Nigeria’s new tax reforms: Implications for the health sector
President Muhammadu Buhari signed the Finance Bill (now Act) into law on January 13, 2020. The bill was presented to the National Assembly in October 2019 alongside the 2020 Appropriate Bill and passed in November 2019. Reflecting key recommendations of various stakeholders across government, industries and civil societies particularly the National Tax Policy Implementation Committee and the President Enabling Business Environment Council, the act seeks to support enterprise growth, facilitate strategic investments and raise government revenue. It represents one of the most comprehensive tax reforms the country has designed with key changes to existing laws on personal and corporate income taxes, value-added tax (VAT), petroleum profits tax, capital gains tax, customs and excise tariff as well as stamp duties. It also enables the government collect taxes from digital service providers based outside Nigeria. These reforms build on the 2016/17 review of the National Tax Policy and recent improvements in tax administration.
The Act requires individuals and enterprises to obtain Tax Identification Numbers (TIN) to operate business accounts, thus facilitating a potential expansion of the formal sector and the tax base. While small-size companies are exempted from corporate income tax (CIT), medium and large enterprises will now pay 20 percent and 30 percent CIT rates, respectively. The law makes the regulatory environment more receptive to insurance companies which can now carry forward losses indefinitely. There is also an increase in the VAT rate from 5 to 7.5 percent – with a VAT compliance threshold of N25 million. While the law includes specific exemptions to reduce the negative impact of VAT increase on the populace, government revenue is expected to grow – with 85 percent of the VAT revenue going to the state and local governments based on current revenue sharing formula.
Domestic resource mobilisation is an integral element of sustainable financing for development and a foremost objective of the government through the Strategic Revenue Growth Initiative. With the current population growth rate, significant physical and human capital development gaps, it is an urgent priority for the country to diversity its revenue sources to bridge these gaps. Nigeria relies mainly on oil revenue to fund implementation of the annual budget but the picture may be changing: oil and gas sector contribute roughly half of total national revenue as non-oil revenue rises steadily. According to the International Monetary Fund, the country’s non-oil revenue averages 3-4 percent of Gross Domestic Product (GDP). VAT contributes less than 1 percent of GDP compared to ECOWAS average of 4 percent. The tax-to-GDP ratio is less than 10 percent compared to the international minimum threshold of 12.75 percent and sub-Saharan Africa average of 18.7 percent. According to the World Bank, public debt-to-GDP ratio averages 20 percent and debt servicing consumes a significant percentage of current revenue, shrinking the fiscal space to invest in sustainable development.
In addition, a 2019 Oxford Martin School Working Paper shows that Nigeria may already be a post-oil state: this requires a paradigm shift across institutions from consumption and oil-focused distributive model of resource allocation to a highly productive multisectoral landscape hinged on macroeconomic stability and peaceful coexistence. The evidence is compelling: Nigeria urgently requires a comprehensive tax overhaul to address the revenue challenge of governments at national and subnational levels while lifting millions out of poverty.
Although there is limited information on the models of impact on various sectors, the tax changes have short- and long-term implications for sustainable domestic resource mobilization, government allocation to the health sector and investments in the private health sector.
Public financing for health
Public financing is central to achieving universal access to high-quality health services for all but households bear the brunt of healthcare payments in Nigeria. The National Health Act (NHA) requires government to devote at least one percent of the consolidated national revenue to the Basic Healthcare Provision Fund (BHCPF), alongside other domestic and external financing sources. The BHCPF is additional resources allocated to the health sector to ensure primary health services are available to the populace especially the vulnerable population. It is a platform that harnesses the collaborative efforts of governments at national and subnational levels to finance cost-effective interventions so that citizens can access high-quality essential health services at primary health facilities across the country. It is also intended to facilitate an expansion of pre-paid, risk-pooling mechanisms which help to reduce the burden of out-of-pocket healthcare payments. Based on existing accountability framework, communities can demand for improvement in health services and contribute to health system development. Although BHCPF implementation is still in its early stages, it is a promising health investment that can fast track progress towards health for all Nigerians.
An increase in government revenue as a result of the new tax reforms could have a direct impact on health sector allocation and BHCPF. It is commendable that the federal government makes budgetary provisions for the BHCPF in compliance with the NHA and several states have begun building and/or strengthening institutions such as primary healthcare agencies and health insurance agencies so that supply- and demand-side reforms can translate to increase access to health services for the populace. An increase in revenue at subnational levels through VAT increase could result in increased health investments, with new allocations as counterpart funding for the BHCPF. These allocations are unlikely to be automatic due to a wide range of competing priorities, so health stakeholders particularly parliamentarians and civil society leaders have crucial advocacy tasks ahead to ensure higher revenue translates to better health investments.
Increased human capital investment (in health and education) is linked to improved productivity and economic development. While it also creates jobs for workers within these sectors, these investments can help build the social contract required for productive government-citizen interactions including tax collection and compliance. Nigeria’s overwhelming reliance on oil revenue to finance government budget and systemic corruption may have perpetuated a cycle of weak tax collection, poor human capital investments and low tax compliance because of lack of shared accountability. One way the government can break this vicious cycle is to demonstrate commitment to ensuring well-being of citizens through access to high-quality health services. Although civil society organizations have played a vital role in holding government accountable for improvement in the health sector for decades, the emergence of active citizens requires a robust social contract – which is currently non-existent. The health sector must be a crucial focus of investment to build a healthy, productive workforce.
Nigeria’s current health insurance coverage is less than 5 percent. Most of those covered are in the formal sector – mainly civil servants working in government agencies and employees of the organised private sector on private health insurance. Very few are covered with existing pockets of community health insurance schemes. Although there is no national law for mandatory health insurance, several states have developed legislative frameworks to make health insurance compulsory. Administration of health insurance tends to be easier for the formal than the informal sector because of the fragmented nature of the latter. Widespread use of the TIN by businesses and individuals can facilitate a transition of many opaque businesses into the formal sector, creating new opportunities for health coverage expansion. Health insurance is not a subscription service for diagnostics and drugs for a particular disease. Rather, it is a pre-paid risk-pooling mechanism that allows cross-subsidy between the rich and poor, and between the relatively healthy and unhealthy. This pool can contribute to a reduction in out-of-pocket payments made by households for essential health services and improve the productivity of businesses as public financing for health increases across states.