The current controversy surrounding the Tax Reform Bills introduced by President Bola Tinubu highlights a significant and contentious issue: the principle of derivation in the proposed Value Added Tax (VAT) sharing formula. At the heart of the matter is a proposed increase in the derivation percentage from 20% to 60% for VAT revenues, a move that has ignited fervent opposition, particularly from Northern political leaders. Their concerns raise critical questions about equity, regional balance, and the historical context of Nigeria’s fiscal policies.

Historically, the derivation principle has undergone significant transformations. Initially, during the colonial period, regions retained 100% of mineral revenues, reflecting a decentralized approach to resource management. This shifted over time, with military regimes imposing increasingly restrictive allocations that often undermined the autonomy of resource-rich states. The introduction of the 13% minimum derivation formula in the 1999 Constitution was a hard-won concession for oil-producing states, primarily in the Niger Delta, which have long fought for a fair share of the wealth extracted from their lands.

The proposed changes in the VAT sharing formula, however, threaten to exacerbate existing regional tensions. By allocating 60% of VAT based on derivation—essentially rewarding states based on their consumption rather than production—President Tinubu’s reforms seem to favor states like Lagos and Rivers, which are more consumption-oriented. This raises valid concerns about perceived bias in a governance structure already fraught with accusations of favoritism.

The Northern Governors’ Forum’s swift rejection of the tax bills stems from fears that such a significant increase in derivation will only deepen disparities between regions, favoring the South while marginalizing the North.

Equity demands that if the government considers increasing derivation for VAT, similar adjustments should be made across all revenue sources, including mineral resources and Company Income Tax. The current proposal appears selective and risks entrenching regional disparities rather than alleviating them. It is not just about the allocation of VAT but about setting a precedent for how fiscal policies are crafted in a country marked by diversity and regional inequalities.

Furthermore, the historical context of the derivation principle underscores the need for a balanced approach. The gradual decline of derivation percentages from the colonial era to the present has created a landscape where resource-rich states often feel shortchanged, while less resource-endowed states depend heavily on federal allocations. A re-evaluation of how revenues are shared, grounded in the principle of derivation, should consider the historical injustices faced by various regions and strive for a fairer distribution of resources.

The ongoing debates surrounding these tax reform bills are not merely about percentages; they encapsulate the broader struggle for equity and justice within Nigeria’s federal system. If President Tinubu’s administration seeks to build a truly united Nigeria, it must address these disparities with transparency and inclusiveness, ensuring that all states benefit from the nation’s collective wealth, rather than a select few. The challenge lies in crafting a fiscal policy that honors the principle of derivation while promoting a sense of shared destiny among all Nigerians. Only then can Nigeria’s social formations hope to move past regional grievances and build a more equitable future for the country.