Value Added Tax System in Nigeria and Equitable Distribution of Revenue Proceeds
Abstract
Value Added Tax (VAT) in Nigeria currently serves as a huge source of revenue generation standing at a rate of 7.5% on selected goods and services. The Federal Government of Nigeria (FGN), its 36 States, and all the 774 Local Government areas (LGAs) benefit from proceeds of VAT in the stated distribution formula after the collecting agency (Federal Inland Revenue Service) has collected its 5% administration charges. The vertical allocation formula (VAF) is used to distribute VAT proceeds amongst FGN, States, and LGAs in the ratio 2:5:3. In contrast, the horizontal allocation formula (HAF) is applied amongst states and LGAs using factors such as equity (50%), population (30%), and derivation (20%). This has generated various controversies as several states have gone to court to challenge the equitability and fairness of the HAF. Using secondary data gathered from ten (10) top VAT-generating states and ten (10) low VAT-generating states for 5 years (2019-2023), regression analysis, as well as ANOVA, were used to determine the justification, equitability, and fairness of the HAF with each state's population as a controlling factor. The study found a rationale for population and derivation in the HAF and also posited that the equality factor has no statistically significant effect on the HAF. In contrast, population and derivation are statistically significant. The study concluded and recommended a review of the HAF to ensure equitable and fair allocation of VAT revenue amongst states in Nigeria.
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