Kehinde Akinpelu,Ilorin
A Chartered Tax Professional, Dr. Francis U. Ubani, has said there are some differences in the tax formula that has been in operation and the Tax Reform Bills that are currently before the National Assembly which are currently going through public scrutiny and inputs.
He explained that the current “Distribution Method” being used by Revenue Mobilisation Allocation and Fiscal Commission (RMAFC), and Federal Account Allocation Committee (FAAC) are that- “All revenue generated by the Nigerian Federation are sent to the Federation Account and distributed monthly.
He said that these funds are distributed based on the VAT distribution formula, as shown below: The present “VAT Distribution Formula” and Allocation are: -Federal Government 15%, State Government 50%, Local Government 35%.
These were contained in a statement on Wednesday titled: The Eastern Nigerian Economy– Beyond The Tax Reform Bills: The Main Issues and Sundry Things Therein That You Need To Know.”
Ubani said: “The Federal Government uses this formula to calculate what each State Government share of the 50% would amount to.
“For example, assuming that ₦100B is generated: ➢ Federal Government takes 15% (₦15B) ➢ State Governments’ share 50% (₦50B) ➢ Local Governments share 35% (₦35B). This is how the present revenue redistribution works.
“However, it is important to note the following: The 50% and 35% share allocated to the State Governments are not shared equally, but are further divided into three fragments as shown below: –
“A certain formula is used to determine what each State and Local Governments receives from the ₦50B and ₦35B respectively. The State and Local Governments’ certain allocation sharing formula are as shown below: • Equality 50% • Population 30%; • Derivation 20% The formula is explained thus: 1. Equality: This means that from the total generated revenue, 50% (₦50B) is allocated to the State Governments, plus the FCT. Under Equality sharing, 50% of the ₦50B, which amounts to (₦25B) is distributed equally among all the State Governments. Equality sharing formula of the 50% is divided by the 36 State Governments.”
He added: “Population: This means that after the first half (Equality sharing) is done; the remaining second half is split between “Population and Derivation.”
“The Population is set at 30% of the ₦50B which amounts to ₦15B is again shared based on the size of the population of each State of the Federation. Population sharing formula of 30% is divided by the 36 State Governments and FCT and categorized by State and its population size. The States with higher population receive more, while the States with smaller population receive less. The States with larger populations that receive more money than those with smaller ones are mostly the Northern Region States and Lagos State. Meanwhile, at this point, 80% of the revenue funds allocated to the State Governments has been shared, benefiting primarily the States in the North and Lagos State.
“Derivation: The remaining 20% to be shared from the ₦50B revenue funds allocated to the Federating States is to be shared through Derivation. Under the Derivation formula, Federating States that contributed more tax revenue receive more money, and those Federating States that contributed less tax revenue receive less money, irrespective of the population size of the State. Derivation Sharing formula: The 20% remaining is divided by the 36 States and FCT categorized by the Federating State’s tax revenue contribution to the Federation Pool Account, (example: tax revenue remitted to the FIRS by the State).”
Ubani, who also is a tax consultant said that states with higher tax revenue contribution to the Federation Account receive more money and the States with lower contribution to the Federation Account receive less.
he added that the States that benefit the most from Derivation are those States with major company Headquarters, Industrial, and Economic hubs, such as Lagos and Rivers States.
“Nevertheless, the rest of the States, that gained greatly from the previous two formulas: – Equality and Population, will most likely not care about this.
“The overall sharing formula beneficiaries are as follows: ❖ 50% Equality: – All the States benefited. ❖ 30% Population: – Northern States, and Lagos State benefited most. ❖ 20% Derivation: – Lagos, Ogun, Rivers, Oyo, FCT, Delta and somehow: Bayelsa, Kano, Akwa Ibom, Anambra, Edo, Ekiti benefited most.
“The New Tax Reform bills, especially the one currently being mostly discussed: – The Federal Government reduced its allocation by 5% and added it to the States, increasing the States’ share to 55% and the Local government allocations still remains unchanged at 35%. Thus the new VAT Distribution formula: ✓ Federal Government 10% ✓ State Governments 55% ✓ Local Governments 35%
“Also changed in the States sharing formula are: ▪ Equality is lowered to 20%. ▪ Population is lowered to 20%. ▪ Derivation is increased to 60%.
“The new Tax Reform Bills sharing formula beneficiaries are as follows: ❖ 20% Equality benefits all the Federating States. ❖ 20% Population benefits States in the North, and only Lagos State in the West mostly. ❖ 60% Derivation benefits Lagos, Ogun, Rivers and somehow Oyo, FCT, Delta, Bayelsa, Kano, Anambra, Edo, and Ekiti States mostly.
“In the light of the foregoing analysis, it is obvious the States and Regions that would benefit most from the new Tax Reform Bills,” Ubani said.