Essay

By Prof Mike A. A. Ozekhome, SAN

INTRODUCTION

IN my book “Zoning to Unzone: the Politics of Power and the Power of Politics in Nigeria”, (2014); Mikzek Law Publications Ltd, pages XIX – XX), I decried the primitive sharing of National resources by political elites who only share from the national cake, but never cared about how it is baked. I wrote as follows: “from the forgotten oil wells of Oloibiri, (first discovered in 1956, down to the rocky (Olumo Rock) terrain of Abeokuta; the serenity and temperateness of the Mambilla Plateau; the steep hills and deep caves of Abakaliki, the fish-laden River Niger of Agenebode; the serene and occasionally uproarious and tempestous Lagoon of Lagos; the hot desert and scenic undulating sand dunes of Sokoto, Katsina, Bauchi, Birni Kebbi and Potiskum; from the delicate swamps and now ecologically devastated mangroves of Amasoma and Gelegele, and the dense rubber and timber jungles of Sapele and Benin, the story is the same: share the national cake. Who bakes this cake, no one answers. No one cares. No one wants to care. No one cares to know. The sleazily corrupt political elite and their collaborators both in the military and civil populace grandstand about their God-given right to pillage our national treasury and loot our common wealth. They swear it is their inalienable right to roughen it over the down-trodden, the Frantz Fanon’s “wretched of the Earth”. They beat drums of war, chant expletives of hate and sloganeer religious bigotry, cultural diversity, status segregation and gender inequality”.

The national ruckus and furore that has so far heralded the tax reform agenda of the Tinubu Administration, epitomised principally by two, out of the four tax reform bills – the Joint Revenue Board Bill, the Nigerian Revenue Service Bill, the Nigerian Tax Bill and the Nigerian Tax Administration Bill – which he recently presented for passage before the National Assembly, continues to rage unabated. It merely recaps my above worries expressed over a decade ago in my book. Our Nationalists and first Republic regional leaders, Dr Nnamdi Azikiwe, Dr Michael Okpala, Chief Obafemi Awolowo, Sir Ahmadu Bello, Sir Tafawa Balewa, et al – will be rolling in their cold graves to see what nonsense has been made of the true fiscal federalism they enjoyed with their regional products which made them excel in governance. The usually sleeping magma which the thin regional cohesion represents is threatening to blossom into a full-blown volcanic eruption of hate and threats between the North and South. Those two problematic bills, the Nigerian Tax Bill and the Nigerian Tax Administration Bill (particularly, but not exclusively, their provisions dealing with Value Added Tax), have irked mostly Northern State Governments, their legislators and not a few of their high-heeled political elites. It throws up once more the pseudo federalism we tout which is actually unitarism in practice. Are these lachrymal effusions and trumpeted concerns justified? Are the proposals ill-timed, coming so soon after the removal of fuel and electricity subsidies as well as the floating of the Naira (all of which have haemorraged  the purchasing power of the average Nigerian as to virtually make nonsense of the recent upward review of the minimum wage)? Are there any other unknown legitimate or valid grounds for opposing the bills? We may attempt a few answers starting, as is usual with me, the law- my primary turf. 

WHO CAN REGULATE TAXES?

By virtue of Item 59 of the Exclusive Legislative List and Paragraphs 7-11 of the Concurrent Legislative List of the 1999 Constitution, both the National and State Houses of Assembly share the responsibility of enacting tax legislation – although admittedly, the former possesses by far the lion share of those powers. That provision of the Constitution (Item 59 of the Exclusive List as aforesaid, empowers the National Assembly to enact legislation in respect of the “taxation of incomes, profits and capital gains.” Of course, under the “doctrine of covering the field”, any clash between federal and state legislations will see the former triumph. See AG Lagos V. Eko Hotels (2017) LPELR – 43713, SC; AGF V. AG of Lagos (2013) 16 NWLR pt 1380, pg. 249, SC; and INEC V. Musa (2003) LPELR-24927(SC).

The silence of Item 59 of the Exclusive Legislative List (and that of the related provisions of Paragraphs 7-11 of the Concurrent Legislative List which are basically aimed at avoiding double taxation) on Value Added Tax, have propelled the legal challenges to that head of tax, culminating in its invalidation by at least one Federal High Court sitting in Port Harcourt. The matter is concurrently on appeal. To that extent, it is hard to disagree with the likes of Hon. Benjamin Kalu, the Deputy Speaker of the House of Representatives, who opined that the Tax Reforms Bills (or, at least, their VAT component) might not go far without a corresponding amendment of the Constitution using section 9 of the 1999 Constitution. Time will however tell. At this juncture however, before going further into a detailed critique of the bills, it is pertinent to first review their key provisions.

ANALYSIS OF THE BILLS

Some of the major innovations introduced by the bills are the following: 

1. The rich to pay more tax while the poor will stop paying tax.
2. Removal of all taxes on small businesses which are defined as those with a turnover of not more than N50,000,000.00 (fifty million naira);
3. Over 90% of workers in the public and private sectors will no longer pay income tax.
4. Stoppage of Pay As You Earn Tax (PAYE) on those earning the national minimum wage of N70,000 and, an overall reduction of the tax burden on as much as 90% of workers in both public and private sectors;
5. Complete removal of between 82% and 100% of VAT on the average on items consumed by low income persons, such as house-hold expenditure (consumption) on items such as food, education, health-care, rent, public transport and fuel products/renewable energy; 
6. Gradual reduction of corporate income tax from 30% to 25% over 2 years, as well as replacement of earmarked taxes on companies, with a reduced single harmonised levy; 
7. Consumption tax collected by States will be eliminated completely.
8. Introduction of new (supposedly equitable VAT sharing formula which provides that VAT will no longer be calculated based on where companies have their headquarters, but where their goods are consumed. This is aimed at ensuring that States with fewer company headquarters are not worse off than those with more; 
9. Repeal of over fifty (50) so-called nuisance taxes and levies and harmonisation of the rest into a single-digit.
10. Those earning less than N1.7m monthly will now pay less income tax. 
11. Customs, NUPRC and other government agencies will no longer collect tax as only one Agency will be responsible for collection of all taxes in Nigeria.
12. Those receiving less than N9 million per annum could have their income tax cut by half.
13. The bill could lead to abolition of other multiple tax laws such as stamp duties. 
14. Gradual increase in VAT from 10% in 2025 to 15% in 2020, with almost every good consumed by low income earners exempted from VAT
15. Over 90% of small business would no longer pay profit tax.
16. The bill seeks to put an end to multiple taxation of over 60 types of taxes which kills many Nigerian companies.

There are more salutary provisions, but the above are the major innovations. However, the VAT aspects have over-shadowed virtually all the other provisions in the aforementioned two tax reform bills.

CRITIQUE

The most stringent criticism of the bills has been directed at their VAT provisions. So, what is VAT? VAT means Value-Added-Tax. It is simply a Consumption Tax that is levied on the value added to goods and services at each stage of production and distribution. VAT being an indirect tax, is levied on the consumption rather than the business itself. VAT is charged on sale prices of goods and is paid to government. In Nigeria, it was introduced by the military Government of late Gen. Sani Abacha, and, is currently based on the location of the headquarters of the producers of goods and services, rather than where such goods and services are actually consumed. Even though undefined under the existing VAT Act or any other law, this is how the term ‘derivation’ has, all along been understood, resulting in awarding as much as 20% of such revenue to the ‘lucky few’ States where such companies (or producers) are headquartered. 

This is provided for in Section 40 of the VAT Act of 2007, under which the Federal Governments gets 15% of such revenue; State Governments and FCT, 50%; and Local Governments, 35% – with the said 20% derivation formulated being applied to the share of States and Local Governments as discussed above. The States and Local Government share is allotted on the following basis: 50% on equality 30% on population and 20% on derivation (after deducting 4% and 2% as cost of collection, by FIRS and Nigerian Customs Service, respectively). The actual VAT rate itself is 7.5%.

Chapter VI of the new Nigeria Tax Bill seeks to alter this legal regime by providing (specifically, in Section 146) a new graduated VAT rate, as follows: 

1. 2025 year of assessment: 10% 
2. 2026, 2027, 2028 and 2029 years of assessment: 12.5% 
3. 2030 year of assessment and beyond: 15% 

Furthermore, Section77 of the Nigerian Tax Administration Bill 2024, stipulates that 60% of the amount standing to the credit of States and Local Governments is to be distributed on the basis of derivation. Unfortunately (just as in the existing VAT Act), neither the Nigerian Tax Bill 2024 nor the Tax Administration Bill, 2024, defines “derivation”. So, we may have to fall back on the status quo which favours States where the headquarters of the companies which produce the vast majority of the goods and services in the country are located, i.e., Lagos, Rivers and Ogun. Accordingly, these 3 states will take the lion share of the “derivation” components of VAT revenue. 

THE INJUSTICE OF THE CURRENT VAT REGIME

The following sample statistics from some select states in the month of August, 2024, will illustrate the glaring anomalies (if not outright injustice) inherent in the present system of VAT derivation and payments:

• Bayelsa State contributed ₦7.12billion as VAT and received a lower sum of ₦5.58billion therefrom; 
• Imo State contributed a mere ₦235.41million (less than 5%), but received a whooping N6.01b; 
• Katsina contributed only ₦1.68billion and received a humongous  ₦7.27billion;
• Delta contributed a whooping ₦13.09billion, but received virtually half of her contribution – ₦7.72billion;
• Zamfara contributed only ₦432.8Million and received princely ₦5.65billion;
• Rivers contributed a staggering ₦70.54billion, but received a mere ₦15.54billion; just about a mere 20% of her contribution.
• Abia contributed only ₦663.42million (a little over 10%), but received an incredible ₦5.43billion;
• Kebbi contributed a meagre N665.17million and received an astonishing ₦5.66billion;
• Cross River contributed ₦1.08billion, but received for her 20% contribution,  ₦5.51billion;
• Lagos contributed a fearsome ₦249.77billion and received a meagre ₦40.22billion (just about 16.09%);
• Jigawa contributed only ₦1.59billion and received a humongous ₦6.42billion;
• Kaduna contributed ₦2.03billion and received ₦7.47billion (a sum nearly four times her contribution);
• Niger contributed just ₦1.73billion and received a mind blowing ₦6.21billion.

The above figure mean that Lagos State which is the highest VAT contributor received only 16.78% of her contribution, while Imo State was allocated a staggering 1,715.98& of her contribution. In the first 10 months of 2024, Lagos State contributed #2.21 trillion in VAT (the highest share of the total pool). Meanwhile, Imo State which contributed a mere #3.33 billion (the lowest among the States) received #57.09 billion, a figure much higher than her contribution.17 States including Kano and Kaduna, received between 101% and 300% of their contributions; while 11 States, including Ekiti and Bauchi States, were gifted 301  % – 500%. Indeed, Abia, Kebbi, Imo and Cross River States got over 500% of their VAT contributions.

The scenario smacks of the sad situation of “monkey-dey-work-baboon-dey-chop.”

People have expressed concerns and fears particularly regarding the 60% derivation allocation. Their argument is that it disproportionately favours Lagos State, the primary contributor to the VAT pool. Their position suggests that under this system, Lagos State will receive a substantial chunk of the VAT generated, leaving the remaining 36 states and the Federal Capital Territory (FCT) with a significantly smaller share.

In my humble opinion, the above fears and objections to the reform stems from a complete misunderstanding of the impact and import of the provisions. Currently, VAT is attributed to where returns are filed, mostly in Lagos due to the concentration of major corporations there. The reform, however, changes this by attributing VAT based on the actual location of consumption, ensuring that VAT stays in the state where the supply is consumed. To assess if the new formula is detrimental to other states aside Lagos, a data-driven analysis of actual VAT consumption across states must be undertaken to compare the outcome with the current distribution template. Any conclusion reached without this rigorous analysis would at best be speculative and hypothetical. This is what the Northern Governors are doing – fear of the unkown.

IS DERIVATION ‘THE ELEPHANT IN THE VAT ROOM’?

By the terms of the proposed bill, the oil-industry template of derivation (based on the location of production or head office of the producer of the goods or services) will be discarded in favour of the location or places where the products are actually consumed (i.e., retail customers). This makes sense, as VAT is, by definition, a Consumption tax and the existing interpretation of derivation has been based on a false model. 

To that extent, I believe that the change ought to be embraced by neutral parties who approach it with an open mind. Alas, if only the average Nigerian was like that – especially those who feel threatened by any change in the status quo, whether it is reasonable, rational, or not. A close scrutiny of the fine print of the bills might show that their fears are exaggerated, if not outrightly unjustified. 

To start with, the present formula of FG, 15%, States 50% and Local Governments 35% will only be slightly adjusted in the proposed change by the FG ceding 5% of its share to the States to become FG 10%, States 55%, and LGs 35%. In terms of the basis of distribution, the current formula for sharing VAT among states is as follows: 20%: derivation, 50%” equality and 30%: population. 

The new bill proposes a different model of derivation which will attribute VAT to the place of supply and consumption, as opposed to the present one which attributes VAT to the State where it is remitted. The latter had historically favoured States where the corporate headquarters of the producers of goods are situated. Additionally, the new derivation model fixes it at a much higher rate of 60%. This will theoretically ensure greater equity and that a much larger pool is available for distribution – albeit under a new consumption-based derivation formula as aforesaid. 

It is this aspect that appears to fuel the perception that the proposed formula will lead to lower revenue for some (mostly Northern) States. However, as explained by the Presidential Fiscal Policy Tax Reform Committee, the 5% share of the Federal Government which it proposes to cede to the states will be set aside for what it calls “equalisation transfers” to cater for any shortfall to a State under the new model, thus ensuring that no State is worse off in the short term, while significantly boosting economic activities and revenue for all States in the medium-to-long term. Time will however tell. 

CHALLENGES TO THE VALIDITY OF THE VAT ACT

The most fundamental question of all is the one which very few people have alluded to – the constitutional validity of the VAT provisions in the new tax bills. This issue came up in relation to the existing tax law enacted by the National Assembly, in EMMANUEL CHUKWUKA UKALA vs. FIRS (2021) 56 TLRN 1. There, the Federal High Court sitting in Port Harcourt held that the powers of the National Assembly to make tax laws is limited to items expressly listed in Item 59, Part 1 of the Second Schedule to the 1999 Constitution which relate only to “income, profit and capital gains and stamp duties on instruments”; but do not extend to VAT. 

The court further held that any tax law enacted by the National Assembly outside those in respect of which the Constitution expressly empowers the Assembly will be a nullity. This decision is currently on appeal. Accordingly, unless the decision is overturned by the Court of Appeal (or the relevant provisions of the Constitution are amended), it is hard to see how the VAT provisions of the new tax bills can pass the validity test.

RECOMMENDATIONS

I agree with some of the criticisms of the proposals in the new tax bills on VAT (particularly those of Prof. Ahmad Bello Dogarawa of the Department of Accounting of Ahmadu Bello University, Zaria) to the effect that the proposal contained in Section 77 of NTAB is unfair to States where VAT revenue is actually generated vis-à-vis states of consumption. It is important to emphasize that VAT is a general consumption tax and, therefore, those who do the actual consumption ought to reap more of the benefits of the tax – as opposed to the producers or manufacturers of such goods and services which is currently the case. 

This truism is otherwise known as the rule of “attribution based on the location of consumption”. Therefore, I agree with Prof. Dogarawa that the situation can be addressed in any of the following ways:  

1. By clearly defining the term ‘derivation’ in the two bills to mean where the goods or services are actually  consumed, regardless of the location of their producer or manufacturer; or 
2. Divide the levying of VAT between the Federal and State Governments. This will reflect the principle of federalism, which is the foundation of the Constitution; or 
3. Discard the whole idea of derivation entirely by completely removing it as a basis for distributing VAT revenue.

The problem with this third suggestion is that producers of goods who suffer the consequences of environmental and other forms of degradation arising therefrom will be short-changed in the enjoyment of produce from their lands.

Beyond that, however, I believe a lot can be said for a return to the position in the First Republic, where Sections 134 and 140 of the 1960 and 1963 Constitutions, respectively, prescribed the sharing formula in respect of royalties extracted or mining rents derived from a region to the tune of 50% of the proceeds of such activity, with the Federal Government keeping 20%, while the rest of the regions shared the remaining 30%, including the region that had already taken her 50%. I believe this is far more equitable, fair and just, as opposed to either the status quo or even the proposed innovations under the Tax Reform Bills. The 1960 and the 1963 Constitutions espoused true fiscal federalism and engendered a competitive spirit among the regions. This led to fast development of the regions. This is unlike the present situation where states have become lazy and merely send their Commissioners for Finance to Abuja every month to share from FAAC under section 162 of the 1999 Constitution. Thus, many states share from a baked cake without caring about how the cake is baked.

CONCLUSION

There is a sense in which, by introducing the Tax Reform Bills now, the Tinubu Administration appears to be trying to do too much too fast. The innovations are coming in a deluge. They are rather being rushed. And this is why Nigerians are reeling from the simultaneous removal of fuel and electricity subsidies as well as the floating of the Naira, and the concomitant inflationary pressures which they have caused. The cost of living is at an all-time high. These challenges directly precipitated the #Endbadgovernance protests a couple of months ago. To be sure, Nigerians are dying in droves. Many of those still living are but Ayi Kwei Armah’s “living dead” or “walking corpses”. (Armah’s epic, “The Beautiful ones are not yet born”). 

Accordingly, the timing of the new tax bills (well-intended as they arguably are) is probably their greatest demerit. The Government should, quite literally, give us a break; it should give us some breathing space. We have all been tossed around too severely, driven from pillar to post and are practically at our wits’ end by the cocktail of economic shocks inflicted on us by the apparent determination of this Government to implement its reforms under the IMF and world bank drive agenda come what may. As a result, Nigerians have been sapped of strength and are literally gasping for breath. The Tinubu Government should apply some much needed breaks. The tax bills can come later – perhaps in a year’s time. Only the living can enjoy the benefits of reforms, however well intended. The dead do not live. My take.

PROF. MIKE A. A. OZEKHOME, SAN, CON, OFR, FCIArb, LL.M, Ph.D, LL.D

A.I

Dec. 11, 2024

Tags: Prof Mike A. A. Ozekhome

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