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Sharing VAT Revenue On The Basis Of Consumption: A Trojan Horse For The North
By Yakubu Musa
No doubt the proposed tax reform by President Tinubu’s administration has caused a serious polarized debate among Nigerians.
The nitty-gritty and bone of contention of the VAT reform is its proposed new sharing formula (section 77). All other reforms therein are inconsequential, which include the exemptions, inclusions, rate increment/reduction etc. Unfortunately, many of the proponents of this reform (of which some are northerners) based their opinions on some of these inconsequential arguments.
The bone of contention (section 77 of the proposed bills) ⎼ the sharing formula. What appears to many of us from the initial stage of this reform is that the derivation parameter (point of generation), which presently attracts 20%, will be reformed to attract 60%. Meaning, the states that housed the headquarters of companies that produced the commodities on which VAT is charged will get more share than those with relatively few or none. Consequently, the reform will be injurious to northern states economically, since the locations of most of the headquarters of these companies are in the south, specifically Lagos, Rivers and Oyo states. Thereafter, in what appears to be like a U-turn, the FIRS boss suddenly announced that the sharing formula will be reformed, and consumption will now be the parameter for the sharing of VAT revenue among states, and it is expected that it (point of consumption) will attract 60%. Perhaps Tinubu’s administration knew fully that this will please the northern governors and appease them to support the reform, because northern leaders and some of its pressure groups have for long agitating for a consumption-based model gullibly. Trojan-horse in the making!
It seems the promoters of the proposed VAT reform have done their home-work very well before presenting it as Trojan-horse for the North. From my rough analysis, which I’m very much sure the promoters of VAT reform are aware of, applying the proposed consumption-based model at 60% will yield similar results as the point of generation model (the status quo) will do at 60%. Because both will see southern Nigeria as a whole collecting higher share from the total VAT revenue, leaving the north with a paltry share thereof. At this juncture, it’s very imperative for northern leaders to know that the economic implication of section 77 of these bills will be very severe for the north if implemented as it is. Some analysts forecasted that endorsing section 77 of the bills will put the north in a worst off position it has ever found itself in since the nation’s independence!
Of the 50% VAT share in favor of states, 50% of it is shared on the basis of equality, 30% on the basis of population, while 20% on the basis of derivation (in favor of the states that housed the headquarters of the companies that produced the commodities on which VAT is charged). In essence, the proposed reform is intended to increase the derivative share from 20% to 60% using consumption based model, invariably reducing the percentages of equality and population bases (the “zero-sum” effect), which are the two parameters that “presumably” favors the North.
As established by the proponents of this reform, VAT is a consumption tax, paid by the final consumers. Inferably, the more one consumes the more VAT one pays and consequently, the more one ought to receive from the federation account in respect of VAT revenue. Unfortunately, applying this yardstick (consumption level) will drag the northern states back by far behind the southern states, because the level of consumption in the South is by far higher than that of the North irrespective of the South’s smaller population size. This is what the North’s poverty level is portraying—under consumption of national resources (goods and services). Put simply, the higher the level of poverty the lower will be the level of consumption; consequently the lower will be the revenue from VAT. While on the other hand, the lower the level of poverty the higher will be the level of consumption; consequently, the higher will be the revenue from VAT. Hence, population growth without consumption (purchasing) power is useless and disadvantageous to the Northern states, if used as a benchmark for determination of VAT revenue allocation! Therefore, insistence for the review of the existing sharing formula of VAT revenue by the Tinubu’s administration (as supported by some gullible northerners) on the basis of consumption will most likely predispose the North to a worst off position.
The principle of catch-22 upon which the Nigerian economy is based will not allow the practical application of consumption-based model to be of any benefit for Northern Nigeria. “Catch-22 is a problematic situation for which the only solution is denied by a circumstance inherent in the problem or by a rule” (Mariam Webster Dictionary). Example: “To get a job, you need work experience. But to get that work experience, you need to have had a job”. This is exactly the position of Northern Nigeria in relation to the proposed Tax reform (section 77). Thus:
“Northern Nigerian states cannot go out of their socio-economic problems until they have access to basic infrastructure, productive assets, decent education etc.; but the Northern states cannot get access to all these without getting adequate purchasing power (funds) from VAT revenue, and VAT revenue is now a function of consumption, which depend on purchasing power (funds); and at the moment, the Northern states seem to have insignificant command over the nation’s purchasing power! Consequently, they cannot escape from the socio-economic logjam they are entrapped with!”
Consumption is a function of finance (money), which the North doesn’t have at present. More disturbing is the fact that the North’s finance (consumption level) is predetermined and limited to a level below its need by the financial system; and no matter how hard it strives to go beyond that it cannot exceed the level set for it by the system. “He who pays the piper calls the tune”. Southern Nigeria owns these banks and therefore, it decides who get what from the financial system. These restrictions were explained in detail in my book: “POVERTY TRAP IN NORTHERN NIGERIA: ITS NATURE, CAUSES AND REMEDIES”.
For the sake of brevity, these restrictions could be seen from the following statistics:
Nigerian Broad money (M3) is the proxy of what we call money today. However, approximately 74.18% of it is the creation of the banking system via a process called: money creation (fractional reserve banking system). Invariably, the banking system has ownership of the created money (significantly owned by the south). Based on the only available public statistics related to credit and deposit (Nigerian Bank's credit/deposit on State Basis from 2010 –2015), Nigerian banks gave approximately 91.01% of their loanable funds (money) in the southern part of this country. Within the same period, the 19 states of the North only received 5.20% of the total loanable funds. Thus, the south got 17.5 times of what the North got from the banks as credit for the period 2010-2015. An in-depth analysis of the above statistics will reveal the gloomy picture of Northern Nigeria in relation to access to purchasing power (money) for consumption.
I enjoin the Northern leaders to employ experts for thorough research on the above statistics for more insight. The era of naivety in relation to comparative indicators (between the North and the South) should be over, because the spirit of “even development” has long been replaced by the spirit of “zero-sum game”. Hence, Northerners must start to take full control of their finances by establishing their own financial edifices (banks and other financial institutions)! Our leaders should also know, for now, triggering agricultural or industrial revolution in the region will hardly pull the North out of its quagmires provided it has no control over its finance; because, the north will toil hard to produce while the south will simply click to create the money for purchasing the produced commodities. This covert exploitation must stop! I doubt if there is any exploitative means that proved more fatal to the Northern economy than the existing financial ecosystem. Put simply, the North needs a financial ecosystem that is significantly owned by it, which will simultaneously regress the economic exploitation and progress its regions forward economically.
Mr. President should know, when the southern states and their pressure groups kicked against the proposed “Ruga” Settlement policy by the then administration of President Muhammadu Buhari, despite all the goodness in it, the former president and the north decided to let go of the project to let peace and spirit of togetherness prevail. Why can’t the present administration reciprocate the same gesture?
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