The proposed Tax reforms initiated by the administration of President Bola Tinubu, has generated controversy especially, as some parts of the nation appear uncomfortable with some of the proposed reforms.
The Tinubu-led federal government has defended the move saying that it will “simplify the tax landscape, reduce the burden on small businesses, and streamline tax collection.”
Reports have it that the proposed bills for the said tax reforms, have already passed second reading in the Senate of the National Assembly.
One interesting aspect of Tinubu’s tax reforms is its move to ensure “Derivation Principle in VAT Revenue Distribution.”
This means that if the proposals sail through, there will be a
significant shift in VAT revenue distribution, which will involve allocating revenues based on the states where goods and services are consumed rather than pooling them centrally for redistribution.
Zacch Adedeji, the Chairman of the Federal Inland Revenue Service, FIRS, had explained that “this approach aligns VAT with its nature as a consumption tax.”
Over time, there has been this contention or argument that states, especially, some Morthern states where sale of alcohol is banned, should stop receiving VAT from alcohol. The proposed tax reform is expected to address this issue by ensuring that the share of VAT accruing to a state depends on the amount of goods and services consumed in that state.
A former Minister of Health, Prof. Isaac Adewole, in advocating fiscal federalism, once said:
“We should be honest with ourselves. States that prohibit the sale of alcohol should not share out of VAT from alcohol. Straight forward.”
It is obvious that some states of the federation do not support the sale of alcohol for reasons usually bordering on religious beliefs.
It has also been reported that some of these states have taken measures towards ensuring that alcoholic products brought into their states were seized and/or destroyed.
Why then should such states share from VAT derived from alcohol consumed in other states?
It is hoped the the tax reform will address the seeming injustice inherent in the above scenario.
It is important to state here that we align with the derivation principle in the distribution of revenue accruing from VATable goods only to the extent that the derivation principle of President Tinubu’s Tax Reform makes it clear that derivation does not mean the payment of VAT accruals to the states hosting the Corporate headquarters of the firms that produce the products.