Tax reform bill: A slap in the face of federalism

The proposed Nigerian Tax Reform Bill, currently under scrutiny in the National Assembly, has sparked widespread debate. While the federal government has promoted it as a catalyst for economic growth, the bill poses a grave threat to the principles of federalism, undermining the fiscal autonomy and sustainability of Nigeria’s states.

Recently, the National Economic Council (NEC), chaired by state governors, urged President Bola Tinubu to reconsider the bill, identifying it as a covert effort to centralize fiscal control and hinder states’ ability to serve their citizens effectively.

A Dangerous Precedent in Revenue Allocation

One of the bill’s most concerning provisions is its proposed approach to revenue distribution, which would change how federally collected taxes are allocated to states. Equitable revenue distribution is fundamental in any federal system, allowing federating units to fulfill their responsibilities to citizens. Under the guise of reform, however, this bill threatens to consolidate fiscal power within the federal government, reducing states’ capacity for financial independence. If passed, it risks steering Nigeria toward a centralized control model that undermines the federal structure meant to empower each region.

A Betrayal of Federal Principles

Federalism is built on the balance of power and resources between national and state governments to support local growth and development. This bill disrupts that balance. Instead of empowering states, it could subordinate them, stripping them of control over essential resources needed for self-governance. Imagine states relegated to mere bystanders, dependent on federal allocations for critical expenditures—this bill threatens to create precisely such a scenario, contradicting Nigeria’s constitutional commitment to federalism and local autonomy.

Implications for Our Federal Structure

The implications for Nigeria’s federal system are profound. While a derivation-based VAT model might promote regional development, it also risks contravening federalism’s core principles of equitable sharing and collaboration. By shifting VAT allocation focus to the states where it is generated, the bill could deepen existing disparities between states, disadvantaging those with lower industrial capacity and exacerbating historical inequalities.

Redirecting VAT revenues back to their generating states is, at first glance, a fair approach. However, states with lower industrial activity—often due to historical underinvestment or geographic limitations—would face substantial disadvantages under this model. Without federal redistribution, these states may struggle to attract the investments needed to expand their VAT base, perpetuating a cycle of limited development and resource scarcity. A federal system should prioritize balanced development across all states; penalizing regions based on factors beyond their control risks fragmenting Nigeria’s unity and prosperity.

The VAT Allocation Controversy

Another contentious element of the bill is its Value Added Tax (VAT) allocation framework. Currently, VAT is collected centrally and distributed according to a federal formula that ensures each state receives a fair share, regardless of economic size. However, the bill’s proposal to let each state retain 100% of its VAT risks exacerbating regional economic imbalances, as wealthier states would accumulate more revenue while less economically active states struggle to fund basic infrastructure and services. Such a structure undermines the collaborative spirit of federalism, which relies on equitable wealth distribution to promote unity and progress.

New Excise Duties: Burdening the Economy and Citizenry

Adding to these concerns is the bill’s reintroduction of a 5% excise duty on services such as telecommunications, gaming, and gambling. In a country already burdened by record-high living costs, this tax would impose an additional financial load on both businesses and consumers. Far from fueling growth, it risks stalling Nigeria’s emerging digital economy and could stymie one of its most promising sectors.

Restrictive Exchange Rate Provisions

Equally troubling is the bill’s excise duties on foreign exchange transactions above official Central Bank of Nigeria (CBN) rates. This provision would limit economic flexibility in an already strained environment, potentially deterring businesses that rely on competitive rates. By penalizing firms requiring alternate rates for operational efficiency, the bill risks discouraging foreign investment and dampening economic activity, further impacting local businesses.

A Call for Withdrawal and Genuine Fiscal Reform

The NEC’s call for withdrawal reflects a clear consensus: this bill threatens Nigeria’s federal balance. Federal systems are built on equitable resource sharing, ensuring that all Nigerians benefit from the nation’s collective wealth, regardless of their location. The proposed changes to revenue sharing, VAT retention, and excise duties represent a fundamental shift away from that principle, jeopardizing the federal framework Nigeria depends on.

Conclusion: Reasserting the Spirit of Federalism

This bill is more than just policy; it challenges Nigeria’s federal identity. Federally collected taxes belong to all Nigerians—whether in Lagos, Enugu, or Gombe. By reshaping revenue frameworks to centralize control, this bill could create fiscal winners and losers among states, jeopardizing the unity vital to Nigeria’s stability.

Any tax reform must honor the spirit of true federalism, ensuring that resources are distributed equitably and that every state has the fiscal autonomy to address its unique needs. The NEC has spoken, and Nigerians should join in their call: this bill, in its current form, is a regression disguised as reform. It must be revised or discarded if Nigeria is to remain a united and balanced federation.

While the National Assembly’s role as the people’s representative is crucial and open debate is welcome, the nature and intent behind this bill warrant serious concern. With its provisions for disproportionate revenue centralization, the bill appears not as a genuine reform but as an overreach that erodes state fiscal autonomy and hinders local governance.

Our constitution enshrines a balance that empowers states, respecting the diversity and uniqueness of each region. However, this bill diverges from those principles, raising concerns that it was drafted without genuine regard for federalism. By weakening states’ financial independence, it tilts the scales towards centralized power.

For these reasons, I stand for the bill’s withdrawal. Its provisions require not mere debate, but a fundamental reconsideration to ensure that any reform respects federal values and safeguards each state’s autonomy.

In closing, any reform must prioritize the principles of federalism, ensuring that all Nigerians benefit equitably from our nation’s resources.