VAT Derivation Plan: Why Governors at Odds with FG – Finance Commissioner

The Gombe State Commissioner for Finance and Economic Development, Gambo Magaji, has shed light on the apprehension among state governors regarding the Federal Government’s proposed derivation principle on Value Added Tax (VAT).

Magaji made this disclosure on Saturday during a one-day citizens’ consultative meeting on the 2025 budget preparation. He warned that the proposed VAT policy could result in substantial revenue losses for state governments. The event was organized by the Ministry of Budget and Economic Planning in collaboration with the Ministry of Finance and Economic Development.

VAT Revenue Allocation Breakdown

Explaining the current VAT revenue sharing formula, Magaji noted that the Federal Government retains 15%, states (including the Federal Capital Territory) receive 50%, and local governments share 35%. However, the proposed derivation principle could reduce the states’ share significantly, with Gombe State potentially losing up to 40% of its VAT income.

“If implemented, this policy would slash our VAT revenue from ₦4.6 billion to ₦2.5 billion monthly, a drastic decline that would severely impact state finances,” he warned.

Exchange Rate and Inflation Concerns

Magaji also criticized the Federal Government’s Medium Term Expenditure Framework (MTEF), particularly the proposed exchange rate of ₦1,400 per dollar for 2025.

“The current 2024 budget pegs the dollar at ₦750, but the 2025 proposal suggests ₦1,400, with the market rate hovering around ₦1,700. This small exchange rate differential, which has helped cushion statutory revenue allocations, will disappear, further straining state resources,” he said.

On inflation, Magaji expressed pessimism, citing its persistent rise as another challenge that could exacerbate financial pressures in 2025.

Project Financing and Borrowing Policies

Magaji clarified the sources of funding for ongoing projects, emphasizing that development partners and financial institutions, not recurrent expenditure borrowing, primarily finance these projects.

“Federal law prohibits borrowing for recurrent expenditures like salaries. We can borrow for capital projects, but not for recurrent funding, which sometimes causes misunderstanding among citizens,” he explained.

Citizen-Nominated Projects and Governance Achievements

Representing Governor Muhammadu Yahaya, the Secretary to the State Government, Professor Ibrahim Njodi, highlighted the administration’s commitment to citizen priorities. He revealed that 48 of the 71 citizen-nominated projects from the 2024 budget had been completed, reflecting the administration’s focus on addressing critical needs.

“These projects directly impact the development and well-being of the people, ensuring resources are allocated where they are most needed,” Njodi said.

He reassured residents of the government’s continued focus on sectors such as education, healthcare, water supply, and rural development.

Institutionalizing Citizen Engagement

The Commissioner for Budget and Economic Planning, Salihu Alkali, praised Governor Yahaya’s reforms, particularly the institutionalization of citizen engagement in the budget process since 2019.

“This initiative has empowered citizens to actively shape annual budgets, making it a model for other states,” Alkali stated.

The consultative meeting underscored the administration’s transparency in governance and commitment to addressing the fiscal challenges ahead while prioritizing citizens’ needs.