There is hardly anyone who will disagree that Nigeria needs a fundamental tax reform. This, after all, is a country with one of the most cumbersome tax regimes in the world, where tax laws and regulations are overlapping and burdensome, where the administration and collection of taxes are ridden with inefficiency and corruption, and where tax avoidance and evasion are prevalent. Consequently, at about 9 per cent, Nigeria has the lowest tax-to-GDP ratio in sub-Saharan Africa, which, coupled with erratic and dwindling revenue from predominantly oil-based exports, puts the country in a fiscal quagmire. Truth is, Nigeria’s tax system is in deep crisis and direly needs a radical reform.
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However, while crises are a trigger for fundamental reforms, making the status quo unsustainable, they are not a sufficient condition for successful reforms. In a democracy, there is a critical need for an explicit electoral mandate for reform and for a carefully crafted policy design, shaped by a broad consensus for change. In a recent report, the IMF said: “A strong electoral mandate for policy changes, underpinned by effective communication and far-reaching efforts to convince voters and stakeholders of the need for reform during an electoral campaign, is instrumental in several instances for reform success.”
Unfortunately, neither a strong electoral mandate nor consensus building, let alone a carefully crafted policy design, informs the radical proposals that President Bola Tinubu put forward in the tax reform bills he recently sent to the National Assembly. Of course, Tinubu would argue that the deep crisis in Nigeria’s tax system justified the far-reaching reform proposals. But he is naïve to think that he can push through fundamental tax reforms without a strong electoral mandate and without building a genuine national consensus for such reforms. It is, thus, not surprising that the proposals are deeply controversial and, in truth, would face serious implementation challenges, even if the National Assembly were to pass them into law.
Let’s start with the policy design. In October, President Tinubu sent four tax reform bills to the National Assembly. They are the Nigeria Tax Bill, the Joint Revenue Board (Establishment) Bill, the Nigeria Revenue Service (Establishment) Bill and the Nigeria Tax Administration Bill. All the bills emanated from the work of the Presidential Committee on Fiscal Policy and Tax Reforms inaugurated by Tinubu in August 2023 and chaired by Taiwo Oyedele, a renowned tax expert, who had written widely on the issues covered by the bills.
“Unfortunately, neither a strong electoral mandate nor consensus building, let alone a carefully crafted policy design, informs the radical proposals that President Bola Tinubu put forward in the tax reform bills he recently sent to the National Assembly.”
To be fair, judged against the goal of streamlining Nigeria’s tax system, the bills are broadly positive. For instance, repealing 11 existing tax laws and bringing them under the omnibus Nigeria Tax Bill must be welcomed, and so must making the proposed Nigeria Revenue Service (NRS), which would replace the Federal Inland Revenue Service (FIRS), the sole collector of all federal taxes, including those currently collected by agencies like the Nigeria Customs Service. Yet, it would be premature to describe the harmonisation proposals as a game changer, given the scale of the problem. For instance, in a recent report on Nigeria, the WTO said that “companies make about 60 official tax payments per year and about 200 unofficial tax payments.” Would the proposed tax reforms radically change that? Utterly doubtful. And would concentrating the tax-collection powers of all federal agencies in the NRS simply concentrate endemic inefficiency and corruption in one powerful agency? Most likely!
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The Presidency described the bills as “pro-poor and pro-growth” How true? Again, to be fair, one can describe as pro-poor and pro-growth proposals to exempt any person earning N800,000 or less from income tax and to reduce the company income tax from 30 percent to 25 percent, while exempting small companies from paying income tax. However, what the proposed reform gives with one hand – reduced and zero-rated income tax – it takes with another – a hike in Value Added Tax (VAT), which would rise from the current 7.5 percent to 15 percent in 2030. Truth is, any government that says it is helping the poor but hikes up VAT for businesses is lying. Why? Faced with high VAT rates, businesses will either raise the prices of goods and services (inflation) and/or, due to unsold goods/reduced profits, retrench workers/reduce recruitment (unemployment), both of which will hurt the poor.
Well, by contrast, the tax reform proposals are pro-billionaires. Think about it. The tax rate for anyone earning N50m or more per annum is 25 percent. Thus, someone earning N50m per annum is lumped together with a billionaire. In a country where many billionaires are state-made or corruptly enriched themselves, and where there’s no culture of philanthropic giving among the wealthy, it is perverse to put a billionaire and someone earning N50m per annum on the same tax rate. In the UK, the highest tax rate, which captures billionaires, is 45 percent. But Tinubu’s tax reforms shield the super-rich while penalising the middle-class!
Which brings us to the most controversial aspect of the proposed tax reforms. In the Nigeria Tax Administration Bill, Tinubu proposes to introduce a new VAT distribution model, where 60 percent of the VAT allocation accruing to the states are based on derivation; it would replace the current methodology which attributes VAT to the place of remittance with one that attributes VAT to the place of supply and consumption of goods and services. The proposed change would benefit the South, which contributes the lion’s share to the VAT pool (e.g., N387.06bn out of N444.19bn in August) but receives a disproportionately lower allocation (N149.09bn). By contrast, it would disadvantage the North, which contributes a minuscule share (N13.69bn in August) but receives a disproportionately higher allocation (N59.17bn).
You could say that the proposed change is fair: bigger contributors receive bigger shares, and vice versa. But in any situation where there are winners and losers from a policy, the losers will resist it. Thus, it’s hardly surprising that the North is vehemently opposed to the proposed reforms. In their communique after a joint meeting with the Northern Traditional Rulers Council, the Northern States Governors Forum, which represents the 19 Northern states, said the proposed derivation-based model was “against the interests of the North”. The Northern Elders Forum said the proposal was “conceived in bad faith.” In truth, given the fundamental nature of proposed change, Tinubu should have canvassed it during the election campaign to secure explicit mandate for the proposal.
Disingenuously, one of Tinubu’s media sophists – they are all sophists – said the tax reform bills were part of Tinubu’s campaign manifesto. The only reference to tax reform in Tinubu’s manifesto – “Renewed Hope 2023” – is a short paragraph on page 16, which says: “We shall review the corporate tax system and deploy technology and effective policies to better rationalise the system.” No mention of changing the VAT distribution model. If Tinubu had said during the campaign that he would introduce a derivation-based VAT distribution model, would the North have voted for him despite his Muslim-Muslim ticket? Going by their current reaction, the answer is no. So, Tinubu misled the North and won their votes by stealth; the North is thus right to accuse him of acting “in bad faith”.
Read also: Tinubu tax reform bills scale Senate second reading
Even worse, in a supposed federal system, Tinubu sidelined the state governments. In October, the National Economic Council, consisting of Nigeria’s 36 state governors, urged Tinubu to withdraw the tax reform bills “for comprehensive consultation and consensus building”. He refused. It affronts democracy that someone who won a minuscule 36.6 percent of the popular vote, rejected by 63.4 percent of the electorate, acts autocratically and shuns national consensus building. Tinubu misreads his “mandate”!
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