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American Journal of  
Society and Law

Personal Income Tax in Nigerian Fiscal Federalism: Matters Arising
Idachaba Martins Ajogwu1*

Volume 1 Issue 1, Year 2022
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Article Information ABSTRACT

Received: September 18, 2022
Accepted: November 10, 2022
Published: November 20, 2022

Fiscal federalism is a by-product of  federalism. Federalism is a political concept in which 
power to govern is shared between national and sub-national Governments creating what 
is often called a federation. Federalism is a political concept in which the power to govern 
is shared between Federal, States and Local Governments, creating what is often called a 
federation. Fiscal federalism is characterized by fiscal relations between central and lower 
levels of  Government. The progression in taxation in Nigeria is from personal income tax 
to taxation on other sources such as petroleum, companies etc. Personal Income Tax Act 
identifies taxable persons, chargeable incomes, determines assessable income and tax that 
income. The Act also determines the residence of  the tax payer for the purpose of  pay-
ment and or collection of  personal income tax. This paper contains primary and secondary 
sourced materials, such as laws, statutes, and other resource materials. This paper revealed 
the aspect of  personal income that raises concerns on the ownership of  funds collected by 
State Governments through the State Boards of  Internal Revenue under personal income 
tax regime. Though it is argued by some school of  thought that the rules of  agency suggest 
that an agent acting under a delegated authority cannot be heard contesting the subject mat-
ter of  agency with the principal. However, due to the combined provisions of  sections 80(1), 
120(1) and 163 of  the Constitution which direct that the personal income tax collected by 
the State Government be paid into the Consolidated Revenue Fund of  the State and used 
for the benefit of  the State lay to rest the issue of  ownership of  the personal income tax 
collected by the State Government. 

Keywords
Fiscal Federalism, Constitution,  
Income Tax, Government

1 Faculty of  Law, Kogi State University, Anyigba, Nigeria
* Corresponding author’s e-mail: Idachabamartins1@gmail.com

INTRODUCTION
In Nigeria there is a constitutional duty to pay tax by 
every taxable adult and this duty gives corresponding 
rights to every taxpayers. Such rights as right to life, 
right to dignity of  human person, right to personal 
liberty, right to private and family life, right to freedom 
from discrimination (Constitution Chapter, 2011) and so 
on are intrinsically available to Nigerian taxpayers. It is 
against this background that we shall be considering the 
importance of  tax and related matters within the Nigerian 
economy.
The Government of  Nigeria, like other countries in 
different parts of  the world, has legislative powers to 
impose on its citizens, any form of  tax and whatever 
amount it deems appropriate. Tax, like most legal 
concepts, is not amenable to a single or universally 
accepted definition. There are as many definitions of  
the word as there are scholars who define the subject 
from their own perspectives. For the purpose of  this 
paper, definitions proffered by judicial decisions, policy 
document, learned authors and would be considered.
Tax has been defined in the Australian case of  Mathews v 
Chicory  Marketing Board (S A Ateiza,2008)  as:
a compulsory exaction of  money by a public authority 
for public purposes, or taxation is raising money for the 
purpose of  Government by means of  contribution from 
individual persons.
Ola defined tax as the demand made by the Government 
of  a country for the compulsory payment of  money by 
the citizens of  a country (C S Ola, 2001) Adam Smith did 
not define tax, but rather described it in his treatise where 

he brought to the fore the characteristics of  tax (A Smith, 
1776).  In his maxims relating to taxes, he stated that 
the subjects of  every State ought to contribute towards 
the support of  the Government as nearly as possible, 
in proportion to the revenue which they respectively 
enjoy under the protection of  the State. He identified 
the characteristics of  a good tax to include: certainty, 
equity, neutrality and administrative efficiency. From 
Smiths description, it can be deduced that tax, though a 
compulsory contribution made by persons in support of  
Government, is proportionate.
In the perception of  Agbonika, Tax is an obligatory levy 
exacted by Government on eligible persons, goods or 
activities for particular purposes which may be expressed 
or implied in the interest of  the nation (J A A Agbonika, 
2015). It is easily deduced from the definition that taxes 
are not paid by everybody, the taxpayer must be eligible 
and it is not the entirety of  a person’s earned income 
that is assessed to tax, it is the residue, that is, what 
remains after all the statutory deductions, allowances and 
incentives have been subtracted that is assessed for the 
purpose of  tax. 
The 2017 revised National Tax Policy succinctly defines 
tax as any compulsory payment to Government imposed 
by law without direct benefit or return of  value or 
a service whether it is called a tax or not is apt.(The 
National Tax Policy Document). The absence of  direct 
benefit qui pro quo should not lead to a wrong conclusion 
that Government could collect taxes and careless about 
the taxpayers or society. Such an attitude will be most 
unfortunate and may precipitate civil unrest. There is 

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an underpinning principle in furtherance of  the Social 
Contract Theory (J J Rousseau, 2020), that tax revenue 
is supposed to be utilized for the provision of  social 
services and development of  the society; which Nigerian 
parlance includes the advancement of  the provisions of  
the Fundamental Objectives and Directive Principles of  
State Policy(Constitution, Chapter, 1999)  

Personal Income Tax
Personal income tax (PIT) is a tax imposed on individuals 
or entities that varies with respective income or profits. 
Income tax generally is computed as the product taxable 
income (H Peter, 2001). Taxation rates may vary in type 
depending on the taxpayer. The tax rate may increase as 
taxable income increases. The tax imposed on companies 
is usually known as corporate tax and is levied at a flat 
rate of  30% subject to some exceptions as introduced 
under the 2019 and 2020 Finance Act. Most jurisdictions 
exempt locally organized charitable organizations from 
tax. Capital gains may be taxed at different rates than 
other income. Credits of  various sorts may be allowed 
that reduce tax. Some jurisdictions impose the higher of  
an income tax or a tax on an alternative base or measure 
of  income. 
Most jurisdictions require self-assessment of  the tax and 
payers of  some types of  income to withhold tax from 
those payments. Advance payments of  tax by taxpayers 
may be required. Taxpayers not timely paying tax owed 
are generally subject to significant penalties, which may 
include jail for individuals or revocation of  an entity’s 
legal existence. 
The concept of  taxing income is a modern innovation and 
presupposes several things: a money economy, reasonably 
accurate accounts, a common understanding of  receipts, 
expenses and profits, and an orderly society with reliable 
records. For most of  the history of  civilization, these 
preconditions did not exist, and taxes were based on other 
factors. Taxes on wealth, social position, and ownership 
of  the means of  production (typically land and slaves) 
were all common. Practices such as tithing, or an offering 
of  first fruits, existed from ancient times, and can be 
regarded as a precursor of  the income tax, but they lacked 
precision and certainly were not based on a concept of  
net increase (I. A. Ayua,1996).  
The first income tax payment was recorded in Egypt(A 
.Sanni, 2019). In the early days of  the Roman Republic, 
public taxes consisted of  modest assessments on 
owned wealth and property. The tax rate under normal 
circumstances was 1% and sometimes would climb as 
high as 3% in situations such as war. These modest taxes 
were levied against land, homes and other real estate, 
slaves, animals, personal items and monetary wealth. The 
more a person had in property, the more tax they paid. 
Taxes were collected from individuals. 
In the year 10 AD, Emperor Wang Mang of  the Xin 
Dynasty recorded an unprecedented income tax, at the 
rate of  10 percent of  profits, for professionals and skilled 
labor. He was overthrown 13 years later in 23 AD and 

earlier policies were restored during the re-established 
Han Dynasty which followed. 
One of  the first recorded taxes on income was the 
Saladin tithe introduced by Henry II in 1188 to raise 
money for the Third Crusade. The tithe demanded that 
each layperson in England and Wales be taxed one tenth 
of  their personal income and moveable property. The 
inception date of  the modern income tax is typically 
accepted as 1799, at the suggestion of  Henry Beeke, the 
future Dean of  Bristol(Clark, 2019). This income tax was 
introduced into Great Britain by Prime Minister William 
Pitt the Younger in his budget of  December 1798, to pay 
for weapons and equipment for the French Revolutionary 
War. Pitt’s new graduated (progressive) income tax began 
at a levy of  2 old pence in the pound (1/120) on incomes 
over £60 (equivalent to £6,200 in 2018)  and increased 
up to a maximum of  2 shillings in the pound (10%) on 
incomes of  over £200. Pitt hoped that the new income 
tax would raise £10 million a year, but actual receipts for 
1799 totalled only a little over £6 million.( ,2019) 
Pitt’s income tax was levied from 1799 to 1802, when it 
was abolished by Henry Addington during the Peace of  
Amiens.  Addington had taken over as prime minister in 
1801, after Pitt’s resignation over Catholic Emancipation. 
The income tax was reintroduced by Addington in 1803 
when hostilities with France recommenced, but it was 
again abolished in 1816, one year after the Battle of  
Waterloo.  Opponents of  the tax, who thought it should 
only be used to finance wars, wanted all records of  the 
tax destroyed along with its repeal. Records were publicly 
burned by the Chancellor of  the Exchequer, but copies 
were retained in the basement of  the tax court (C. Adams, 
2003). 
In the United Kingdom of  Great Britain and Ireland, 
income tax was reintroduced by Sir Robert Peel by 
the Income Tax Act 1842. Peel, as a conservative, had 
opposed income tax in the 1841 general election, but a 
growing budget deficit required a new source of  funds. 
The new income tax, based on Addington’s model, was 
imposed on incomes above £150 (equivalent to £13,870 
in 2018) (A B Steven, 2011).  Although this measure was 
initially intended to be temporary, it soon became a fixture 
of  the British taxation system. A committee was formed 
in 1851 under Joseph Hume to investigate the matter, 
but failed to reach a clear recommendation.  Despite the 
vociferous objection, William Gladstone, Chancellor of  
the Exchequer from 1852, kept the progressive income 
tax, and extended it to cover the costs of  the Crimean 
War. By the 1860s, the progressive tax had become a 
grudgingly accepted element of  the English fiscal system. 
The United State (US) Federal Government imposed the 
first personal income tax on August 5, 1861, to help pay 
for its war effort in the American Civil War  (3% of  all 
incomes over US$800) (equivalent to $22,300 in 2018) (S 
Pollack, 2016).  This tax was repealed and replaced by 
another income tax in 1862. It was only in 1894 that the 
first peacetime income tax was passed through the Wilson-
Gorman tariff. The rate was 2% on income over $4000 

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(equivalent to $116,000 in 2018), which meant fewer than 
10% of  households would pay any (S. Pollack, 2014).  The 
purpose of  the income tax was to make up for revenue 
that would be lost by tariff  reductions.  The US Supreme 
Court ruled that the income tax was unconstitutional, the 
10th amendment forbids any power not expressed in the 
US Constitution, and there being no power to impose any 
other than a direct tax by apportionment. 
In 1913, the Sixteenth Amendment to the United States 
Constitution made the income tax a permanent fixture 
in the U.S. tax system. In fiscal year 1918, annual internal 
revenue collections for the first time passed the billion-
dollar mark, rising to $5.4 billion by 1920 (A. Young, 
2007). The amount of  income collected via income tax 
has varied dramatically, from 1% in the early days of  US 
income tax to taxation rates of  over 90% during World 
War 2.  While tax rules vary widely, there are certain basic 
principles common to most income tax systems around 
the world, whether in China, Canada, Germany, United 
Kingdom and so on. 
Individuals are often taxed at different rates than 
corporations. Individuals include only human beings. 
Tax systems in countries other than the United State of  
America treat an entity as a corporation only if  it is legally 
organized as a corporation. Estates and trusts are usually 
subject to special tax provisions. Other taxable entities are 
generally treated as partnerships. In the US, many kinds 
of  entities may elect to be treated as a corporation or a 
partnership. Partners of  partnerships are treated as having 
income, deductions, and credits equal to their shares 
of  such partnership items. Separate taxes are assessed 
against each taxpayer meeting certain minimum criteria. 
Many systems allow married individuals to request joint 
assessment.  Many systems allow controlled groups of  
locally organized corporations to be jointly assessed. 
Tax rates vary widely. Some systems impose higher rates 
on higher amounts of  income. Example: Elbonia taxes 
income below E.10, 000 at 20% and other income at 30%. 
Tax rates schedules may vary for individuals based on 
marital status (P. Thomas, 2018).   Residents are generally 
taxed differently from non-residents. Few jurisdictions 
tax non-residents other than on specific types of  income 
earned within the jurisdiction. A very few countries 
(notably Singapore and Hong Kong) tax residents only 
on income earned in or remitted to the country. 
Residence is often defined for individuals as presence in 
the country for more than 183 days. Most countries base 
residence of  entities on either place of  organization or 
place of  management and control. The United Kingdom 
has three levels of  residence. Most systems define income
subject to tax broadly for residents, but tax non-residents 
only on specific types of  income. What is included in 
income for individuals may differ from what is included 
for entities. 
The timing of  recognizing income may differ by type of  
taxpayer or type of  income. Income generally includes 
most types of  receipts that enrich the taxpayer, including 
compensation for services, gain from sale of  goods 

or other property, interest, dividends, rents, royalties, 
annuities, pensions, and all manner of  other items (R. 
Chun, 2019).   Many systems exclude from income part 
or all of  superannuation or other national retirement plan 
payments. Most tax systems exclude from income health 
care benefits provided by employers or under national 
insurance systems. 
Only net income from business activities, whether 
conducted by individuals or entities is taxable, with few 
exceptions. Many countries require business enterprises to 
prepare financial statements  which must be audited. Tax 
systems in those countries often define taxable income 
as income per those financial statements with few, if  any, 
adjustments. A few jurisdictions compute net income as 
a fixed percentage of  gross revenues for some types of  
businesses, particularly branches of  non-residents. 
Nearly all systems permit residents a credit for income 
taxes paid to other jurisdictions of  the same sort.  Thus, 
a credit is allowed at the national level for income taxes 
paid to other countries. Many income tax systems permit 
other credits of  various sorts, and such credits are often 
unique to the jurisdiction. Some jurisdictions, particularly 
the United States and many of  its States and Switzerland, 
impose the higher of  regular income tax or an alternative 
tax.  Switzerland and U.S. states generally impose such tax 
only on corporations and base it on capital or a similar 
measure. 
Personal income tax is generally collected in one of  
two ways: through withholding of  tax at source and/
or through payments directly by taxpayers. Nearly all 
jurisdictions require those paying employees or non-
residents to withhold income tax from such payments. 
The amount to be withheld is a fixed percentage where 
the tax itself  is at a fixed rate. Alternatively, the amount to 
be withheld may be determined by the tax administration 
of  the country or by the payer using formulae provided 
by the tax administration. 
Payees are generally required to provide to the payer or 
the Government the information needed to make the 
determinations. Withholding for employees is often 
referred to as ‘pay as you earn’ (PAYE) or ‘pay as you go’. 
Income taxes of  workers are often collected by employers 
under a withholding or pay-as-you-earn tax system. Such 
collections are not necessarily final amounts of  tax, as the 
worker may be required to aggregate wage income with 
other income and/or deductions to determine actual tax. 
Calculation of  the tax to be withheld may be done by 
the Government or by employers based on withholding 
allowances or formulae. 
Nearly all systems require those whose proper tax is not 
fully settled through withholding to self-assess tax and 
make payments prior to or with final determination of  
the tax. Self-assessment means the taxpayer must make 
a computation of  tax and submit it to the Government.  
Some countries provide a pre-computed estimate to 
taxpayers, which the taxpayer can correct as necessary. 
The proportion of  people who pay their income taxes 
in full, on time, and voluntarily (that is, without being 

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fined or ordered to pay more by the Government) is 
called the voluntary compliance rate (A. Bernasek, 2010).  
The voluntary compliance rate is higher in the US than 
in countries like Germany or Italy.  In countries with a 
sizeable black market, the voluntary compliance rate is 
very low and may be impossible to properly calculate. 
Personal income taxes are separately imposed by sub-
national jurisdictions in several countries with Federal 
systems. These include Canada, Germany, Switzerland, 
Nigeria and the United States, where provinces, cantons, 
or States impose separate taxes.  In a few countries, cities 
also impose income taxes. The system may be integrated 
(as in Germany) with taxes collected at the Federal level.
In Quebec  and the United States,  Federal and State systems 
are independently administered and have differences in 
determination of  taxable income. Retirement oriented 
taxes, such as Social Security or national insurance, also 
are a type of  income tax, though not generally referred 
to as such.  In the US, these taxes generally are imposed 
at a fixed rate on wages or self-employment earnings up 
to a maximum amount per year. The tax may be imposed 
on the employer, the employee, or both, at the same or 
different rates.
Tax avoidance strategies and loopholes tend to emerge 
within income tax codes.  They get created when taxpayers 
find legal methods to avoid paying taxes. Lawmakers then 
attempt to close the loopholes with additional legislation. 
That leads to a vicious cycle of  ever more complex 
avoidance strategies and legislationJ. (A. Pechman, 1974).  
The vicious cycle tends to benefit large corporations and 
wealthy individuals that can afford the professional fees 
that come with ever more sophisticated tax planning,  
thus challenging the notion that even a marginal income 
tax system can be properly called progressive. The 
higher costs to labour and capital imposed by income 
tax causes deadweight loss in an economy, being the loss 
of  economic activity from people deciding not to invest 
capital or use time productively because of  the burden 
that tax would impose on those activities. There is also a 
loss from individuals and professional advisors devoting 
time to tax-avoiding behaviour instead of  economically-
productive activities. 
Income taxes are used in most countries around the world. 
The tax systems vary greatly and can be progressive, 
proportional, or regressive, depending on the type of  
tax.  Comparison of  tax rates around the world is a 
difficult and somewhat subjective enterprise. Tax laws in 
most countries are extremely complex, and tax burden 
falls differently on different groups in each country and 
sub-national unit.  Services provided by Governments 
in return for taxation also vary, making comparisons all 
the more difficult. Countries that tax income generally 
use one of  two systems: territorial or residential. In the 
territorial system, only local income – income from a 
source inside the country – is taxed.  In the residential 
system, residents of  the country are taxed on their 
worldwide (local and foreign) income, while nonresidents 
are taxed only on their local income. In addition, a very 

small number of  countries, notably the United States, 
also tax their nonresident citizens on worldwide income. 
Countries with a residential system of  taxation usually 
allow deductions or credits for the tax that residents 
already pay to other countries on their foreign income. 
Many countries also sign tax treaties with each other 
to eliminate or reduce double taxation. Countries do 
not necessarily use the same system of  taxation for 
individuals and corporations. For example, France uses a 
residential system for individuals but a territorial system 
for corporations (H. L. A. Hart., 1961)   while Singapore 
does the opposite,  and Brunei taxes corporate but not 
personal income. 

Fiscal Federalism
Fiscal federalism denotes an inter-governmental fiscal 
relation defining functions and responsibilities among 
the various tiers of  Government as well as the financial 
resources to achieve stated objectives (R Ajibola, 2008).  
It is a term used to describe a system of  Government 
in which the fiscal responsibilities rest with the various 
tiers of  Government in the country. In Nigeria, for 
instance, the Federal, State and Local Governments have 
the joint responsibility of  generating and expending 
revenue to carry on Government responsibilities. Fiscal 
federalism therefore relates to the division of  tax income 
and functional responsibilities among the various tiers of  
Government in a Federal State. It follows, therefore, that 
both States and Federal authorities in a federation must 
be given the Constitutional power, each to have access 
to and power to control its own financial resources; each 
must have power to tax and to borrow for the financing 
of  its own services by itself  (A. Ferrara, 2010). 
Hilman had argued that in a federal system of  Government, 
there is allocation of  taxing power, federally collectable 
revenue and Federal expenditure to the different level/
components of  Government in a federation so as to 
enable them discharge their constitutionally assigned 
functions and responsibilities to their citizens. He added 
that in most federations, the taxes of  citizens (corporate 
and biological) constitute the major items that go into the 
common purse of  the federation (A. L. Hillman, 2003).  
In view of  the underlying imperatives of  fiscal federalism, 
Gruber Jonathan maintained that the principle of  fiscal 
autonomy and fiscal integrity is a sine qua non for the 
survival and continued existence of  a truly federal 
system of  Government. He advocated that each level of  
Government Federal, State and Local must necessarily 
have a minimum source of  independent revenue and full 
control of  such revenues in order to enable it discharge 
its constitutional responsibilities (J Gruber, 2010).  
As a matter of  the fact, the greater the fiscal independence 
through internally generated revenue amongst the 
component States, the stronger the foundation of  its 
federal system and the greater the chances of  the survival 
and continued existence of  the federation. It is therefore 
essential that each unit of  the Government in the 
federation must not only have identifiable independent 

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sources of  revenue, but that such independent sources 
should to a large extent, provide a solid base for its 
revenue needs and economic potentialities. 
Fiscal federalism is concerned with understanding which 
functions and instruments are best centralized and which 
is best placed in the sphere of  decentralized levels of  
Government (W. E. Oates, 1999).  In other words, it is the 
study of  how competencies (expenditure side) and fiscal 
instruments (revenue side) are allocated across different 
(vertical) layers of  the Government. An important part of  
its subject matter is the system of  transfer of  payments or 
grants by which a central Government shares its revenues 
with lower levels of  Government (J E Stiglitz, 1999).  
Federal Governments use this power to enforce national 
rules and standards.
There are two primary types of  transfers, conditional 
and unconditional. A conditional transfer from a Federal 
body to a province, or other territory, involves a certain 
set of  conditions. If  the lower level of  Government is to 
receive this type of  transfer, it must agree to the spending 
instructions of  the Federal Government. An example of  
this would be the Canada Health Transfer. (J. P. Faguet & 
C. Poschl, 2015) 
An unconditional grant is usually a cash or tax point 
transfer, with no spending instructions. An example 
of  this would be a federal equalization transfer.  This 
may be noted that the concept of  fiscal federalism is 
relevant for all kinds of  Government: Unitary, Federal 
and Confederal (C. K. Sharma, 2009).  The concept 
of  fiscal federalism is not to be associated with fiscal 
decentralization in officially declared federations only; it 
is applicable even to non-federal States (having no formal 
federal constitutional arrangement) in the sense that they 
encompass different levels of  Government which have 
de facto decision-making authority. This, however, does 
not mean that all forms of  Governments are ‘fiscally’ 
federal; only that ‘fiscal federalism’ is a set of  principles 
that can be applied to all countries attempting ‘fiscal 
decentralization’. In fact, fiscal federalism is a general 
normative framework for assignment of  functions to the 
different levels of  Government and appropriate fiscal 
instruments for carrying out these functions. 
Governor of  Rivers State of  Nigeria, Ezenwo Nyesom 
Wike said that he believes true fiscal federalism will 
strengthen the economy of  Nigeria as all sections will 
develop based on their comparative advantages (O 
Donatus, 2019).  Agbonika and Agbonika, 2015  clarifies 
that while “fiscal federalism constitutes a set of  guiding 
principles, a guiding concept” that helps in designing 
financial relations between the national and sub-national 
levels of  Government, fiscal decentralization on the 
other hand is a process of  applying such principles. 
Federal and non-federal countries differ in the manner 
in which such principles are applied. Application differs 
because Unitary and Federal Governments differ in their 
political and legislative context and thus provide different 
opportunities for fiscal decentralization. 
The concepts of  fiscal federalism are related to vertical 

and horizontal fiscal relations. The notions related to 
horizontal fiscal relations are related to regional imbalances 
and horizontal competition. Similarly, the notions related 
to fiscal relations are related to vertical fiscal imbalance 
between the two senior levels of  Government, which 
is the centre and the States/Provinces. While the 
concept of  horizontal fiscal imbalance is relatively non 
controversial, the concept of  vertical fiscal imbalance 
is quite controversial. Vertical Fiscal Imbalance (VFI) is 
conceptually distinct from the notion of  Vertical Fiscal 
Gap (VFG) (R. Bahl & R. Bird, 2008). 
Various activities of  the Government are undertaken 
at different levels. Federal Government redistributes 
the income to lower levels of  Government using tools 
that are called allocation or grant as the case may be. It 
does so because of  several reasons. Local Governments 
have often better information about preferences of  local 
people and costs. Another reason is that the Federal 
Government may try to offer States and localities 
incentives to undertake additional spending, from which 
will benefit also neighboring communities or the whole 
country. The composition of  federal grants in the United 
State of  America (USA) has changed significantly over 
the past 50 years. Nowadays, federal grants for health 
programs represent 65 percent of  the total amount of  
money distributed by federal grants, compared with less 
than 20 percent in 1980 (J. P. Faguet & C. Poschl, 2015). 
A number of  constraints and challenges both within 
and outside the fiscal system are part of  the problems 
that must be solved in order to achieve an effective fiscal 
system. The challenge to effective fiscal federalism can 
be identified to include the problem of  external debt 
overcharge, macro-economic instability, distresses in 
domestic financial system, lack of  political stability and 
above all, bad leadership or leadership ineffectiveness. 
The external indebtedness of  the country and inability 
to meet external debt service obligations had been a 
major constraint to fresh flow of  foreign investment into 
the country, while the distress in the domestic banking 
system also constitutes a distinctive to the much needed 
growth in private savings and investments. This is further 
complicated by the high level of  inflation experienced 
during the review period. 
High inflation is destructive to private savings as it 
continuously increases the share of  disposable income of  
consumption. It has been observed also that rapid growth 
and development cannot be achieved in an environment of  
political and social instability.  Political stability implies an 
orderly system for a change of  Government. The absence 
of  an orderly system and dedicated leadership is a great 
challenge to the operation of  an effective fiscal system 
needed to support economic growth. The challenge is 
formidable because it is the leadership that would dictate 
the pattern and direction of  fiscal engineering. 
In view of  the foregoing points, Ajibola identified the 
following as the major challenges of  fiscal federalism in 
Nigeria: 

i.The major problem could be seen in the mismatch 

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between revenue sources and functions of  the various 
tiers of  Government. The revenue allocated to the 
lower tiers of  Government is lower in comparison to 
the enormous duties expected of  them. This has actually 
influenced meaningful infrastructural development in the 
country.

ii. Frequent change in Government and incessant 
military coups reduce the 

operations and effectiveness of  fiscal federalism. This 
is because during military intervention, constitution is 
usually suspended in favour of  decrees and edicts. In this

situation, the principles of  fiscal federalism were 
affected and this in turn affected development in the 
country, especially within the state and local Government 
areas.

iii. Dwindling revenue due to reduction in the country’s 
export and fluctuations in the prices of  the nation’s 
commodities in the international commodity market are 
among the challenges of  the fiscal federalism in Nigeria.

iv. Economic and financial mismanagement which 
is reflected in corruption and financial impropriety 
of  Government functionaries have actually affected 
development in Nigeria especially where leaders in the 
country are corrupt and self  centered.

v. The sharing of  federal revenue reflects political 
applications rather than economic consideration. Rapid 
increase in fiscal unit thereby reduces the funds allocated 
to each State and Local Government in the country.
The Federal Government controls all the major sources 
of  revenue like import and excise duties, mining, rents 
and royalties, petroleum sales tax, petroleum profit tax 
and companies income tax among other revenues sources. 
State and Local Government taxes are minimal, hence this 
limits their ability to raise independent revenue and so they 
depend solely on allocation from the federation account 
(E. G. Emenuga, 2010).  Much of  the revenue collected 
by the Federal Government and distributed among the 
different tiers of  Government using the vertical revenue 
allocation formula is from the federation account. But it 
is our view that the Federal Government exercises too 
much control over its distribution. So many deductions 
are made from the total revenue collected before the rest 
is distributed according to the sharing formula.

Matters Arising
The significant aspect of  personal income that raises 
matters bothers on the ownership of  funds collected 
by State Governments through the State Boards of  
Internal Revenue under Personal Income Tax Regime. 
The Personal Income Tax Act being a Federal legislation 
delegates collection to States.
Where does the money so collected go to? Can States use 
the money without authorization of  their principal i.e the 
Federal Government? There are two major positions on 
the above controversy.
The first group is of  the view that the Federal Government 
being the initiator of  the PITA through section 4 of  the 
Constitution owns the money collected under PITA by 

the States and can, at best, give State Governments a 
percentage of  the collection pending division of  money 
from the Federation Account (Constitution Chapter, 
2011). 
The second group says that personal income tax is 
residence-based and belongs to collecting States even 
though they were acting as delegates of  the Federal 
Government. To resolve the controversy, there is need to 
consider the clear provisions of  the Constitution and the 
Personal Income Tax Act. There seem to be two separate 
consolidated revenue funds one being for the federation 
and the other for the States (Constitution Chapter, 2011).  
Section 80(1) of  the 1999 Constitution provides that:
All revenues or other moneys raised or received by the 
Federation (not being revenues or other moneys payable 
under this Constitution or any Act of  the National 
Assembly into any other public fund of  the Federation 
established for a specific purpose) shall be paid into and 
form one Consolidated Revenue Fund of  the Federation.
While Section 120(1) of  the Constitution provides that:
All revenues or other moneys raised or received by the 
State (not being revenues or other moneys payable under 
this Constitution or any Law of  a House of  Assembly 
into any other public fund of  the State established 
for a specific purpose) shall be aid into and formone 
Consolidated Revenue Fund of  the State.
It can be seen from the two provisions above that the 
Constitution creates two special accounts for money 
or funds made and earned by the Federal and State 
Governments. While section 80(1) is in respect to the 
Federal Government, Section 120(1) applies to revenue 
made by the State Government. This Consolidated 
Revenue Fund is different from the Federation Account 
(Constitution Chapter, 2011)  and State Joint Local 
Government Account.  The Federation Account is 
a special account which all revenues collected by the 
Government of  the Federation are paid into, except the 
proceeds from the personal income tax collected by the 
Federal Inland Revenue Service.
The State Joint Local Government Account on the other 
hand is a special account which all allocations to the Local 
Government councils of  the State from the Federation 
Account and from the Government of  the State are 
paid into i.e excluding the proceeds or revenue internally 
generated by the State. Whereas funds in the Consolidated 
Revenue Fund of  the Federation exclusively belongs 
to the Federation and is administered by the National 
Assembly to meet the administrative and other needs of  
the Federal Government and its agencies as they deem fit,  
funds in Consolidated Revenue Fund of  the States belong 
to the State and is similarly utilized by the State, under the 
exclusive appropriation of  the State House of  Assembly, 
to meet its needs. Save for taxes collected from personnel 
of  the Armed Forces, Nigeria Police, Ministry or 
Department of  Government charged with foreign affairs 
and the residents of  Federal Capital Territory which by 
operation of  Sections 80 and 162 of  the Constitution go 
into the Consolidated Revenue Fund of  the Federation 

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and by implication belongs to the Federal Government, 
the rest enter the Federation Account en route to its final 
destination which is the Consolidated Revenue Fund of  
the States. Section 163 of  the Constitution was apt when 
it stated:
Where under an Act of  the National Assembly, a tax or 
duty is imposed in respect of  any of  the items listed in 
item D part II of  the Second Schedule to this Constitution 
(i.e to say incomes or profits from persons other than 
companies/personal income tax, etc) the net proceeds of  
such tax shall be distributed amongst States on the bases 
of  derivation and accordingly-

(a)Where such tax or duty is collected by the 
Government of  a State or other authority of  the State, the 
net proceeds shall be treated as part of  the consolidated 
revenue fund of  that State.

(b)Where such tax or duty is collected by the 
Government of  the Federation or other authority of  the 
Federation, there shall be paid to each State at such time 
the National Assembly may prescribe a sum equal to the 
proportion of  the net proceeds of  such tax or duty that 
are derived from the State
Therefore, it can be seen that the Federal Government 
is not a beneficiary of  the personal income tax collected 
by the State Government. This is due to the combined 
provisions of  sections 80(1), 120(1) and 163 of  the 
Constitution which direct that the personal income tax 
collected by the State Government be paid into the 
Consolidated Revenue Fund of  the State and used for the 
benefit of  the State. 

Distribution of  State Generated Revenue
With respect to the means of  distribution of  the revenue 
generated or collected by the State Board of  Internal 
Revenue under the Personal Income Tax Regime, section 
163 of  the Constitution, the net proceeds of  such tax or 
duty collected shall be distributed among the States on 
the basis of  derivation.
The Supreme Court in Attorney-General of  the 
Federation v. Attorney-General of  Abia State & Ors. 
(No.2)  has interpreted this to mean that whatever net 
revenue is collected from any State by the Government 
of  the federation must be paid back to that State. The 
said section states aptly that:
Where under an Act of  the National Assembly, tax or 
duty is imposed in respect of  any of  the matters specified 
in item D of  Part II of  the Second Schedule to this 
Constitution, the net proceeds of  such tax or duty shall be 
distributed among the States on the basis of  derivation.
It is imperative to note that the net proceed is the 
whole amount collected as personal income tax minus 
the collection cost. This was made clear by Section 
165 of  the Constitution which enjoins the State to pay 
to the federation an amount equal to such part of  the 
expenditure incurred by the federation for the purpose 
of  collection of  taxes or duty which is wholly or partly 
payable to the States pursuant to the provision of  the 
Constitution. The rate of  this collection cost is put at 

5% by virtue of  the proviso to section 88(1) (b) of  the 
Personal Income Tax Act. Furthermore, where a tax or 
duty is collected by the Government of  a State or other 
authority of  the State, the net proceeds shall be treated as 
part of  the Consolidated Revenue Fund of  that State for 
the purposes distribution of  the net proceeds.  But where 
such tax or duty is collected by the Government of  the 
Federation, there shall be paid to each State at such times 
as the National Assembly may prescribe a sum equal to 
the proportion of  the net proceeds of  such tax or duty 
that are derived from the State. 
Personal income tax is an area that raises concerns of  
administration especially since the legislating Federal 
authority only delegate power of  collection to the State 
authorities. The usual rules of  agency suggest that an 
agent acting under a delegated authority cannot be 
heard contesting the subject matter of  agency with the 
principal. It is therefore the constitutional responsibility 
of  the National Assembly to make tax laws or amend 
existing laws as provided in the second schedule to the 
Constitution, and as may be required under section 4 
of  the Constitution so that each level of  Government 
can impose tax in respect of  any of  the items that it has 
power to legislate upon.

CONCLUSION
Fiscal Federalism is all about the allocation of  taxing 
powers and expenditures between the three tiers of  
Government i.e the Federal, State and Local Government. 
But a close look at the provisions of  section 2(1) of  
the 1999 CFRN as amended provides that Nigeria is a 
federation consisting of  the States and the federal capital 
territory. Taxing powers operates at two broad levels; the 
level of  imposition by legislation and collection. From 
the combined statutory provisions considered above, it is 
apparent that the Federal Government is not a beneficiary 
of  the personal income tax collected by the State 
Government. This is due to the combined provisions of  
sections 80(1), 120(1) and 163 of  the Constitution which 
direct that the personal income tax collected by the State 
Government be paid into the Consolidated Revenue 
Fund of  the State and used for the benefit of  the State. 

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