The Revenue Mobilisation, Allocation and Fiscal Commission (RMAFC) has strongly opposed President Bola Ahmed Tinubu’s tax reform bills currently under review by the National Assembly. The proposed reforms, which aim to introduce changes to the Value Added Tax (VAT) sharing formula, have sparked significant concerns from the commission.
In a detailed nine-page memorandum signed by its chairman, Mohammed Bello Shebi, RMAFC rejected the principle of derivation suggested in the reforms. The commission cited numerous legal, constitutional, and technical issues with the proposed legislation.
RMAFC’s Constitutional Role
The memorandum highlighted that the 1999 Constitution (as amended) grants RMAFC the authority to determine the revenue-sharing formula for federal, state, and local governments. Section 162(2) explicitly mandates the commission to ensure revenue distribution reflects fairness and justice.
“The Constitution clearly establishes RMAFC as the ultimate authority on revenue allocation,” the document emphasized. It further stated that no Act of Parliament, including the VAT Act, could override this constitutional responsibility. Any attempt to do so would be deemed unconstitutional and a threat to the rule of law.
Concerns Over VAT Derivation
RMAFC raised objections to the derivation principle in VAT allocation, noting that VAT revenue is currently shared as follows:
- 15% for the Federal Government
- 50% for State Governments
- 35% for Local Governments
The commission argued that VAT differs fundamentally from oil revenue, where 13% is allocated to producing states based on derivation. VAT is a consumption-based tax, making the application of derivation complex and impractical.
The memorandum elaborated, explaining that derivation in fiscal federalism typically allocates revenue to the area where it originates. For instance, oil revenues are shared with producing states to ensure economic equity. However, applying this principle to VAT, which is tied to consumption rather than production, creates challenges.
Challenges in Tracking VAT Consumption
RMAFC illustrated these challenges with an example: goods purchased in Lagos might ultimately be consumed in Kano. The commission noted that Nigeria’s VAT laws lack mechanisms to trace goods from point of sale to final consumption. Without robust tracking systems, allocating VAT based on derivation would be contentious and prone to disputes.
The commission also highlighted systemic flaws in VAT administration. It argued that the current VAT system prioritizes pooling and formula-based distribution over strict derivation principles, which helps maintain equity across all regions.
The Need for Equitable VAT Allocation
VAT is a major source of revenue for the federal, state, and local governments. According to RMAFC, it is essential to allocate these revenues equitably to promote national unity and fairness. The commission proposed a revised allocation formula to ensure balanced distribution.
RMAFC warned against arbitrary changes to the VAT sharing percentages, whether among tiers of government or states and local governments. Such changes could create public perceptions of bias towards wealthier states with higher production or corporate presence. This, in turn, could marginalize less economically developed regions, threatening national unity and equity.
Recommendations by RMAFC
To address these challenges, RMAFC presented several recommendations in its memorandum:
- Empower RMAFC: The federal government should authorize the commission to finalize a VAT allocation formula in line with its constitutional mandate.
- Adherence to Constitutional Frameworks: VAT allocation should strictly follow RMAFC’s framework, avoiding arbitrary provisions in the VAT Act or proposed reforms.
- Encourage Dialogue: Federal, state, and local governments should engage in discussions to reach a consensus on RMAFC’s formula, reducing tensions and ensuring widespread acceptance.
- Improve Transparency: Implement systems like electronic invoicing to track VAT collections to end-user locations, enhancing accountability and accuracy.
- Avoid Undermining RMAFC: Legislative and executive actions that weaken RMAFC’s authority should be avoided to maintain constitutional harmony.
Risks of the Proposed Tax Reforms
RMAFC warned that the proposed tax reforms pose risks to national unity and constitutional balance. By undermining the commission’s authority, the reforms could erode trust in the revenue allocation process and exacerbate regional inequalities.
The commission emphasized that VAT, as a centralized tax, serves to redistribute resources fairly among all regions. Any attempt to alter this structure must consider the broader implications for equity, development, and national stability.
Conclusion
The debate over VAT sharing underscores the complexities of fiscal federalism in Nigeria. While the proposed tax reforms aim to address certain issues, RMAFC’s objections highlight the need for a careful, balanced approach. By empowering RMAFC to fulfill its constitutional mandate, Nigeria can ensure that revenue allocation remains fair, just, and in line with the principles of national unity.
This ongoing dialogue will play a critical role in shaping the country’s fiscal policies, with far-reaching implications for economic equity and governance.
