The Geopolitical Disparities in VAT Contributions and Allocations: Implications for Nigeria’s Economy and Proposed Tax Reforms

Analysis of Contributions and Allocations (2024):

1. South West:

Contributed: ₦3.11 trillion

Received: ₦849.71 billion (27.4%)

The region contributes the largest share to the VAT pool due to its industrial base, economic activities, and population. However, its allocation is disproportionately low compared to its contribution.

2. South South:

Contributed: ₦1.08 trillion

Received: ₦543.49 billion (50.3%)

The oil-rich region generates significant VAT revenue but receives only half of its contributions, despite being a key economic driver.

3. North West:

Contributed: ₦211.27 billion

Received: ₦574.32 billion (271.8%)

The region receives far more than it contributes, highlighting the redistribution model aimed at addressing regional underdevelopment and population needs.

4. North East:

Contributed: ₦174.50 billion

Received: ₦411.84 billion (236%)

Similar to the North West, this region benefits from significant allocations to address developmental gaps and insurgency-related challenges.

5. North Central:

Contributed: ₦154.54 billion

Received: ₦408.66 billion (264.4%)

This zone also receives disproportionately high allocations, emphasizing its developmental and infrastructural needs.

6. South East:

Contributed: ₦101.09 billion

Received: ₦341.46 billion (337.8%)

Despite its entrepreneurial activities, the region’s contributions remain low. Its high allocation underscores a redistribution model favoring equity over contribution.

Effect on Nigeria’s Economy:

1. Revenue Redistribution Imbalances:

The significant disparity between contributions and allocations discourages productivity in high-contributing zones, potentially affecting national revenue growth.

2. Inefficiency in Resource Utilization:

Allocations to underperforming regions may not yield desired economic outcomes due to corruption, mismanagement, or lack of capacity to utilize funds effectively.

3. Equity vs. Productivity Debate:

While the redistribution model aims to address inequality, it creates tensions between high-contributing and high-receiving zones, undermining fiscal federalism.

4. Impact on Tax Reforms:

Governors’ Ratio: Many state governors advocate for a formula favoring higher allocations to contributing states to encourage productivity and accountability.

Presidential Tax Reform Committee’s Proposal: The committee suggests a more balanced approach to VAT sharing, emphasizing both equity and efficiency.

This divergence in perspectives complicates consensus on tax reform policies.

The Way Forward:

1. Redefine VAT Sharing Formula:

Proposed Model: Adopt a formula that balances contributions and equity, ensuring productive states receive fair rewards while underdeveloped regions are supported for growth.

Example: A ratio like 50% based on contributions, 30% based on population, and 20% based on need could promote fairness and incentivize productivity.

2. Encourage Economic Diversification:

Underperforming regions should focus on developing key sectors like agriculture, mining, and services to increase their VAT contributions.

3. Strengthen Accountability:

Ensure funds allocated to underdeveloped regions are transparently used for developmental projects to achieve measurable outcomes.

4. Promote Fiscal Federalism:

Empower states to collect and manage more of their revenues while contributing a portion to the federal pool, fostering responsibility and efficiency.

5. Implement Taxpayer Incentives:

Introduce incentives like tax reliefs for high-performing businesses and regions to boost compliance and productivity.

6. Phased Implementation of Reforms:

Gradual adjustments to VAT sharing formulas will minimize economic shocks and allow regions to adapt to the new system.

7. National Consensus Building:

Engage stakeholders, including state governments, economic experts, and civil society, to ensure buy-in for the proposed reforms.

Conclusion:

The disparities in VAT contributions and allocations among Nigeria’s geopolitical zones highlight the complexities of balancing equity and efficiency in revenue distribution. While the current model addresses developmental gaps, it risks discouraging productivity in high-contributing regions. A restructured VAT sharing formula that rewards productivity, ensures accountability, and promotes inclusivity is essential for driving sustainable economic growth and achieving the objectives of the proposed tax reforms.