The federal government is proposing a significant change to the allocation of funds by the Federation Account Allocation Committee (FAAC). The proposed change involves states and local governments receiving 90% of the FAAC allocations, with the federal government receiving only 10%. This is a significant change from the current 52.68% share structure, which gives the federal government 52.68%, states 26.72%, and local governments 20.60%. The new plan also requires 60% of state and local governments’ share to be determined by derivation, with N100 available for distribution going to the federal government, N10 going to the federal government, N36 evenly divided among 36 states, and N54 allocated according to derivation, favoring states with more resources.
This modification to the sharing formula is a component of larger reforms meant to get rid of a lot of “nuisance taxes” and simplify the tax collection procedure. Oyedele pointed out that in order to win over the states to a more centralized and effective revenue collection system, the federal government had to make this compromise.
However, there remain unresolved questions over whether the federal government will lessen its portion of the personal income tax (PIT), which is customarily collected by the states. Oyedele noted that under the new 10 percent regulation, the federal government would receive N5 trillion if PIT collection were to be centralized, as he believes it might yield up to N50 trillion annually.
The federal government intends to increase its reliance on MDAs (Ministries, Departments, and Agencies) for internally generated revenue (IGR) in the interim.
According to Oyedele, MDAs are currently bringing in about N1 trillion a month for the government, and if current leaks and loopholes are fixed, there is a lot of room for development.
The suggested adjustments are a risky step toward encouraging a more balanced fiscal framework in Nigeria and decentralizing income collection. However, how these changes are carried out and if important stakeholders can agree on the new distribution system will determine how successful these reforms are.
While negotiations between the federal government and other levels of government continue, the entire impact of this planned tax change will probably be closely watched in the upcoming months.
