Nigeria’s tax reform: A lifeline or another economic misstep?

The Nigerian House of Representatives recently passed four significant tax reform bills, signalling a potential shift in the country’s revenue system. While the government presents these reforms as essential for economic stability and long-term growth, the amendments introduced by the House have sparked debate about their true impact. As the Senate prepares to deliberate, Nigerians are left questioning whether these measures will provide genuine economic relief or merely serve as another half-measure failing to address deeper structural deficiencies.

The Senate’s next move: compromise or confrontation?
With the reform bills now awaiting Senate review, legislators face a critical decision: approve them as passed by the House or introduce further modifications. One of the most debated elements is the retention of the current 7.5 percent Value Added Tax (VAT) rate, as opposed to the initially proposed increase to 12.5 percent by 2026. While this decision offers short-term relief for consumers and businesses already grappling with inflation, it also raises concerns about the government’s ability to meet its revenue targets without resorting to excessive borrowing.

A key point of contention is the reallocation of VAT revenue among states. The initial proposal aimed to allocate 60 percent of VAT proceeds to high-revenue states such as Lagos, where economic activity is concentrated. However, the House revised this distribution formula, reducing the allocation to 30 percent and favouring a more even redistribution. This adjustment, likely made to appease states with lower VAT contributions, rekindles the long-standing North-South revenue allocation debate. The Senate now faces the challenge of balancing regional interests while ensuring a fair and effective tax structure.

The broader economic implications
Beyond immediate tax adjustments, the broader economic implications of these reforms cannot be ignored. Nigeria has long struggled with revenue mobilisation, relying heavily on crude oil exports, which are subject to price volatility. The push for tax reform aligns with global best practices aimed at expanding non-oil revenue sources, but concerns persist about whether the proposed measures are sufficient to drive sustainable growth.

One major concern is the potential impact on businesses and investment. The uncertainty surrounding tax policy changes can deter investors, both local and international. While a stable tax regime is essential for economic planning, inconsistent policies risk undermining investor confidence. The rejection of the VAT hike may provide temporary relief, but without alternative revenue sources, the government may resort to increased borrowing, exacerbating Nigeria’s debt burden.

Furthermore, the effectiveness of tax reforms depends not just on revenue generation but also on fiscal transparency and efficient public spending. Many Nigerians remain sceptical about whether increased tax revenue will translate into improved infrastructure, healthcare, and education. Without a corresponding effort to curb government waste and corruption, higher taxes may only deepen public frustration.

A path forward
As the Senate deliberates, a balanced approach is crucial. The tax reforms should aim to broaden the tax base, ensuring that revenue generation is sustainable without overburdening businesses and consumers. Rather than focusing solely on VAT adjustments, the government must explore more innovative strategies, such as improving tax compliance, reducing leakages, and leveraging technology to enhance tax collection efficiency.

Additionally, fiscal discipline and transparency should accompany any tax reform efforts. Nigerians need assurance that increased revenue will be used to drive development rather than being lost to inefficiencies. Enhanced accountability mechanisms, coupled with clear communication from the government, can help build public trust and encourage compliance.

In the coming weeks, the Senate’s stance on these tax reforms will shape Nigeria’s economic trajectory. Whether the outcome is a lifeline for economic stability or another policy misstep will depend on the willingness of policymakers to address the root causes of revenue shortfalls while fostering an environment conducive to growth. The challenge now is not just passing tax reforms but ensuring they serve as a catalyst for real economic transformation.

Abayomi Fashina (Fash): Tax and Risk Professional | BSc, MSc, AAT, ACA