The past three weeks have seen heated debates across Nigeria regarding the proposed tax reform bill and its potential impact on the country’s economic growth and ease of doing business (EODB). With the goal of positioning Nigeria as an attractive investment destination and Africa’s business hub, the bill has elicited mixed reactions from stakeholders. While some view the proposed bill as a welcome development, others argue it should not be passed, sparking widespread discussions and controversies.
This article aims to guide and inform the public on the potential benefits of the proposed Tax Reform Bill, along with its associated challenges, to enable a balanced understanding of its implications.
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The bill introduces several changes that could present challenges. One of the most prominent issues is the planned incremental increase in VAT rates, which will rise from the current 7.5 percent in 2024 to 10 percent in 2025, then to 12.5 percent in 2026, and finally to 15 percent in 2030 to align with the ECOWAS benchmark. Additionally, the bill proposes higher taxes on high-net-worth individuals (HNIs), which could create a disproportionate burden compared to low-income earners. Furthermore, companies will face increased administrative and financial burdens to comply with the new regulations, leading to higher compliance costs. Another significant issue is the contentious VAT sharing modalities proposed in Section 22 of the bill. This section introduces a Derivation Model for VAT revenue distribution, shifting the focus to the location of taxable supplies rather than the current headquarters-based remittance model, sparking controversy among stakeholders.
The VAT sharing models—derivation and attribution—each have distinct characteristics and implications. The derivation model proposes sharing VAT revenue based on the location of consumption, promoting fair and equitable distribution. States and local government areas (LGAs) with higher consumption levels will receive a larger share, thereby encouraging economic growth as states and LGAs become motivated to attract business activities. However, this model is complex to implement, requiring advanced ICT infrastructure to track consumption patterns accurately. It may also create controversies and unhealthy competition among states and LGAs. In contrast, the attribution model allocates VAT revenue based on the location of company registration, which makes it simpler to administer. However, this approach disproportionately benefits urban areas with more registered businesses and undermines equity and fairness by not accounting for actual consumption patterns.
“Furthermore, companies will face increased administrative and financial burdens to comply with the new regulations, leading to higher compliance costs.”
Despite its challenges, the proposed tax reform bill offers several advantages. It simplifies the tax structure by consolidating over 66 taxes into eight under the Tax Identification Consolidation Collaboration (TICC) scheme, streamlining tax administration. It addresses outdated tax laws, thereby improving Nigeria’s business environment and enhancing the country’s attractiveness to foreign direct investment (FDI). Small and medium enterprises (SMEs) also stand to benefit from the bill. The definition of small companies will expand to include those with annual turnovers of up to ₦50 million, up from the current threshold of ₦25 million. These small companies will be exempt from taxes such as Company Income Tax (CIT), Education Tax (ET), Withholding Tax (WHT), and Value-Added Tax (VAT).
The bill provides additional reliefs to vulnerable groups within the economy. Minimum wage earners—those earning ₦70,000 or less—will be exempt from taxes, and essential items such as food, educational materials, and healthcare facilities will be VAT-exempt. Large companies, defined as those with annual turnovers of ₦100 million or more, will also benefit from reduced CIT rates, which will decrease from 30 percent in 2024 to 27.5 percent in 2025 and further to 25 percent in 2026.
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Furthermore, the bill includes incentives for private sector employers by providing tax relief for wage awards and transport subsidies offered to employees. It also promotes job creation by granting tax incentives to companies that generate incremental employment and retain staff for at least three years. The gas sector will receive a boost, with simplified local content requirements to encourage investments and ensure competitiveness. Lastly, the bill seeks to promote fiscal discipline by improving remittances from government agencies and corporations to the Consolidated Revenue Fund (CRF).
In conclusion, the Nigerian Tax Reform Bill presents a mix of challenges and opportunities. While it demands significant adjustments from businesses and government agencies, its provisions for equity, transparency, and economic growth hold promise for the nation’s future. A balanced approach to its implementation, coupled with strategic stakeholder engagement, will be essential to realising its full potential.
Kingsley Ndubueze Ayozie, KJW, FCTI, FCA; Public Affairs Analyst and Chartered Accountant, Writes from Lagos.
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