returned to the producing states.
“Derivation in fiscal federalism refers to the principle where revenue generated from a specific resource or activity is allocated to the jurisdiction (state or region) where it originated. In Nigeria, this principle is constitutionally recognized, notably in the allocation of oil revenues where 13% of revenue derived from oil is returned to oil-producing states, though different from the VAT derivation. It aims to ensure fairness and economic equity by compensating resource-originating regions for their contributions to the national purse,” the memorandum added.
Continuing, the RMAFC painted a scenario where goods purchased in Lagos (as a point of VAT collection) are consumed in Kano, adding that VAT laws in Nigeria do not provide a clear mechanism to track goods post-sale to the end-use location. “Without robust systems for monitoring consumption patterns, the allocation of VAT based on derivation becomes contentious.”
While highlighting systemic issues in VAT administration, the Commission also argued that the existing VAT system prioritizes revenue pooling and formula-based distribution over strict derivation principles.
It maintained that VAT as a critical source of revenue for the three tiers of government, is a centralized tax collected for redistribution across the Federation, making it crucial to allocate revenues equitably.
Proposing a formula developed by the commission, the RMAFC said this would ensure equitable distribution among federal, state, and local governments.
“Given the dynamics, arbitrary apportioning of percentages for VAT allocation, whether vertically among the tiers of government or horizontally among states and local governments, is both impractical and unconstitutional. There might be Public perception of skewing the law to favour states with higher production or corporate presence, regardless of where consumption occurs. Ignoring the need to support less economically developed states and regions and undermining national unity and equity in revenue-sharing.”
Among several recommendations in its memorandum, the RMAFC called on the federal government to empower the Commission to finalize a VAT allocation formula in line with its constitutional mandate.
Also, it noted that this will reinforce Constitutional Mandates by ensuring that VAT allocation strictly follows RMAFC’s framework, not arbitrary provisions in the VAT Act or the proposed reform bill, while also urging dialogue among federal, state, and local governments to secure consensus on the RMAFC’s formula, thereby reducing tensions and ensuring acceptance.
The memo also cautioned legislative or executive measures that undermine RMAFC’s authority and advocates implementing systems like electronic invoicing to tag VAT collections to end-user locations, enhancing transparency and accuracy.
According to RMAFC, the proposed tax reform bills threaten national unity and constitutional harmony.
