The Nigeria Tax Bill and priority sectors: A path to sustainable growth? Part 1

Introduction

The fourth quarter of 2024 ushered in the fastest economic growth observed in three years for Nigeria’s economy. The notable economic upswing was edged on a significant 3.84 percent increase in the GDP. This increase was dominantly fueled by the service sector contributing over 57 percent of the aggregate during the period and expanding by 5.37 percent on a yearly basis. Although the full-year growth for 2024 culminated at 3.40 percent, which is an improvement from the 2.7 percent increase recorded in 2023, it falls short of the 6 percent increase target set by President Tinubu upon assuming office.

The current trajectory of the global economy is focused on building momentum towards the actualization of sustainable economic growth. According to the International Monetary Fund report (January 2025), the collective global economic growth is projected to increase by 3.3 percent, as similarly predicted in 2024 and will remain steady in 2026. However, growth trajectories will vary across countries, with some experiencing economic slowdowns. Therefore, certain countries will experience economic contractions notwithstanding the collective positive outlook and can only be corrected by addressing growth stunts such as inflation, fiscal deficits and unstable monetary policies leading to economic instability and long-term fiscal sustainability. As a result, governments and businesses are implementing long-term strategies aimed at promoting sustainable economic growth.

The economic progression of a country is highly dependent on effective measures through policies and strategies aimed at building a formidable economy. For Nigeria, this includes a comprehensive tax reform encapsulated in the Nigeria Tax Bill. To address the challenges of underperformance in certain areas that prove instrumental for economic growth and to stimulate economic diversification, the Nigeria Tax Bill introduced a strategic focus on priority sectors. While the provision of tax incentives for priority sectors possesses the potential to drive sustainable economic growth, it is important to establish a delicate balance to avoid the inherent risks of market distortions.

Overview of The Nigeria Tax Bill and Priority Sectors

The Nigeria Tax Bill was introduced to reform taxation and boost economic development. Its measures towards achieving this include tax incentives for priority sectors. A key feature of the Nigeria tax bill, in addition to other various innovative measures, is the priority sectors provided in the eleventh schedule of the Nigeria Tax Bill. These sectors are selected based on their potential to significantly contribute to the economy notwithstanding their current state of underutilization or favourable prospects for further development. Although it largely benefits underutilized industries within the sector, such sectors would be removed when they are sufficiently developed. An illustrative case is the industrial sector which only accounts for roughly 17 percent of Nigeria’s GDP in the fourth quarter of 2024; recognizing its potential to attract foreign direct investments, generate employment and encourage regional sectoral development, the industrial sector is well represented in the priority list. Tax incentives could prove an effective tool to address the sectors’ underperformance relative to Nigeria’s economic needs.

As provided by the eleventh schedule of the Bill, the sectors identified under the priority list include agriculture and food, energy, mining and quarrying, health, information communications technology, building and operation of utility projects, chemical and building materials, steel and metal, transportation, industrial machinery, environment, textile production, other manufacturing such as manufacturing of pulp and paper, manufacturing of household and personal hygiene paper products and services, with the sunset date for each subsector varying from ten years to twenty years. Potential beneficiaries of the priority list include Nigerian-incorporated companies, companies exempted from incorporation and promoters of a company yet to be incorporated. The Nigerian Investment Promotion Commission (NIPC) and the Federal Ministry of Industry, Trade and Investment are statutorily charged with overseeing compliance measures. These potential beneficiaries would be subject to the following:

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The Economic Development Incentive Certificate: As provided in Sections 168, 169 and 170 of the Bill, the identified beneficiaries can apply for the economic development incentive certificate. The application must contain proof of qualifying capital expenditure meeting the minimum investment threshold contained in the eleventh schedule before the production phase. The application would also include details of assets on which capital expenditure will be incurred, proposed production start date and expected product or service output, ownership structure, and a non-refundable fee of 0.1% of the qualifying capital expenditure, which is thereafter approved by the President based on recommendations of the Nigerian Investment Promotion Commission (NIPC) and evaluation of the Minister of Industry, Trade and Investment.

Tax Incentives: The economic development tax credit received would be based on profits during the incentive period, the incentive period being 5 years and extendable if 100 percent of the profits are reinvested in sector expansion. A priority company that operates a non-priority business must maintain separate accounting records, otherwise, all its income would be classified as non-priority. The difference between the priority period and sunset date is that the priority date is the period during which beneficiaries of the tax incentives under the priority list enjoy the benefits of the tax incentives while the sunset date is the final deadline or expiration date of the tax incentive program itself, although it can be extended following the conclusion of the date included in the Bill.

Compliance and Cancellation: Companies that do not begin production within 12 months of their proposed production date risk losing their incentive status. Incorporated companies that are beneficiaries must file their annual returns to sustain their incentive status. However, underutilized credits would remain valid for 5 years after the priority period.

Rationale and Benefits of Tax Incentives for Priority Sector under the Bill

Tax incentives in the priority sector can be considered a double-edged sword. They benefit businesses and sectoral growth as well as overall national economic sustainability. By developing the priority sectors under the list, the national economy can be effectively diversified to increase manufacturing and reduce overreliance on revenue generation from oil. The current contributions to the GDP from underdeveloped sectors, such as renewable energy and ICT, can build up a resilient economic structure. Industries in the priority sector, such as manufacturing, require labour that would create jobs, build human capital through workplace training, create jobs and tackle unemployment. This tax incentive would drive up foreign direct investments that provide Nigeria a competitive edge in the global market. The economic development incentive is structured to ensure sustainability. By providing incentives for companies who reinvest 100 percent of their profits, reinvestment is rewarded, which inadvertently results in long-term sustainability.

Companies and businesses benefiting from the priority sector’s tax incentive receive tax relief, thereby reducing operational costs and increasing profitability. This increase in profitability opens up expansion opportunities for these businesses. These expansion opportunities include increase in exports and a competitive edge to compete in the global market. The increase in domestic production would also increase reliance on local goods and services rather than imported goods, reducing the risks of imported inflation and promoting self-economic sustainability. The incentive attached to compliance would ensure conformity to tax regulations including tax payments that would increase governmental revenue overtime. As a thriving industrial economy, investments in technology and social development would increase, thereby improving infrastructural development.

Conclusion

Although economic development incentives for select sectors could prove a potent tool for economic progression, it could also create market distortions if not effectively managed. To achieve sustainable economic growth and development, Nigeria must strike a balance for tax incentives that do not result in fiscal imbalances and unintended economic consequences.