Federal Government will begin deducting unremitted value-added tax and withholding tax directly from the revenue allocations of states, local governments, and federal ministries, departments, and agencies.
Executive Director, Large Taxpayers and Government Directorate at the Nigerian Revenue Service, Amina Ado, announced the plan on Tuesday 19 May in Abuja at a national workshop organised by the NRS.
She said the government had observed significant leakages in the prompt deduction and remittance of VAT and withholding tax by some sub-national entities.
Under the Nigerian Tax Administration Act, the Office of the Accountant General of the Federation is empowered to deduct unremitted revenue from an MDA’s budgetary allocation and remit it to the relevant tax authority.
The measure is aimed at forcing public entities to comply with tax rules in the same way individuals and businesses are required to, Ado said.
“Whereas some jurisdictions work hard to fill the national revenue pool, others participate in the distribution without making their fair contribution.” She added that the compliance gap distorts fiscal federalism and creates imbalances in revenue sharing.
The workshop brought together finance commissioners and accountants general from the 36 states. It was convened as the NRS targets N40 trillion in tax revenue for the federation this year.
Minister of Finance and Coordinating Minister of the Economy, Taiwo Oyedele, said Nigeria needs a tax system that is transparent and applied consistently across all levels of government. He noted that the NRS is responsible for collecting taxes from transactions carried out by all tiers of government, MDAs, and government-owned enterprises.
“For sustainable success, there must be alignment of policies between the Federal Government, sub-national administrations and our public enterprises,” Oyedele said through his representative, Tolu Adegbiye.
NRS Executive Chairman Dr. Zacch Adedeji said the Service will also launch an initiative this year to identify and reward the most tax-compliant states and local governments. He described the Federation Account Allocation Committee fund as the financial lifeblood of the three tiers of government and said improved compliance would provide a steady and equitable revenue stream for public projects.
How the deduction process would work
Policy analysts explain that the mechanism is already set out in the Nigerian Tax Administration Act. It gives the Office of the Accountant General of the Federation the power to deduct unremitted taxes at source before releasing funds to the defaulting entity. Though the procedure in practice would pass through due process.
The Nigerian Revenue Service would flag MDAs, states, and local governments that have deducted VAT or withholding tax from payments to contractors and suppliers but failed to remit. This usually comes up during audits, reconciliations, and returns filed by the entities.
The NRS in turn sends a demand notice to the defaulting entity with the amount owed. If the entity doesn’t clear it within the set period, the case is forwarded to the Office of the Accountant General of the Federation.
As Amina Ado explained, when the monthly FAAC allocation or budgetary release is processed, the Accountant General deducts the outstanding amount at source directly from the entity’s allocation. That money is then remitted to the NRS or relevant state tax authority.
The deducted funds go straight to the Federation Account or state treasury, depending on where the tax should have gone. The NRS then updates its records so the entity’s tax liability is cleared.
Ado emphasized that direct deduction closes that leakages by making remittance automatic. “It removes the option to hold onto tax money for cash flow. States and MDAs will need to remit promptly or see their allocations reduced without needing a separate court process.” She adds.
Analysts say the policy is similar to how PAYE for federal employees is already handled, where tax is deducted before salaries are paid.
