Revenue Allocation in Nigeria: How Federally Collected Funds Are Shared
Revenue allocation in Nigeria involves collecting revenue into common government revenue arrangements and distributing the distributable revenue according to an approved formula. It matters because the money shared decides what the Federal, State and Local Governments can spend on services such as schools, health centres and roads.
Major Sources of Federally Collected Revenue
The pool that feeds revenue allocation in Nigeria comes from several sources. These include:
- Petroleum revenue
- Company income tax
- Customs duties
- Excise duties
- Value Added Tax (VAT)
- Other federally collected revenue
1. Petroleum Revenue
Petroleum revenue is money earned by the Nigerian government from the exploration, production, and sale of crude oil and natural gas. It includes revenue from royalties, petroleum taxes, rents, and other payments associated with petroleum activities.
Because petroleum has historically been an important source of government revenue in Nigeria, changes in international crude oil prices, production levels, and oil-sector activities can affect the amount of revenue available to the government.
A portion of petroleum-related revenue is distributed through the appropriate revenue-sharing arrangements, including the derivation principle for oil-producing states.
2. Company Income Tax
Company income tax is a tax paid by companies on their taxable profits. Companies operating in Nigeria are required to pay tax on income or profits according to the applicable tax laws.
The revenue collected from company taxation provides funds for government expenditure on areas such as education, healthcare, infrastructure, security, and administration. Company income tax is an important non-oil source of federally collected revenue and becomes particularly important when petroleum revenue falls.
3. Customs Duties
Customs duties are taxes or charges imposed on certain goods brought into Nigeria from other countries. The Nigeria Customs Service collects customs duties and other related charges on behalf of the government.
For example, when an importer brings certain taxable goods into Nigeria, the importer may be required to pay the applicable customs duty before the goods are cleared.
Customs revenue provides funds for the government and also helps regulate international trade by making some imported goods more expensive.
4. Excise Duties
Excise duties are taxes imposed on particular goods produced or consumed within the country, especially specified products such as certain alcoholic beverages, tobacco products, and other goods covered by the relevant tax rules.
They are generally collected from producers or manufacturers and are included in the price of the products. Apart from raising government revenue, excise duties can also be used to discourage excessive consumption of certain products. The revenue generated contributes to government funds available for public expenditure.
5. Value Added Tax (VAT)
Value Added Tax is a consumption tax charged on the supply of taxable goods and services. It is ultimately borne by the final consumer, although businesses collect and remit the tax to the government through the tax administration system.
VAT is collected on eligible transactions at different stages of the supply chain, with mechanisms to prevent the same value from being taxed repeatedly.
The revenue generated from VAT provides an important source of public revenue and is distributed among the appropriate levels of government according to the applicable laws and allocation arrangements.
6. Other Federally Collected Revenue
The Federal Government also receives revenue from several other sources, including fees, licences, fines, dividends, and profits from government investments, rents, earnings from government agencies, and other statutory receipts.
Although individual sources may generate less revenue than petroleum or major taxes, they collectively contribute to government income. The amount collected from these sources can vary depending on economic activity, government policies, and the performance of government-owned assets and agencies.
These revenues help the government finance its responsibilities and reduce excessive dependence on a single source of income.
How Revenue Allocation in Nigeria Works in Practice
The distribution process involves the different levels of government receiving their approved shares.
Also Read: The Economic Uses of a Budget to the Government
The Federation Account
The Federation Account is an account established by the Nigerian Constitution into which certain revenues collected by the Federal Government are paid before they are shared among the Federal, State, and Local Governments according to the applicable revenue allocation formula.
Major revenues that contribute to the distributable pool include petroleum-related revenue, company income tax, customs duties, and other federally collected revenues, subject to applicable laws and deductions.
The purpose of the Federation Account is to ensure that revenue meant for distribution is shared among the different levels of government so that they can carry out their assigned responsibilities.
Derivation Principle
The derivation principle is a revenue allocation principle under which a portion of revenue generated from natural resources is allocated to the state from which the resources are derived.
The principle is intended to give producing states a direct financial benefit from the natural resources found within their territories. In Nigeria, the principle is particularly associated with petroleum-producing states, which receive a derivation share from relevant oil and gas revenues.
The derivation principle has been a major issue in debates on revenue allocation in Nigeria because resource-producing states often argue that they should receive greater compensation for the resources extracted from their areas.
Allocation to States
Allocation to states refers to the distribution of the share of federally distributable revenue assigned to the state governments among Nigeria's 36 states.
After the amount available for states has been determined under the applicable revenue allocation arrangements, the states receive their respective shares according to the approved horizontal allocation formula.
Factors considered in revenue allocation may include equality of states, population, social development needs, land area and internally generated revenue, depending on the applicable formula.
The allocation enables state governments to finance responsibilities such as education, healthcare, roads, water supply and other public services.
Allocation to Local Governments
Allocation to local governments refers to the distribution of revenue available to local government councils to enable them to perform their functions.
Local governments are responsible for various grassroots services and development activities, including local roads, markets, sanitation, primary healthcare support and other community services.
Their revenue comes from sources such as statutory allocations and their own internally generated revenue, with the applicable federal-to-local allocation arrangements determining their share of distributable revenue.
Adequate and properly managed allocations are important because local governments are the level of government closest to many communities and are expected to provide services directly at the grassroots.
Summary of Revenue Allocation in Nigeria
Certain federally collected revenues are paid into arrangements such as the Federation Account for distribution according to the law.
Major sources include petroleum revenue, company income tax, customs and excise duties, VAT and other federally collected revenue.
Revenue is distributed among the Federal, State, and Local Governments according to the applicable formula.
The derivation principle gives resource-producing states a share of revenue derived from natural resources within their areas.
States receive their allocated share for carrying out their responsibilities.
Local governments also receive allocations to perform their functions.
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