Governors’ misstep: Squandering Nigeria’s VAT reform opportunity

BY OLU ALLEN

Imagine a household where one member earns all the money, but everyone gets an equal share regardless of effort or contribution. Over time, most family members might stop trying to earn, relying instead on the steady income of one hard worker. This, in essence, is how Nigeria’s current VAT revenue-sharing formula operates: it discourages effort and rewards complacency.

Under the existing system, 20 percent of VAT revenue is distributed based on derivation, 50 percent on equality, and 30 percent on population. This approach has created a culture where states depend on federal allocations instead of striving to grow their economies. The proposed VAT reform in the Tax Reform Bill, which
allocates 60 percent to derivation, 20 percent to equality, and 20 percent to population, aims to change this. It’s a bold move toward fiscal responsibility, yet the Governors’ Forum has countered with a proposal that clings to outdated norms, missing a rare chance to transform Nigeria’s economic landscape.

The Governors’ Forum has proposed a formula of 30 percent derivation, 50 percent equality, and 20 percent population—a slight tweak to the status quo that does little to encourage states to stand on their own feet. Instead of incentivising economic dynamism, their proposal doubles down on the culture of dependency.

Take Lagos State as an example. As the engine of Nigeria’s economy, Lagos contributes over half of the nation’s VAT revenue but receives only a fraction in return. Under the current formula, its contributions subsidise less productive states, discouraging further innovation and investment. The governors’ alternative perpetuates this imbalance, stifling states with potential while rewarding inertia.

The Tax Reform Bill’s 60 percent derivation formula is a game-changer for several reasons:

1. It Encourages Local Revenue Generation

States would finally have a reason to grow their tax base and stimulate economic activities. Picture Kano’s bustling markets or Anambra’s industrial hubs in Nnewi and Onitsha becoming even more vibrant. This reform gives states the incentive to turn potential into progress.

2. It Promotes Fiscal Responsibility

When states rely on their revenue, governors must answer to their citizens about how funds are spent.
This fosters transparency and reduces corruption. Imagine a Nigeria where citizens hold their leaders accountable because they can see the direct link between their taxes and public services.

3. It Rewards Productivity and Innovation

With a larger share of the revenue they generate, states like Rivers could diversify beyond oil into agriculture and tourism. Similarly, states with untapped resources, like Zamfara with its gold deposits, would have a reason to develop new industries.

Sticking with the current formula—or the governors’ lukewarm proposal—keeps Nigeria in a cycle of dependency. It’s like giving a student the same grade as their peers regardless of effort, discouraging everyone from striving for excellence.

Consider states like Yobe or Zamfara, which currently depend on federal allocations. Under a reformed VAT formula, these states would be compelled to tap into their rich agricultural and mineral resources. Maintaining the status quo denies them that opportunity.

The governors’ resistance to meaningful reform could lead to unintended consequences. Ongoing legal disputes over VAT collection could push the Supreme Court to rule in favour of 100 percent derivation. If this happens, states would be forced to rely solely on their internally generated revenue—a seismic shift
most governors are unprepared for. Adopting the 60% derivation formula now offers a softer transition to fiscal independence.

This VAT reform is more than a policy change; it’s a chance to redefine Nigeria’s economic future. By prioritising derivation, the proposed formula rewards effort, promotes accountability and unlocks the potential of every state.

The Governors’ Forum, however, has chosen the comfort of the old ways, jeopardising an opportunity to reshape Nigeria’s fiscal landscape. If they fail to rise to the occasion, economic reality—or the courts—will eventually force the nation to prioritise derivation.

This reform isn’t just the better choice; it’s the only choice for a Nigeria that aspires to thrive. Governors must act now or risk being remembered as leaders who failed to seize a generational opportunity.

Olu Allen can be contacted via [email protected]