…Replaces ‘Derivation’ with ‘Place of Consumption’ in VAT Sharing Formula

…Approves New VAT Sharing Formula: 10% for FG, 55% for States, 35% for LGs

By Henry Umoru

ABUJA – The Senate has passed two of the four Tax Reform Bills forwarded by President Bola Tinubu for consideration, with the passage of these bills marking a significant step toward reforming Nigeria’s tax framework.

The two bills, Nigeria Revenue Service (Establishment) Bill (NRSEB) and the Nigeria Tax Administration Bill (NTAB), were read for the third time and passed. The remaining two bills, the Nigeria Tax Bill (NTB) 2024 and the Joint Revenue Board (Establishment) Bill (IRBEB), are set to be considered later today. The passage followed the presentation of the report by the Senate Committee on Finance, led by Senator Sani Musa (APC, Niger East).

Key highlights of the passed bills include the establishment of the Nigeria Revenue Service to replace the Federal Inland Revenue Service (FIRS), and the appointment of an Executive Vice Chairman to head the revenue agency, with the board being chaired by a non-executive Chairman.

Additionally, the new bill replaces the “derivation” principle with the “place of consumption” in the Value Added Tax (VAT) sharing formula. Under the new formula, 10% of VAT revenue will go to the Federal Government, 55% to the States, and 35% to Local Governments.

The bills aim to reform Nigeria’s tax system by enhancing transparency, strengthening institutions, and improving tax compliance and accountability. The new VAT sharing formula will allocate funds based on equality (50%), population (20%), and place of consumption (30%) for states, and for local governments, 70% will be allocated based on equality (30%) and population (70%).

Service Cost of Collection has been reduced from 4% to 2% for the tax collection agency. The Nigeria Revenue Service Bill also outlines the creation of six Executive Director positions, one from each of the country’s geopolitical zones, and mandates the Secretary of the Board to be a qualified legal or financial professional.

The Senate also introduced stringent penalties for tax-related offences, including fines for failure to register or file returns, as well as imprisonment for up to three years for serious violations.

Senate President Senator Godswill Akpabio praised the Committee on Finance for their efforts and expressed confidence that the reforms will optimize tax collection across the country. He also dismissed claims that the reforms serve only specific regional interests, affirming that all Nigerians will benefit from the changes.

Deputy Senate President Senator Barau Jibrin (APC, Kano North) also commended the Senate’s work, noting that the reforms would address previously contentious issues, with stakeholders’ views considered during deliberations.

The reforms are now subject to concurrence by the House of Representatives and presidential assent to become law.