A corrosive pill is being forced down the throats of the banks. And the industry is quacking over it. It is stirring a lot of obloquy within and outside the industry. The Federal Government, through the National Assembly, has just amended the Finance Act of 2023 to impose a 50 per cent one- off levy on the forex windfall made by banks last year.
The levy was increased to 70 per cent after the bill was passed. The levy is part of the government’s plan to fund the N6.2 trillion supplementary budget submitted to the National Assembly penultimate week by President Bola Ahmed Tinubu. The proposal seeks to increase the 2024 budget from N28.7trillion to N34.9. And the federal lawmakers passed the bill, known as the Finance(Amendment) Bill, 2024, last Tuesday and hiked the forex windfall levy from 50 per cent to 70 per cent, with a retroactive effect from January 1, 2023.
The amended law, which is now awaiting the President’s assent, prescribes a grim penalty for default in payment. “Any bank that fails to pay the windfall profit levy to the Service(Federal Inland Revenue Service-FIRS) and has not executed the deferred payment agreement as at the time of the regime, shall be liable to pay the windfall levy withheld or not remitted in addition to a fine of 10 per cent of the levy withheld or not remitted per annum and interest at the prevailing Central Bank of Nigeria(CBN) minimum discount rate,” the amended bill prescribes.
The echo of the levy is ricocheting with rebounds across the otherwise sedate industry’s boardrooms. While industry gurus and other finance experts were still trying to make sense of a levy that has, for inexplicable reasons, singled out the banks as target, the Minister of Finance and Coordinator of the Economy, Wale Edun, and the Chairman of FIRS, Zach Adedeji, were putting up a spirited defence for the levy.
Edun and Adedeji, who appeared before the National Assembly Joint Committee on Finance in Abuja, shortly before the bill was passed, said it is normal for government to impose such a levy on the windfall arising from changes in government’s policy to, according to them, “redistribute the windfall to the people!”
The minister said there is nothing new in imposing such levies on windfalls all over the world, adding that in the present circumstance, the local banks profited so much from foreign exchange transactions not by their own ingenuity but as a result of changes in government’s policy.
“The bank windfall profit levy, although small, still constitutes an important contribution to government’s finances at a time when revenues have substantially increased despite minimizing taxes,” he said.
Edun explained that the monies to be taken from the banks should not be seen as a tax but a levy, dismissing the insinuation that the levy would be passed to the customers. “This is an important opportunity to all stakeholders. All over the world, it is common that the society takes a share of such profits,” he submitted.
The FIRS boss, in his submissions before the panel, explained that the bank windfall profits levy would help in balancing the economic inequality in the country, especially after the government introduced its harmonization policy of the foreign exchange market.
Adedeji said the manufacturing sector could not be levied because, according to him, it(sector) incurred a loss of N1.7 trillion as a result of the forex policy.
The Chairman of the Joint Committee, Senator Sani Musa, said the intent behind the levy is to ensure that banks contribute their fair share to the national revenue, especially in the light of the substantial gains they made from foreign exchange activities.
“The proposed Finance(Amendment) Bill, 2024, is a pivotal step in our nation’s economic transformation journey… The levy does not affect Nigerians; it is not on Nigerians but the huge profits on forex that the banks made,” the senator said.
This levy, coming at a time the banks are facing the exerting task of recapitalization, is perceptibly punishing. It is, indeed, a needless distraction at this time that the banks require maximum concentration to meet the recapitalization targets and deadline.
It is quite incautious and totally befuddling because it is difficult, if not impossible, to surmise why the banks are being singled out, out of all the other vibrant sectors of the economy that equally profited immensely from the forex windfall, maybe excluding the manufacturing sector that reportedly recorded a huge loss.
The impression should not be created, or even veiled, that the banks are probably being made a ‘scapegoat’ of a sort because they are not to blame for any policy somersault and desultory, fiscal misstep that might have created possible unintended distortions in the system along the line.
Expectedly, the reactions from finance experts and other industry watchers are those of outrage and incredulity. Finance buffs are agreed without any dissension that the levy would affect the banks negatively.
First, the Chartered Institute of Bankers(CIBN), in a highly measured response to the levy, listed five implications of imposing that burden on the banks.
One, according to the CIBN President/Chairman of Council, Prof. Pius Deji Olanrewaju, the levy amounts to double taxation because the same banks, he disclosed, had already paid 30 per cent income tax when they filed the 2024 tax returns. He then posed rhetorically: “Will the tax already paid be deducted from the new imposition?”
Two, it violates the fairness and equity principle in taxation, “as banks are the only entity singled out for this payment,” adding: “This is discrimination; what about other sectors or businesses that have recognized the same foreign exchange gains in their books in 2023?”
Three, the levy could discourage foreign investors and “negatively impact Nigeria’s investment landscape, especially at a time when banks are required to raise capital and they may be looking towards foreign investors.”
Four, imposing this levy, the CIBN boss said, “could lead to reduced investment, decreased liquidity and increased costs and negatively impact Nigeria’s economic growth and development.”
Five, Prof. Olanrewaju warned that the levy “could lead to reduced market participation, exacerbating currency fluctuations and potentially destabilize the economy.”
As a way forward, he proposed a stakeholders consultation, comprising the Federal Ministry of Finance, the CBN, the banks and other stakeholders “where all the parties would do a holistic review of the implications of the proposed tax on the banks.”
The Association of Corporate and Marketing Communication Professionals(ACAMB), in its comments, argued that the banks have demonstrated enormous support for government’s economic agenda and “should not be burdened with a new levy that obviously would be counterproductive at this time.”
The President of ACAMB, Rasheed Bolarinwa, said with the ongoing recapitalization, “which is also aimed at supporting government’s $1trillion economic agenda, banks need more monetary and fiscal incentives now.”
He admonished: “We shouldn’t kill the goose that lays the golden eggs. Government should have a rethink. We think further consultation is needed in this case. We know the President has a listening ear, as demonstrated on many occasions and we expect banks should be given fair hearing on this.”
Global rating agency, Moody’s, posited that the windfall levy would “have a particularly negative effect on banks whose capital adequacy is close to regulatory thresholds.” The agency argued that the levy “would significantly reduce banks’ profits available for problem-loan provisioning and transfers to retained earnings, a crucial component of regulatory capital, thereby posing a challenge to banks’ financial stability.”
In their own admonitions, experts at the KPMG said government’s reasons for imposing the windfall levy are understood, but there is need for further consultations “to secure the necessary buy-in of the banks.”
“We do not think this is late though. We, therefore, recommend that government engages with the CBN and Bankers Committee to agree on possible changes as soon as possible,” KPMG advised.
The Managing Director of High Cap Securities, David Adonri, said the windfall levy amounts to the expropriation of shareholders’ wealth. He added: “It defeats the purpose of making banks strong enough to support the $1 trillion economy, an objective that is compelling banks to recapitalize.”
Adonri said it is unfair to deny shareholders, who would have borne the brunt in the event of losses, of direct benefits from forex gains, on one hand, and for government to appropriate such, on the other hand.
The High Cap Securities boss, who said the levy is a needless distraction now in view of banks’ recapitalization drive, posited: “Given the strict definition of paid-up share capital, banks have very limited options for meeting the new capital requirements. Thus, the threat posed by the proposed windfall tax is an unnecessary distraction that the banks do not need at this time…
“One thing that is missing from the Amendment Bill is tax relief for the banks that will be subjected to the windfall tax. Available evidence shows that anywhere a windfall tax has been introduced, it makes sense to introduce some form of tax relief such as investment allowance to cushion the impact.
“This will encourage the banks to spend and in turn accelerate economic growth. We, therefore, suggest that this be considered before the law is enacted.”
A banker, who is a treasurer with one of the banks, knocked the imposition of the levy, describing it as a bad and complicated policy that “reeks of desperation” on the part of the government.
The banker, who spoke under anonymity, toed the line of the CIBN boss that the levy amounts to double taxation and that it is “a bad sign for foreign investors.”
According to him, the foreign exchange earnings “are legitimate gains from banks being positioned right against a currency that was overvalued” at the time.
He wondered whether if the banks had incurred losses instead of a windfall, would the CBN had given them tax credit? “So, why take the credit?,” he posited rhetorically.
The banker, like other buffs, posited that there has to be further consultation or a round table parley to iron out issues concerning the levy. His words: “The policy will have to be debated between the banks and government till a reasonable conclusion” is reached.
All said and done, we acknowledge that although the government is facing revenue challenge, especially the immediate task of funding the supplementary budget of N6.2 trillion, we ally with the proposal of most of the finance buffs and industry watchers, who spoke, that President Tinubu should for now withhold assent to the newly passed Finance(Amendment) Bill, 2024.
This is to allow a window for further consultations among a broad spectrum of stakeholders, including the banks, CBN, finance experts, legal practitioners, especially in the area of taxation and the Federal Ministry of Finance, to subject the issue to a more critical review to arrive at a more mutually beneficial agreement.
