FG Proposes Drastic Overhaul Of FAAC Sharing Formula

The federal government is proposing a major shift in the distribution of funds from the Federation Account Allocation Committee (FAAC).

This was revealed by Mr. Taiwo Oyedele, Chairman of the Presidential Fiscal Policy and Tax Reforms Committee, in a statement on his X (formerly Twitter) handle.

Oyedele disclosed that the federal government is set to take only 10 percent of the total FAAC allocations, while states and local governments will receive a combined 90 percent.

This represents a drastic departure from the current sharing formula, which allocates 52.68 percent to the federal government, 26.72 percent to states, and 20.60 percent to local governments.

Under the new proposal, Oyedele explained, the distribution formula for the states and local governments would include a clause stipulating that 60 percent of their share will be based on the principle of derivation. In practice, this means if N100 is available for distribution from FAAC: The federal government will take N10, all 36 states will share N36 equally, and N54 will be distributed based on derivation, favoring states with higher resource generation.

This change in the sharing formula is part of broader reforms aimed at eliminating numerous “nuisance taxes” and streamlining the tax collection process. Oyedele noted that the federal government had to make this concession to get states on board with a centralized and more efficient tax collection system.

“The new approach not only simplifies tax collection but also lays the foundation for fiscal federalism, giving states and local governments more autonomy over their revenues,” Oyedele said.

However, questions remain about whether the federal government will also reduce its share of personal income tax (PIT), which is traditionally collected by states. Oyedele pointed out that the federal government has long sought to centralize PIT collection, which he estimates could generate up to N50 trillion annually, providing N5 trillion for the federal government under the new 10 percent rule.

Meanwhile, the federal government plans to rely more on internally generated revenue (IGR) from its Ministries, Departments, and Agencies (MDAs) for its revenue streams.

Oyedele noted that MDAs are already generating almost N1 trillion monthly for the government, with significant potential for growth once existing loopholes and leakages are addressed.

The proposed reforms represent a bold step towards decentralizing revenue collection and promoting a more balanced fiscal structure in Nigeria. However, the success of these reforms will depend on how they are implemented and whether key stakeholders can reach a consensus on the new distribution framework.

The full impact of this proposed tax overhaul will likely be closely monitored in the coming months as discussions continue between the federal government and other tiers of government.

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