Revenue allocation is one of the Constitutional functions of the Revenue Mobilization Allocation and Fiscal Commission. Specifically, Part I, Paragraph 32 of the Third Schedule to the 1999 Constitution of the Federal Republic of Nigeria, which states that the Commission is to “review, from time to time, the revenue allocation formulae and principles in operation to ensure conformity with changing realities. Provided the any revenue formula which has been accepted by an Act of the National Assembly shall remain in force for a period of not less than five years for the commencement of the Act” Nigeria system of government has three levels namely, Federal, State and Local Governments.
Each tier has its own constitutional responsibilities. And in a situation where the allocation of tax powers creates a resource imbalance amongst the stakeholders, it necessitates the need for an arrangement to allocate centrally-collected revenue so that revenue and development could spread evenly throughout the country. This is manifested in the Nigerian case, where more lucrative taxes are controlled by the Federal Government.
Fiscal federalism is a system of taxation and public expenditure in which revenue-raising powers and control over expenditure are vested in various levels of government within a nation, ranging from the national government to the smallest unit of local government (Anyafo, 1996). Basically, fiscal federalism emphasizes on how revenues are raised and allocated to different levels of government for development. There is the problem of how to allocate revenue to different tiers of government in relation to the constitutionally assigned functions.
The discordance between fiscal capacity of various levels of government and their expenditure responsibilities, the non-correspondence problem, is a striking feature of the Nigerian federal finance. There is also the problem of how revenue should be shared among the states and local councils. According to the resource allocation function of the government, revenue is allocated to federating units of a country for economic development, otherwise called fiscal federalism. Nigeria’s fiscal federalism has emanated from historical, economic, political, geographical, cultural, and social factors. In all of these, fiscal arrangements remain a controversial issue in allocating distributable pool account (DPA) of the federation since 1946 (Ekpo, 2004).
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