State governments may see their monthly proceeds from the value-added tax (VAT) pool balloon by a staggering 182 per cent to N650 billion if the controversial tax reform passes the critical legislative hurdles and secures the presidential assent law next year.

The projection ? though a remote possibility in The Guardian?s in-house data analysis ? is informed by the recent aggressive VAT growth, expected increase from the upward review in the states? share and an assumption that the 96 per cent expansion seen in the first year of President Bola Tinubu?s administration will be sustained.

If these happen, the monthly VAT revenue could touch N1.25 trillion on average next year. With states? share expected to go up to 55 per cent, the sub-national entities could pocket N650 billion on average every month, an astronomical rise from an average of N230 billion monthly share the states received this year.

So far, the national VAT purse has almost doubled year-to-date. In the data sourced from the National Bureau of Statistics (NBS), the government realised N4.775 trillion from the stream in the first three quarters of the year, 95.8 per cent up from N2.44 trillion it received in the same period of last year.

If the traditional seasonal spike seen in the last quarter repeats itself this year, the VAT pool could cross N6 trillion, which would be about 70 per cent higher than last year?s N3.64 trillion inflow. Last quarter four (Q4, 2023), Nigeria grew VAT by 26.6 per cent quarter-by-quarter (q/q), a significant increase from 11 per cent growth recorded in the same period in 2022.

If the country replicates 11 per cent q/q growth, which is the lowest increase seen in the past three years, the annualised VAT would be N6.75 trillion, suggesting that the year?s states? average monthly earnings would edge up to N259 billion. The figure would only need to rise by 50 per cent next year plus the 25 per cent proposed mark-up in overall VAT to deliver about N500 billion monthly windfalls for the 36 states and the Federal Capital Territory (FCT).

But if the common cake sees no further growth besides the additional revenue growth coming from the 25 per cent proposed increase and the 10 per cent upward review in the states? allocation as suggested by the new horizontal sharing formula, the states? distributable VAT could increase by as much as 41 per cent from its annualised monthly average to N365 billion. Then, the annual national VAT would have increased to as much as N8.4 trillion, according to data analysis.

From January to September, the total VAT revenue windfall stood at N4.775 trillion, a sharp increase (close to 100 per cent) from N2.44 trillion realised in the same period in 2023.

After provisions for the cost of generation and other deductions, the state governments, which take statutorily 50 per cent, got a slice of roughly 46 per cent or N2.2 trillion, which brings their average monthly total entitlements to about N244 billion.

There has been substantial and consistent growth in the monthly simple average YTD, with a prospect for upward growth to take it to N259 billion by the end of the year. In August there was a substantial uptick in the revenue stream with the sub-nationals, who now stand at opposing poles over the contentious reform proposals, sharing N266.9 billion.

Without reform, VAT?s three-year natural growth, if sustained, could push the total VAT to N8.47 trillion next year. That may leave the states with an average monthly disposable allocation of N325 billion, following the current sharing arrangements and the total monthly national earning of N706 billion.

So far in the year, VAT stands at N530 billion on average. It will require 33 per cent growth to reach a simple average of N706 billion next year to push states? total monthly earnings to N325 billion.

From 2021 to 2023, VAT grew at 33 per cent on the average. In 2021, the total VAT was N2.07 trillion and grew by 21 per cent year-on-year (Y/Y) to N2.51 trillion in 2022 only to jump by 45 per cent to close last year at N3.64 trillion. The build-up translates to an average yearly growth of 33 per cent since 2020 when the tax was raised by 50 per cent to 7.5 per cent.

A consistent performance that aligns with historical trends would have left this year?s VAT at N4.84 trillion, which was almost achieved at the end of September. The year?s collections have already outperformed the projection with the figure only N66.2 billion behind the mark as of September while the annualised summation points to over N6.75 trillion or 70 per cent year-on-year (y/y) change.

But a similar growth seen this year could push up the monthly VAT by 97 per cent to N1.04 trillion. Without reform, states? share from the purse, may still hit N480 billion if this unlikely growth is repeated next year.

This is unlikely because there is more to the exceptional growth seen this year than expanded business activities. For instance, the sharp depreciation of naira has contributed to a sharp rise in the Nigeria Customs Service (NCS) import VAT this year. In quarter three (Q3, 2024) alone, the component was N410.6 billion or 23 per cent of the total VAT revenue for the period.

The growth in the naira receipt was turbocharged by nearly 50 per cent currency depreciation, triggered by the foreign exchange (FX) reform, which may not happen in the life of the current administration again. Hence, the growth in the spike in VAT earnings was a random walk ? the economy may not replicate in the next few months, much less in the coming years.

If the FX market stabilises and the post-COVID-19 growth momentum of economic activities, including consumption and trade, continues while the expansion drive of VAT smoothens out, a 33 per cent growth is achievable next year even without the envisaged reforms. That could push the composite VAT to N8.98 trillion. With an additional 25 per cent increase from 10 per cent VAT, the total pool could swell to N11.23 trillion while monthly income will be N935 billion.

And if that happens, state governments could be handed an average of N486 billion every month as their share of VAT income to fund their budgets. Reforming the tax system and increasing the state?s ratio could see the tier of government earning much higher, however.

But the envisaged top-up stops at net additional value analysis as the new regime leans more on the promotion of fiscal federalism.

The new bill seeks to reduce the Federal Government?s share to 10 per cent while raising that of states to 55 per cent while retaining the local government component at 35 per cent in the rejigged horizontal sharing template. But whereas the current format is ? 50 per cent based on equality of states, 30 per cent on a population basis and 20 per cent on the consideration of derivation, the proposed formula gives a more weighted share to derivation (60 per cent).

Population and equality are assigned 20 per cent each to make up 40 per cent. The new sharing structure implies states that previously relied on equality and population strength for VAT revenue will see their monthly shares deflated, hence the protest from states that do not bring much to the table.

An expert analysis projected the overall monthly shares? allocation to increase by 8.4 per cent or N22.4 billion N289.4 billion next year. The independent data analysis sees 13 states getting less than what they currently receive while 23 will experience a growth in their ?take home?.

Using gross domestic product (GDP) as a proxy for VAT performance, Habu Sadeik, a financial expert, pointed to negative variance for Borno, Oyo, Rivers and Yobe states in the event the country goes on with the reform.

A new regime would see Lagos state alone taking over 40 per cent of the amount disbursed based on derivation. In August, Lagos contributed over 44 per cent to the VAT pool, though there are intense debates on the determination of the location of actual consumption of the transactions.

On the face value, Lagos would have taken 44 per cent of the 60 per cent derivative portion. Whereas Lagos gets less than 20 per cent of its contributions to the fund historically, 32 states got bigger slices than they contributed in August, an unfair structure the debated reform intends to correct.

Pro-fiscal federalism advocates believe consumption, which is captured by VAT, comes with socio-economic burdens (otherwise known as externalities), which the governance authorities of the location where the consumption takes place, need additional resources to address. It is also believed that economic activities and transactions put undue strains on infrastructure that needs to be maintained with extra-budgetary allocations. These are part of the rationalisation of the VAT administration reform.

But the effort at reengineering the Nigerian tax system is immersed in political murky waters as its opposition continues to grow. (The Guardian)

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