
How Nigeria’s Tax Reform Bill Affects Economic Growth and Regional Equity
President Bola Tinubu’s proposed Tax Reform Bill has generated a lot of discussion in Nigeria. Its goal is to restructure the nation’s tax administration and collection systems, offering a chance to establish a more efficient and equitable taxation model. The bill’s core provisions include changes to the Value Added Tax (VAT) revenue-sharing formula and exemptions for small businesses and ordinary Nigerians. While these changes have the potential to boost the country’s economy, they also highlight serious problems with the federal structure, especially the disparities in wealth between the States and Local Governments.
Even though the President has reiterated that the purpose of the Tax Reform Bills is to shield small businesses from paying taxes and to establish a framework for dealing with the persistent problem of tax evasion and avoidance. However, northern politicians have fiercely opposed the measures, claiming the revisions are directed at their area.
The proposed VAT revenue-sharing model is one of the reform’s most controversial features. The state where goods and services were spent will receive 60% of VAT revenue under the new model, with the remaining 20% being divided equally among all states and 20% being split according to population. This is a change from the current system, which distributes money according to the location of corporate tax payments, which are frequently made in states like Lagos and Rivers that have a large concentration of corporate headquarters.
This reluctance of some state government, however, also reveals a more serious problem: some states’ excessive reliance on federal funding rather of actively enhancing their own internal revenue-generating capabilities.
By concentrating fiscal authority at the federal level, critics contend that the measure violates the fundamentals of federalism and may lessen states’ financial independence and capacity to adequately serve their constituents.
Furthermore, the plan suggests gradually raising VAT rates over the coming years, which has sparked worries about the possible financial strain on businesses and consumers, particularly in a nation already dealing with rising inflation and living expenses. These concerns are heightened by the imposition of new excise taxes on services like gaming, gambling, and telecommunications.
What does the said bills consist of:
- Nigeria Tax Bill
- Nigeria Tax Administration Bill
- Nigeria Revenue Service (Establishment) Bill
- Joint Revenue Board of Nigeria (Establishment) Bill
These are the four tax bills. However, because of specific suggestions, the “Nigeria tax bill” and the “Nigeria tax administration bill” are the most contentious. The former outlines how the government would distribute tax revenue to the people, also includes the harmonized levy (local government), property tax (state and local government), and customs taxes. most importantly discusses who should pay taxes and who shouldn’t.
The proposed tax measure addresses income tax, which comprises capital gains tax (CGT), petroleum profit tax (PPT), corporation income tax (CIT), and personal income tax (PIT).
Value-added tax (VAT), excise tax stamp duties, and development levy (tertiary education tax (TET), NITDA, etc.) are other topics included in the bill.
HOW THE TAX BILL AFFECTS STATES IN NIGERIA
Just 20% of the pool was distributed according to derivation under the previous distribution procedure. 60% of the proceeds will be shared by the government under the new tax reform package.
For instance, if we receive N100 for the pool and, according to derivation, we say 60%. Let’s assume that Lagos State contributes 50% of the total amount. That is, if we take N60 as the government’s part from derivation, Lagos State will receive 50% of that amount, which would be N30.
The state where goods and services were spent will receive 60% of VAT revenue under the new model, with the remaining 20% being divided equally among all states and 20% being split according to population.
WHY IS THE BILL CONTROVERSIAL?
Critics say the VAT allocation is the main cause of the tax bill’s controversy.
60% of the money should be given to the source. States are compensated by Derivation according to their contribution to the pool. States with minimal contributions are projected to get less than those that receive more under the new legislation.
OTHER BILLS INCLUDED IN THE TAX BILL
The measure will impose no taxes on individuals with incomes of N800,000 or less. The current maximum is N300,000 naira. People who make less than that amount are not required to pay any personal income tax.
For individuals who make more than N800,000 but less than the top earners, the bill suggests reduced rates.
For high earners, the bill suggests higher taxes.
Small and medium-sized businesses with annual revenue under N50 million are exempt from paying corporation tax. Therefore, they can profit, have fun, or use it to grow their business.
The plan suggests a zero percent VAT on healthcare, education, and food. Additionally excluded from the consumption tax are energy, rent, and transportation.
The paper states that the VAT rate on non-necessary items (such as jewelry and electronics) will be raised in part to make up for the decrease on essential items, which also include medications and water.
According to the measure, VAT will rise to 10 percent by 2025 from the current 7.5 percent in 2024.
Along with lowering the CIT from 30 percent to 27.5 percent by 2025 and then to 25 percent by 2026, the law also aims to raise the annual tax threshold for small enterprises from N25 million to N50 million.
Additionally, in order to promote export growth, services and intellectual property exports will be subject to zero percent VAT, introducing fiscalization, electronic invoicing, and non-deductibility for income taxes.
A 4 percent development charge, a 5 percent telecommunications services tax, and a 5 percent excise duty on lottery and gaming revenue are among the other elements.
CONCLUSION
The tax reform’s wider ramifications include the possibility of redefining Nigerian governance. Tax reform may promote a change to more responsive and accountable leadership by decentralizing tax administration to give states and local governments more authority. Although this shift will not be simple, it is an essential step in promoting sustainable economic growth and lessening the nation’s excessive reliance on oil earnings.
Transparent execution and meaningful communication between the president, governors, and stakeholders are ultimately what will determine the result of this reform process. Nigeria may make a big step toward achieving an effective growth and economic development by promoting budgetary autonomy.
The bill’s measures also promote equity, transparency, and accountability.