Rethinking revenue: Can Tinubu’s tax reforms unite a divided nation?

President Bola Tinubu’s recent push for comprehensive tax reforms marks a pivotal moment in Nigeria’s economic governance. On September 3, 2024, he submitted four tax reform bills to the National Assembly, drawing from the recommendations of the Taiwo Oyedele-led Presidential Committee on Fiscal Policy and Tax Reforms. These bills—the Nigeria Tax Bill, the Nigeria Tax Administration Bill, the Nigeria Revenue Service Establishment Bill, and the Joint Revenue Board Establishment Bill—aim to reset Nigeria’s fiscal foundations. While the reforms present opportunities for progress, they also reveal deep fault lines in Nigeria’s federal structure and raise critical questions about their implementation and equity.

The most contentious aspect of the reforms lies in the proposed shift from the principle of attribution to the principle of derivation in Value Added Tax (VAT) distribution, as stipulated in Section 77 of the Nigeria Tax Administration Bill. This clause proposes that states benefit directly from VAT generated within their territories, ostensibly to incentivise local revenue generation. However, this move has sparked opposition, particularly from Northern leaders, who fear it could exacerbate regional inequalities by favouring economically dominant states like Lagos and Rivers. Without mechanisms to address these disparities, the principle of derivation could undermine national cohesion.

The reforms’ headline promise of tax relief for individuals and small businesses is laudable. Nigerians earning below ₦800,000 annually would be exempt from personal income tax, offering much-needed relief to low-income earners grappling with inflation and a rising cost of living. Similarly, small businesses with annual revenues under ₦25 million would be exempt from profit taxes, while larger companies would see a phased reduction in Corporate Income Tax (CIT) from 30 percent to 25 percent by 2026. These measures could enhance compliance, stimulate entrepreneurship, and improve the ease of doing business.

However, the gradual increase in VAT from 7.5 percent to 15 percent by 2030 introduces a regressive element to the reforms. Although essential goods such as food, medicine, and energy are exempt, higher VAT rates risk squeezing disposable income and dampening consumer spending. Given that the nation is struggling with high unemployment and slow economic development, the tax breaks for low-income earners and small enterprises might not be enough to alleviate the financial burden on the general populace.

The principle of derivation—though designed to empower states—raises important questions about equity in a nation marked by stark regional disparities. States with limited economic activity could face significant revenue shortfalls, deepening their reliance on federal allocations. A reform of this magnitude demands a careful balancing act: encouraging fiscal autonomy without abandoning the principles of shared prosperity. The current proposal’s lack of safeguards for economically weaker states risks fracturing the federation further.

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One of the most glaring deficiencies in the reform process has been the absence of inclusive consultation. The lack of engagement with state governments, labour unions, civil society organisations, and other stakeholders undermines the legitimacy of the reforms. The opposition from Northern leaders reflects not just regional grievances but also a broader failure to build consensus around a shared vision for Nigeria’s fiscal future. In a country where trust in government is already precarious, reforms of this scale require transparency, dialogue, and collaboration.

Despite its flaws, the tax reform agenda represents a rare opportunity to modernise Nigeria’s fiscal framework. If implemented effectively, the reforms could boost revenue generation, reduce tax evasion, and foster economic competitiveness. However, success hinges on the government’s ability to address the legitimate concerns of stakeholders and refine the proposals to ensure fairness and inclusivity.

President Tinubu’s administration must prioritise three key actions. First, it should establish a robust framework for equitable revenue redistribution to mitigate regional disparities. Second, it must intensify efforts to engage stakeholders in meaningful dialogue, fostering trust and building consensus. Finally, the government should commit to phased implementation, allowing for adjustments based on empirical evidence and stakeholder feedback.

Nigeria stands at a crossroads. The tax reforms, with their potential to modernise the country’s fiscal framework and unlock economic growth, present a unique opportunity. However, their success hinges on a delicate balancing act. The government must prioritise equity and inclusivity, ensuring that the benefits of these reforms are shared broadly across the nation, mitigating the risk of exacerbating existing regional disparities. Transparency and open dialogue with stakeholders are paramount. By actively engaging with state governments, civil society organisations, and the private sector, the government can build consensus, address concerns, and ensure that the reforms reflect the needs and aspirations of all Nigerians.

Furthermore, the success of these reforms cannot be measured solely by revenue targets or macroeconomic indicators. True success will be evident in a more equitable distribution of wealth, improved social outcomes, and a strengthened social contract between the government and its citizens. By fostering a more just and equitable society, these reforms can contribute to national unity and lay the foundation for sustainable economic development. The stakes are indeed high, but by embracing a collaborative and inclusive approach, the government can seize this opportunity to build a more prosperous and equitable future for all Nigerians.