President Tinubu’s proposed tax reforms have sparked conversations nationwide, raising questions about their impact on Nigeria’s future. This has led to excitement and concern, with many eager to understand what these reforms mean. After carefully reviewing the bill, I will explain it in simpler terms and address common misconceptions. Let’s break it down together and clear up the confusion.
Misinformation gets people talking, which can spark curiosity, but it often leads to confusion. That’s why clear, open conversations are critical. These tax reforms are complex, and the government needs to ensure everyone understands their goals and benefits.
One big topic is the Value Added Tax (VAT). Some argue that the new rules will only help big states like Lagos and Rivers, leaving smaller states behind. But that’s not true. VAT revenue will now be shared based on where goods and services are bought, following global best practices for fairness. Section 152 of the proposed tax bill outlines methods for fair VAT revenue sharing. While it does not explicitly reference states or an ‘equality factor,’ it ensures that all regions benefit equitably. Smaller states are guaranteed a significant share of VAT collections to support development and essential services, even if their revenue contributions are lower. This setup provides fairness and encourages all states to grow their local economies.
Some concerns center on the Nigeria Revenue Service (NRS), with critics worrying it gives too much power to the federal government. However, this coordination is necessary to streamline tax collection and eliminate inefficiencies. Another major reform, as reported by Vanguard, is the Nigeria Revenue Service (Establishment) Bill, which will replace the old Federal Inland Revenue Service Act. This change goes beyond surface-level updates; it modernizes revenue collection to meet the needs of today’s Nigeria. The new plan will help the government use technology more effectively, improve tax collection, reduce losses, and ensure all tax money is properly tracked. This is important for enhancing public infrastructure, social services, and the overall quality of life in the country. Chapter Four (Sections 119-122) also addresses agreements to remove double taxation, particularly in cross-border scenarios, allowing taxpayers to claim relief or credits. This creates a business-friendly environment while matching Nigeria’s tax practices with international standards.
States will still collect their own taxes, but the NRS will coordinate efforts to improve efficiency and enforce these double taxation agreements, further simplifying the process for taxpayers. Additionally, Section 153 expands VAT collection responsibilities by requiring Federal, State, and Local Government agencies, as well as appointed persons, to withhold VAT on taxable supplies made to them. The bill also introduces self-accounting measures, ensuring VAT compliance even when suppliers fail to include VAT on invoices. These provisions strengthen transparency, improve tax compliance, and streamline administration, reducing revenue leakages. The NRS also plans to modernize the tax system using technology, reducing hassle for taxpayers.
Another critical aspect of the reforms involves deductions by companies and provisions for small and medium enterprises (SMEs). Chapter Two, Section 20, outlines what businesses can deduct when calculating profits or income from trade. Legitimate business expenses like interest on debts, rents, wages, and pension contributions are deductible if tied to income generation. However, companies cannot deduct items like capital losses, fines, or unrelated expenses. These rules ensure fiscal discipline and fairness across businesses.
The bill also provides specific tax relief for SMEs. Small businesses with a gross turnover of ₦50,000,000 or less are exempt from corporate tax, allowing them to retain more income and reinvest in their operations. However, professional service providers are excluded from this category, reflecting their higher revenue potential. This exemption fosters growth among smaller businesses while maintaining targeted support. Despite the tax relief, SMEs are still required to comply with tax administration obligations, such as filing returns and maintaining accurate records, which could impose operational challenges for some.
While the turnover cap encourages SMEs to stay within manageable revenue levels, it may discourage expansion due to the potential tax burden when crossing the threshold. Introducing phased tax rates for businesses transitioning out of the SME category could mitigate this issue. Additionally, simplifying compliance processes through digital platforms or pre-filled forms would ease administrative burdens. By supporting innovation and economic inclusivity, the reforms create opportunities for SMEs to thrive in a competitive environment.
Additionally, Section 166 provides specific rules for research and development (R&D) expenses, allowing companies to deduct up to 5% of their turnover for R&D purposes in any given year. This deduction encourages innovation while maintaining limits to prevent abuse. Furthermore, any proceeds from the sale or transfer of research outcomes must be taxed, ensuring that companies benefiting from these deductions contribute back to the economy when commercializing their innovations.
Low-income families are also protected under these reforms. Essentials like food, electricity, and cooking gas are exempt from VAT, according to Section 146. The increase in VAT rates—from 7.5% to 15% by 2030—will be gradual, giving families and businesses time to adapt. Basic items will remain at 0% VAT starting January 2025, while certain specified supplies will have a nil VAT rate from the same date. Other taxable supplies will see incremental VAT increases: 10% in 2025, 12.5% from 2026 to 2029, and 15% from 2030 onwards. This phased approach balances revenue generation with minimizing economic shocks.
The personal income tax system also follows a progressive model to ensure fairness. After relief allowances and exemptions under Section 30, the taxable income is taxed at graduated rates: 0% for the first ₦800,000, 15% for the next ₦2,200,000, and 18% for the next ₦9,000,000. Higher-income brackets are taxed at 21% for the next ₦13,000,000, 23% for the next ₦25,000,000, and 25% for amounts exceeding ₦50,000,000.
This structure mirrors successful systems in countries like the U.K. and India, where progressive tax brackets encourage equity while generating significant revenue. However, in cases like the U.S., steep taxes in higher brackets have led to instances of tax avoidance, underscoring the importance of balancing rates with compliance incentives. In Nigeria, the reforms aim to prevent these challenges by focusing on transparency and accountability.
Some fear these reforms will take power away from states, but it’s actually the opposite. For states with low VAT collections, these reforms provide a structured plan to improve collection practices. By involving Federal, State, and Local Government agencies in VAT withholding, as outlined in Section 153, the bill ensures that even states with weaker administrative capacity can capture VAT revenue effectively.
Self-accounting measures and new technology systems introduced by the NRS are designed to make tax compliance easier for everyone. These tools help reduce inefficiencies, ensure taxes are paid on time, and minimize potential losses from leakages. Section 154 emphasizes VAT administration and outlines methods for managing VAT revenue but does not explicitly allocate a specific percentage directly to states.
Under the current VAT sharing system, the Federal Government receives 15%, State Governments get 50%, and Local Governments take 35%. Among the states, 20% of the share stays in the state where the VAT was collected, 30% is distributed based on population, and the remaining 50% is split equally. This system ensures fairness by giving all states enough resources to handle local needs while rewarding those that generate more revenue.
Under the proposed reforms, according to The Cable News, the revenue-sharing formula would shift to 10% for the Federal Government, 55% for State Governments, and 35% for Local Governments. This adjustment aims to empower states by giving them a larger share of VAT revenues to address local needs and development priorities.
Additionally, under the proposed reforms, 60% of VAT revenue would be distributed based on where it was collected, meaning states that contribute more to VAT collections would receive a larger share. This approach encourages states to grow their economies while ensuring fairness in revenue sharing. This approach not only encourages economic activity within states but also ensures fairness by matching revenue distribution with contributions.
This encourages high-revenue states like Lagos and Rivers to continue driving economic growth while equipping lower-revenue states like Zamfara and Yobe with the tools to improve their collection practices. By combining equity with accountability, this approach supports all states in funding critical services and fostering national growth. To make the most of these funds, states must show fiscal responsibility and transparency, ensuring investments in education, healthcare, and infrastructure drive meaningful development.
Other countries offer valuable lessons for Nigeria. India faced challenges during its 2017 Goods and Services Tax (GST) rollout, but public education and gradual adjustments helped build trust and acceptance. South Africa’s VAT system ensures fairness by protecting low-income households, demonstrating how targeted policies can balance equity and revenue. These examples show that transformative changes succeed when carefully planned and clearly communicated to the people affected.
Making these changes won’t be easy. In the short term, there might be pushback as people and businesses adjust. That’s why explaining these reforms in simple terms and answering questions is so important. Community meetings, social media, and public campaigns can help build trust and understanding. In the long run, these reforms could make Nigeria’s economy stronger by encouraging states to rely on themselves and compete in healthy ways. To succeed, the government and the people need to work together.
If done right, these reforms could lead to fairness and growth for everyone. Nigeria’s tax system has needed fixing for a long time, and this is a big step in the right direction. Leaders must handle this responsibly, and citizens should stay informed and involved. Together, we can make these changes work and set Nigeria on a path to prosperity.
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