Nigeria’s Proposed Tax Reform Bill, Explained

A proposed amendment to Nigeria’s tax laws has sparked debates nationwide, especially concerning the sharing formula for value-added tax (VAT) revenue. The reform is part of a broader tax reform package introduced by President Bola Tinubu’s administration to overhaul Nigeria’s tax system.

The Four Proposed Tax Reform Bills

The Senate has advanced four tax reform bills to their second reading:

1. The Joint Revenue Board of Nigeria (Establishment) Bill, 2024 (SB.583)
2. The Nigeria Revenue Service (Establishment) Bill, 2024 (SB.584)
3. The Nigeria Tax Administration Bill, 2024 (SB.585)
4. The Nigeria Tax Bill, 2024 (SB.586)

Among these, the Nigeria Tax Bill (SB.586) has generated significant controversy, particularly among state governors. Meanwhile, the House of Representatives has indefinitely suspended debates on these tax reforms.

What is the Nigeria Tax Bill?

The Nigeria Tax Bill seeks to redefine how tax revenues are distributed between the federal, state, and local governments. It addresses issues like personal income tax, corporate tax, national insurance contributions, and VAT. The bill outlines who should pay taxes and provides exemptions for specific income groups.

A key aspect of the bill is the revision of the formula for distributing VAT revenue.

How Does the Tax Reform Bill Affect States?

The proposed bill introduces a substantial change in the VAT revenue-sharing formula. Under the current system, only 20% of the VAT pool is allocated based on derivation (where the tax is generated). The new bill increases this allocation to 60%, meaning states that contribute more VAT revenue will receive larger shares.

For example, if the total VAT pool is ₦100 billion and Lagos State generates 50% of the total, the state would receive ₦30 billion under the new formula. This is a significant increase compared to the current system.

However, states that contribute less to VAT revenue, particularly those in the northern regions, are expected to receive lower allocations under the new arrangement.

Why is the Bill Controversial?

The controversy stems from the perceived imbalance in benefits among states. Governor Babagana Zulum of Borno State has expressed concerns over the implications for northern states.

“We feel the VAT provision in the tax law heavily favors Lagos and Rivers States. Based on our calculations, only these states will benefit. Our research shows we will lose out significantly,” Zulum told Channels Television.

This sentiment reflects broader concerns from states with lower economic activity and VAT contributions.

Other Proposed Changes in the Bill

The Nigeria Tax Bill includes several other reforms aimed at easing the tax burden on low-income earners and small businesses:

1. Income Tax Relief for Low Earners:
   • Individuals earning ₦800,000 or less annually will no longer pay personal income tax, an increase from the previous exemption threshold of ₦300,000.
   • Those earning above ₦800,000 but below the top earners’ bracket will pay reduced rates.
2. Support for Small Businesses:
   • Small and medium enterprises (SMEs) with annual revenues below ₦50 million will be exempt from corporation tax, allowing them to reinvest profits for growth.
3. Higher Taxes for High Earners:
   • The bill proposes higher tax rates for top income earners, reflecting a progressive taxation approach.

Does Nigeria Need Tax Reform?

Financial expert Gbolahan Olojede argues that Nigeria’s current tax system is outdated and in dire need of reform. “The tax law we use is very old, and we need to modernize it,” Olojede said.

He highlighted several issues with the existing system:

• Excessive and overlapping taxes.
• Poor distribution of the tax burden.
• Inefficient collection methods.
• Low tax-to-GDP ratio, one of the lowest globally.
• A significant portion of the population remains outside the tax net.

The proposed tax reforms aim to address these issues by simplifying the tax system, improving revenue allocation, and expanding the tax base.

Conclusion

The Nigeria Tax Bill represents a significant step toward addressing longstanding inefficiencies in the country’s tax system. However, its impact on VAT allocation has raised concerns about fairness and equity among states. As the debate continues, stakeholders must find a balance between incentivizing economic activity and ensuring equitable revenue distribution.