The ongoing debate over the Value Added Tax (VAT) sharing formula in Nigeria highlights deep-seated tensions between equity, justice, and national integration. The current system, which redistributes VAT revenue disproportionately, has sparked significant controversy, particularly between states that contribute heavily to the VAT pool and those that benefit more from redistribution. The proposals by President Bola Tinubu and the Nigeria Governors' Forum (NGF) reflect differing priorities, with Tinubu emphasizing derivation (60%) and the NGF advocating for equality (50%). To address these issues, a balanced VAT sharing formula must prioritize national integration while ensuring equity and justice.
Key Issues in the Current VAT System
1. Disproportionate Contributions vs. Allocations:
- Lagos and Rivers states are the largest contributors to the VAT pool, generating N2.75 trillion and N832 billion, respectively, in 2024. However, they received only 16.7% and 22.4% of their contributions in return.
- In contrast, states like Katsina, Kano, and Abia received significantly more than they contributed. For instance, Abia contributed N8.68 billion but received N63.78 billion—a 734.8% return.
- This disparity is particularly pronounced between the southern and northern regions. Southern states contributed N4.28 trillion but received only 40.5% of their contributions, while northern states contributed N540.31 billion but received 258.2% of their contributions.
2. Regional Imbalances:
- The south-west and south-south regions, driven by economic hubs like Lagos and Rivers, contributed the most to the VAT pool but received far less in return.
- The north-west, north-east, and north-central regions, despite contributing significantly less, received disproportionately higher allocations. For example, the north-west contributed N211.27 billion but received N574.32 billion—a 271.8% return.
3. Economic and Social Implications:
- The current system discourages economic productivity in high-contributing states, as they receive minimal returns on their contributions.
- It also creates dependency in low-contributing states, potentially stifling efforts to improve local revenue generation and economic development.
Principles for a Fair VAT Sharing Formula
To address these issues, the VAT sharing formula should be guided by the principles of equity, justice, and national integration. National integration, in particular, emphasizes supporting weaker members of the federation while ensuring fairness.
1. Equity:
- Equity requires that states receive a fair return on their contributions to the VAT pool. High-contributing states like Lagos and Rivers should receive a larger share of the revenue they generate, as this incentivizes economic productivity and rewards effort.
- However, equity does not mean absolute equality. It acknowledges the varying capacities of states and seeks to balance contributions with allocations.
2. Justice:
- Justice demands that the VAT system does not perpetuate systemic inequalities. States with lower economic output should not be penalized, but they should also not rely excessively on redistribution at the expense of high-contributing states.
- A just system would ensure that all states have the resources needed to provide basic services and promote development, without creating disincentives for economic growth.
3. National Integration:
- National integration requires a VAT sharing formula that supports weaker states while fostering unity and cohesion. This means redistributing some revenue to less economically viable states to ensure they can meet their developmental needs.
- However, this redistribution should not be so excessive that it undermines the economic viability of high-contributing states or creates resentment.
Proposed VAT Sharing Formula
A balanced VAT sharing formula should incorporate elements of both the NGF and Tinubu proposals, with adjustments to ensure equity, justice, and national integration. The following formula is recommended:
- 40% based on derivation: This ensures that states receive a fair return on their contributions, incentivizing economic productivity and rewarding effort.
- 40% based on equality: This promotes national integration by redistributing revenue to weaker states, ensuring they have the resources needed for development.
- 20% based on population: This addresses the needs of states with larger populations, which often require more resources to provide basic services.
Rationale for the Proposed Formula
1. Derivation (40%):
- Allocating 40% based on derivation strikes a balance between rewarding high-contributing states and ensuring they are not overly disadvantaged. This is a compromise between Tinubu's 60% and the NGF's 30%.
2. Equality (40%):
- Allocating 40% based on equality ensures that weaker states receive adequate support, promoting national integration and reducing regional disparities. This is higher than Tinubu's 20% but lower than the NGF's 50%.
3. Population (20%):
- Allocating 20% based on population ensures that states with larger populations receive the resources needed to provide services. This aligns with both proposals and addresses the needs of densely populated states.
Conclusion
The VAT sharing formula in Nigeria must balance the competing principles of equity, justice, and national integration. While high-contributing states like Lagos and Rivers deserve a fair return on their contributions, weaker states also require support to ensure balanced development and national cohesion. The proposed formula—40% derivation, 40% equality, and 20% population—offers a pragmatic solution that addresses these concerns. By adopting this formula, Nigeria can promote economic productivity, reduce regional disparities, and foster national unity.
