Five takeaways from Tax Reform Bills

By Opeyemi Bamidele

Nigeria is on the cusp of transiting from the archaic tax regime that has been retarding its collective prosperity to a progressive alternative that places businesses and people at the core of its general principles. But this transition has elicited highly spirited debates at the National Economic Council, NEC, and the National Assembly. Again, for me, the degree of debate the Tax Reform Bills, 2024, has generated in the last fortnight or thereabouts obviously attests to Nigeria’s democratic resilience. Its intensity also does not in any way indicate any crack or division in the Parliament or in the National Economic Council. Rather, it clearly represents a high mark of dispassionate interests that nearly all political actors have shown in building an economy insulated from external shocks and a federation that works efficiently for all. For this reason, I sincerely appreciate all the inputs into the process of reinventing the country’s tax regime for the fiscal repositioning of Nigeria.

But are the Tax Reform Bills truly regressive or antithetical to people’s aspirations, as some state governments have claimed? This is no doubt an indispensable question that every Nigerian—educated or uneducated, employed or unemployed, poor or rich—ought to seek an empirical answer to. However, the tax proposals should be understood from the lens of our country’s socio-economic and political standing. First, Nigeria is a 64-year-old federation with an economy heavily dependent on petroleum rents, royalties, and taxes. Undue reliance on oil revenue has infested her with the Dutch disease that stunted the growth of her non-extractive sector until recently. Also, despite its oil wealth, the country’s economic indicators have been bleak and disappointing since the January 1966 military takeover. As shown in diverse reports of the National Bureau of Statistics, this discontent is more evident in 33.88% inflation, escalating exchange rates, an abysmal economic growth rate, a 63% multidimensional poverty index, and declining investment inflows. Likewise, the country’s tax revenue to gross domestic product, GDP, slid to 9.4% in 2023, and the debt-revenue ratio was as horrible as 97% when the current government came on board. However, the latter has significantly shrunk to 65% within the last 18 months.

Since the last democratic transition in May 2023, these are grim realities that we have been contending with or have to contend with not just as a government sworn in “to pursue the greatest amount of good for the greatest number of people,” but as a people hungrily desirous of speedy socio-economic breakthrough. We are not supposed to play politics with such issues of significant public interest or prioritise parochial interests above people’s welfare. Rather, we are under the obligation to address these stark socio-economic realities in the overall interest of our people with creative and innovative legislative proposals that can rejuvenate productive activities nationwide and take away undue burden off the shoulders of the masses and business owners.

This is exactly the intent of the Tax Reform Bills, a set of four legislative initiatives that recently scaled the second reading and are now before the Senate Committee on Finance for wider stakeholders’ engagement. Creatively designed to empower Nigerians across all strata and boost the country’s economic growth, the bills comprise the Joint Revenue Board of Nigeria (Establishment) Bill, 2024; Nigeria Revenue Service (Establishment) Bill, 2024; Nigeria Tax Administration Bill, 2024; and Nigeria Tax Bill, 2024. The bills are not a product of fiat. But their origins are rooted in people’s aspiration for greater good and their quest for a federation that is built on equity, equality, and justice, three key principles that define the health and life of every multinational state like Nigeria. At different times, nearly all critical stakeholders—organised private sector, government institutions, trade associations, professional bodies, and civil society organisations ,CSOs—are duly consulted before its eventual introduction at both chambers of the National Assembly, and that engagement is still ongoing in order to secure more buy-in before the passage of the bills.

As the Parliament continues engagement with strategic actors in the public and private sectors henceforth, I honestly owe all my compatriots the onus of shedding light on the Tax Reform Bills, 2024, while pointing out five takeaways to explain what they are designed to accomplish. The takeaways attest to the imperative of the bills, which I strongly believe will end the rentier culture dominant in our domestic economy and create an entirely new environment competitive enough to guarantee the interest of all. I take up this responsibility not just as the leader of the Senate but also as an incurable patriot who daily seeks economic freedom for all Nigerians regardless of their parties, races, or religions. This is my conviction and indeed the thrust of the tax initiatives. The tax reform bills do not represent what some stakeholders have been painting in the public space. Rather, they reflect a commitment to equity, efficiency, and sustainable development by the present government, the cardinal campaign agenda on which we contested the 2023 race and secured a landslide. Why am I so convinced about the values the new tax initiatives will add once enacted? As people often say, books are judged by their contents and not by their covers. This dictum too applies directly to the proposals, which experts agree connote a set of ideas whose time has come. In the same way, my conviction is wrapped up in five takeaways I am sharing forthwith.

The first takeaway specifically revolves around the review of the sharing formula of the value-added tax, VAT, accrued to all the federation. Under Section 77, the Nigeria Tax Administration Bill proposes a reduction of Value Added Tax distributable to the federal government from 15% to 10%. The bill also concedes 55% to state governments and 35% to the local government councils. Under Section 40, the 2004 Value Added Tax Act stipulated that a 20% derivation shall be reflected in the distribution of the allocation amongst states and local governments. But the reform bill now tinkered with this provision in favour of the subnational governments. From 20% under the current regime, Section 22(12) of the Bill recommended that a 60% derivation shall be reflected in the sharing of Value Added Tax standing to the credit of states and local governments in the spirit of fairness and justice. Diverse interests nationwide have expressed concerns about this provision on the grounds that it may negatively impact some governments.

I differ with these critical interests on three grounds. First, the provision was introduced to dissuade some state governments from dropping litigation against the federal government with respect to Value Added Tax. Because Value Added Tax is considered a residual matter, some state governments challenged the power of the federal government to collect and administer Value Added Tax, and they won in the courts of first and second instances. But the need to prevent the cases of non-remittances inspired the federal government to step in and collect Value Added Tax on behalf of the federation. So, increasing the derivation from 20% to 60% will be motivation for the litigants to drop the suit.

Also, the provision was introduced to boost the economic competitiveness of the subnational entities. Since Value Added Tax is derived from the thriving economic activities, the provision is designed to inspire the state governments to come up with initiatives that boost productive activities from which they generate more taxes within their spaces. Finally, the provision is meant to mainstream equity, equality, and justice into the administration and distribution of Value Added Tax. That is the centrality of federalism, a system our founding fathers bequeathed to us and we have been operating since independence.

With the new sharing formula, the shares of both the states and local governments now account for 90% of total Value Added Tax collected across the federation. This increase literally does not support claims of the state governments that they will not be able to meet their basic obligations if the new tax bills eventually sail through. Rather, as different data have shown, this particular initiative will obviously increase Value Added Tax proceeds due to the state governments once its enforcement takes off. As a matter of fact, this is the first time in the last two decades or thereabouts that the federal government is making such a huge concession to guarantee the fiscal stability of the federating units, encouraging them to run efficient and competitive governments and as well reduce their dependence on the statutory allocations.

Another takeaway from the Tax Reform Bills is enshrined in Section 22 (5-9) of the Nigeria Tax Administration Bill, which in detail provides for tax incentives for defined beneficiaries or entities that will either be exempted from the taxable community or be incentivised with a view to spurring economic growth and guaranteeing collective prosperity. The section, in specific terms, recommends zero Value Added Tax on exports and essential consumptions by the masses. If enacted at last, this provision presents two broad benefits, which none of its critics can ever doubt or deny. In the first instance, goods, services, and intellectual property exports will benefit from zero-rated Value Added Tax and other incentives, which obviously boost the trade competitiveness of Nigeria on the global stage. The provision also exempts food and other related items from Value Added Tax . This obviously will crash the rising food prices and bring huge relief to 133 million citizens now classified as multidimensionally poor.

Beyond these benefits, this provision will have far-reaching implications on public welfare and people’s purchasing powers at large with zero Value Added Tax on essential goods and services. This offer simply suggests that all citizens, regardless of their social status or economic standing, will enjoy outright tax exemption on such essential items as food, education, and healthcare. The exemption further covers, among others, rent, public transportation, and renewable energy. Each of these considerations provides relief for low-income households that spend nearly 100% of their income on basic necessities. This is a historic provision, which, as shown in official records, no government has ever offered since the birth of the Fourth Republic. If the Tax Reform Bills fall through, it means low-income earners will continue reeling under the tax burden and spending almost all their earnings on basic necessities of life that the bills will empirically address.

The third takeaway is, for me, perhaps the most exciting of all, purely because it focuses on the economically disadvantaged or vulnerable working class. Unlike the extant regime that perpetually places them under tax obligations, Chapter 2 of the Nigeria Tax Bill outrightly takes the burden off their shoulders. But it sets a threshold for the working class that can benefit from the proposal. The threshold covers all employees earning N800,000 and below annually. It also captures all minimum wage earners or all low-income households within the threshold. This class of people will definitely enjoy outright exemption from personal income tax with a view to boosting their purchasing powers and de-escalating food inflation. This equally suggests that over 90% of workers across sectors will see a reduced tax burden when the proposed regime becomes effective. At a time of global economic headwinds, this offer means a lot for every household within the threshold. This is in addition to tax exemptions on all essential goods and services from which all citizens will benefit. The core duty of the government remains providing institutionalised and well-structured social support for the vulnerable and not complicating their burdens, considering the current global economic realities that spare no country or territory worldwide.

Fourth, aside from the incentive for minimum wage earners, the tax reform bills equally exempt small businesses from the payment of taxes. It first reviews the financial threshold of businesses that can tap into such benefits. Unlike the subsisting regime that grants exemptions to businesses with N25 million annual turnovers, the tax reform bills raise the threshold to N50 million, which unequivocally accounts for a 100% increase. The bill also exempts small businesses with total assets of N250 million. Again, this is an audacious, indeed progressive initiative with the intent of providing an environment that can speed up the growth of such businesses rather than suffocating them. With these provisions, thousands of businesses within this threshold will be relieved of tax burden. The idea behind this initiative is not far-fetched. First, micro, small, and medium enterprises, MSMEs, constitute about 48% of our GDP. Second, they provide about 87% of total employment nationwide. Third, they have a strong presence across all 774 local government areas. All this data obviously attests to the crux of granting small businesses with N50 million annual turnover tax exemption and its significance in building an army of vibrant entrepreneurs.

The last takeaway largely borders on the long-standing concerns about multiple taxation. Conglomerates, multinationals, and organised private sectors have been complaining about this syndrome for decades. But the tax proposal now offers relief under Section 56 of the Nigeria Tax Bill. The proposal now opts for a significant reduction in company income tax rather than sticking to the subsisting regime that multiplies their tax obligations. The reduction will be effected in two successions. From 30% currently, the bill proposes 27.5% in 2025 and 25% in 2026, which, according to development data, is conservative compared to 27% in South Africa and 30% in Kenya. The bill also introduces a 4% development levy aimed at harmonising the multiplicity of taxes and levies paid by companies. It also maps out the plan to reduce the development levy to 2% in 2030, which will be devoted solely to funding the Nigerian Education Loan Fund, NEFUND, thereby phasing out the 2.5% education tax, the 0.25% National Agency for Science and Engineering Infrastructure tax, and the 1% National Information Technology Development Levy. Instead of all these earmarked taxes, the company will only pay a 4% development levy till 2029 and 2% afterward for the funding of Nigerian Education Loan Fund, a scheme that has benefitted no fewer than 10,000 students already.

These are not the only takeaways from the Tax Reform Bills, 2024. In all, however, the initiatives are largely designed to revolutionise our national economy, end the era of liquidity crisis, and promote a truly competitive environment for the businesses, irrespective of the sizes or structures, to seamlessly thrive. The Nigeria Revenue Service Bill, for instance, seeks synergy between and among revenue agencies across the three tiers of government. The synergy includes the power, though discretionary, optional, or voluntary, to delegate tax collection functions between them. At large, the bill aims at harmonising revenue administration of the federation, reducing the cost of revenue collection in line with the global best practices, and removing all forms of bottlenecks inhibiting revenue remittances to the federation by government agencies. Nothing in these bills ever suggests that one part of this federation will dominate the other; neither does it depict that its provisions will ignite a fiscal crisis at the subnational level.

From all the proposals that promise to guarantee the fiscal stability of the federation, can the Tax Reform Bills impoverish the people as some state governors have claimed? Can they trigger fiscal crises at the sub-national level in line with their conjecture? Will the bills increase the burden on the minimum wage earners? Will they de-incentivise small businesses from operating competitively? These are the fundamental questions that this piece has sufficiently answered based on facts and figures. Rather than suspecting the intent of these legislative proposals, all stakeholders—state governors, legislators, the private sector, civil society, and professional bodies—must now come together in unity of purpose, build common grounds for the tax proposals, and trust the present government with the far-reaching initiatives designed to build a resilient economy that can stand the rage of global economic headwinds, whether now or in the future. Most respectfully, therefore, I urge all stakeholders, whether in the North or the South, to let all roads lead to the public hearing on these bills and enable those who have concerns to place them on the table for public discourse and consensus.

Senator Bamidele, Leader of the 10th Senate, writes from Abuja