Nigeria hint at tax increase could be a risky gamble
On December 13th Nigeria’s finance minister, Zainab Ahmed, hinted at tax rises by mid-2022 as the legislature considers an update to current tax laws. In this analysis, the Economist Intelligence Unit, EIU says it is a risky gamble and in particular cautions against raising company income tax already set at 20-30%
The Finance (Amendment) Bill 2021—being debated by the legislature for passage into law—updates current tax legislation for efficiency and clarity. It also expands the proxy powers of the Federal Inland Revenue Service (FIRS) to collect taxes on behalf of other entities. Although the new finance law proposes amendments to taxation terms and processes, it does not specify whether rates will be changed. The proposed tax law amends elements of the capital gains tax, company income tax, personal income tax, stamp duties and value-added tax (VAT), creating a window for various increases.
Ongoing litigation between the federal and subnational state governments over which of them is entitled to collect VAT and stamp duties is creating a bottleneck. The authorities think that the current legal constraints should be removed by mid-2022 (possibly hinting at an out-of-court settlement), when they plan to update the finance law again and stipulate which taxes will be increased.
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VAT, currently at 7.5%, will probably remain unchanged before an election in early 2023, but we believe that, depending on the court outcome, there will be increases after the poll. It would be risky to raise corporate tax, currently at 20-30%, in 2022 with the economy remaining fragile. With most manufacturing firms operating at half-capacity, and costs high for firms amid infrastructural and logistical constraints, there may not be a substantial payoff for the authorities should they raise rates. Stamp and excise duties are possible contenders for an earlier increase, however.
Pro-rata revenue collection for the current financial year has been satisfactory, with the federal government’s take being 75% of the budget target by September 2021. Nevertheless, the federal debt service (which often consumes 70-90% of revenue) continues to climb as a result of high borrowing costs, leaving Nigeria with an acute shortage of fiscal space. In the context of pressing expenditure priorities relating to development and security, we have long held the view that meaningful tax rises are forthcoming in the medium term.
Impact on the forecast
We forecast a budget deficit of 3.4% of GDP in 2022, which is wide by Nigerian standards, but we may revise this down if tax changes are more sweeping than expected. We still expect the deficit to contract to 2.8% of GDP by 2023 as a result of higher VAT.