A slew of preponderantly angry outbursts and obloquy have trailed the new Executive Tax Reform Bills, 2024, now before the National Assembly, making the proposed laws one of the most contentious instruments of government in recent history. The most blistering of the opposition shots, which have assumed mainly ethnic and regional hues, are from the northern governors, who fear that they will be shortchanged by the new derivation principle embedded in the new VAT revenue sharing formula enshrined in the tax laws.
Some of the proponents of the bills, however, countered the critics, arguing that the derivation clause is, fact, potentially more beneficial to the states because it will incentivize them to be more productive and rake in more revenue.
The four bills, which have already been passed for second reading by the federal lawmakers amid the rancour, are: the Joint Revenue Board of Nigeria(Establishment) Bill, 2024; the Nigeria Revenue Service (Establishment) Bill, 2024; the Nigeria Tax Administration Bill, 2024 and the Nigeria Tax Bill, 2024.
The bills were proposals from the Presidential Committee on Fiscal Policy and Tax Reforms inaugurated in August, 2023 by President Bola Tinubu in Abuja. The objectives of the new bills are to expand Nigeria’s tax base, improve compliance and establish sustainable revenue streams for the nation’s development.
One of the reform bills’ critics is former Governor of Kano State, Rabiu Musa Kwankwaso, who alleged that the reform is an attempt by Lagos State to colonise northern Nigeria through tax. He implied: “Today, as we have noticed, even the telephones that we make or register here in Kano, efforts are there to take all the taxes to Lagos.” His position comes with a tinge of irony because this is the same anomaly proponents of the reform tax bills argue they want to redress.
The Governor of Borno State, Prof. Babagana Zulum, has become the face of resistance to the tax reform bills. “We reject the tax reform bill; it will bring backwardness to the north, and not only to the north, but also to the southeast, southsouth, and southwest. Oyo, Osun, Ekiti, and Ondo will also have problems; it will only benefit Lagos,” he spoke on BBC.
As a matter of fact, Senator Ali Ndume (Borno South), displaying his usual gutsy attitude, is so angry about the bills that he threatened to quit the ruling All Progressives Congress(APC), if they(bills) are not withdrawn by the Executive. He believed that the haste with which the Presidency is pushing the bills at the National Assembly and the alleged obsequious attitude of the lawmakers, especially the Senate, to the whole thing is rather suspicious.
It is, however, not every northerner who is against the bills. Former chairman of the Federal Inland Revenue Service (FIRS), Muhammad Nami, said the reform will put an end to VAT manipulation. His argued that the proposed bills will correct the current anomaly concerning VAT and ensure fairness and equity.
Under the current dispensation, he argues, “VAT returns by companies are not filed on the basis of the place of consumption but based on the head office locations of these companies. This means that a whopping 20 per cent of VAT returns are distributed back to states where these head offices are located — whether consumption took place there or not; it explains why Lagos, FCT and Rivers always take the largest chunk of VAT under the current regime.”
The intensity of opposition to the bills prompted the National Economic Council(NEC), a statutory body made up of the governors, and chaired by the Vice-President, to advise the Executive to withdraw the bills from the National Assembly for the meantime to allow a window for more consultations. The Nigerian Governors Forum(NGF) too requested for a stand down of the bills for redress the anomalies they believe are inherent in the proposed tax laws.
But President Tinubu demurred. He, however, later bowed to pressure and directed the Attorney-General of the Federation to interface with the federal lawmakers to iron out the contentious provisions in the proposed tax laws. How that directive is being carried out is to be seen because while the Lower Chamber of the federal legislature has suspended debate on the bills in deference to the presidential directive, directing members to consult with their constituents, the Upper Chamber has not given any sign of slowing down on the bills at all.
The Senate Leader, Opeyemi Bamidele, has argued that contrary to the harsh criticisms against the proposed tax laws, they are, according to him, an attempt to transit from what he called “the archaic tax regime that has been retarding its(Nigeria’s) collective prosperity to a progressive alternative that places businesses and people at the core of its general principles.” He described the four bills as “creative and innovative legislative proposals that can rejuvenate productive activities nationwide and take away undue burden off the shoulders of the masses and business concerns”. He said they were creatively designed to empower Nigerians across all strata and boost the nation’s economy.
“The bills,” he argues, “are not a product of fiat. But their origins are rooted in people’s aspiration for greater good and their quest for a federation that is built on equity, equality, and justice, three key principles that define the health and life of every multinational state like Nigeria. “At different times, nearly all critical stakeholders—Organised Private Sector(OPS), government institutions, trade associations, professional bodies, and Civil Society Organizations(CSOs)—are duly consulted before its eventual introduction at both chambers of the National Assembly, and that engagement is still ongoing in order to secure more buy-in before the passage of the bills.”
Tax buffs see the bills as a mixed grill. On one hand, the bills, they aver, can potentially increase government’s revenue with a trickle-down effect on the nation’s economy through increased funding for public goods and services such as infrastructure, education and healthcare. On the other hand, some of the provisions of the proposed tax laws are most likely going to have negative impact on businesses and individual consumers if not adequately considered and redrafted.
What exactly are the salient provisions of the proposed tax laws? In some experts’ analyses, the proposed laws are compared and contrasted with the current dispensation to explain some of the provisions on a sectoral basis, especially the areas that have elicited public interest the most.
First, VAT revenue sharing in the proposed Tax Reform Bills is a major talking point. VAT is an extra fee paid whenever one buys an item, a small slice added to the price that goes to the government to fund public services. In Section 40 of the current VAT law in Nigeria, the government takes everything collected and splits it into three big pots. An expert analysis attempts to simplify the sharing scenario this way: If N1,000,000 is collected in a year, N150,000 goes straight to the Federal Government(15%) and N350,000(35%) is shared among the 774 local governments. The remaining N500,000(50%) is shared among the states.
But here is where it gets interesting. The N500,000 is not split among states randomly. Half of it — N250,000 — is shared equally among all 36 states. So, every state gets about N6,944 regardless of how economically viable or large they are. N150,000 (30%) is shared with the states based on their population. The states with larger populations get a larger cut of this N150,000. The last N100,000 goes to states based on derivation, a fancy word that means “Who brought in the money?” States that generate more VAT get a bigger portion of the amount.
However, in the proposed tax reform bills, FG gets N100,000 (10%) of the N1,000, 000 used as an example, and states have N550,000 (55%) to share. Most importantly, the derivation pot in the proposed reform is bigger. N330,000 (60%) out of the N550,000 will be shared with the 36 states based on how much VAT they generate.
On the more individual level, the current tax system only shares a 7.5% VAT on the goods and services Nigerians use. In the proposed bill, VAT charged on goods and services will go up from 7.5% to 10% first and then progressively to 15% by 2030. In short, Nigerians will pay more VAT, and it will increase as the years go by. However, core services such as rent, (public) transportation, health, food and education are exempted from VAT.
Second, Personal Income Tax changes: Under the current tax system in Nigeria, people earning less than N300,000 annually do not pay any tax. Those earning exactly N300,000 are taxed at 7% of their earnings, which amounts to N21,000. For individuals who earn between N300,000 and N600,000, the first N300,000 is taxed at 7% (N21,000), while the next N300,000 is taxed at 11% (N33,000), bringing the total tax to N54,000.
For incomes between N600,000 and N1.1 million, the first N600,000 is taxed as explained (N54,000), and the next N500,000 is taxed at 15%, adding another N75,000. This means the person will pay a total of N129,000.
Those earning between N1.1 million and N2.7 million pay N129,000 on the first N1.1 million and 21% (N336,000) on the next N1.6 million, which brings their total tax to N465,000. For the people who earn more than N3.2 million, the first N3.2 million is taxed at N465,000, and anything above that is taxed at 24%.
Under the proposed reforms, however, the tax brackets change significantly. People earning up to N800,000 annually will not pay any tax at all. For those earning between N800,000 and N3million, the first N800,000 remains tax-free, while the next N2.2 million is taxed at 15%, amounting to N330,000.
For incomes between N3 million and N12 million, the first N3 million is taxed at N330,000, and the next N9 million is taxed at 18%, which adds N1,620,000, making the total tax N1,950,000. For those who earn between N12 million and N25 million, the first N12 million is taxed at N1,950,000, and the next N13 million is taxed at 21%, adding N2,730,000 and bringing the total tax to N4,680,000.
For those earning between N25 million and N50 million, the first N25 million is taxed at N4,680,000, and the next N25 million is taxed at 23%, adding N5,750,000 and bringing the total to N10,430,000. Finally, anyone earning above N50 million pays N10,430,000 on the first N50 million and 25% on anything above that. Essentially, anyone earning below a million naira a year would not pay taxes under this structure. Also, those who earn a higher income will pay more.
Third, Corporate Income Taxes also change in the proposed tax laws: Under the current tax system, companies in Nigeria pay different rates of Corporate Income Tax (CIT) based on their size. Small companies with a total revenue of N25 million or less don’t pay any taxes. Medium companies, earning between N25 million and N100 million, pay 20% (between N5 million and N20 million).
Large companies, making over N100 million, pay the highest rate of 30%. For example, if a company makes N200 million in profits, it owes N60 million in taxes under the current rules.
The proposed reforms, however, simplify this system and reduce rates for many companies. Small companies still will not pay any taxes, but medium and large companies will pay the same rate.
The proposed laws have their flaws but they also pack some pluses. These, as enumerated in the analysis, include the considerable tax waivers granted low-income groups from personal income tax. The threshold of these waivers cover all minimum wage earners or all low-income households within the threshold, ostensibly to reduce their tax burden and boost their purchasing power.
The proposed tax laws also provide for zero VAT on exports and essential consumptions by low-income earners and exempt foods and related items from VAT. This is with the prospects of reducing the rising food prices and increasing the people’s purchasing power. Rent, public transportation, renewable energy etc. are also exempted from VAT.
Also enthralling is the significant expansion of small businesses’ exemption from tax payment. As seen in the analysis, the bills raises the threshold for the grant of tax exemption from the current N25 million annual turnover to N50 million with total assets. Experts imply that small businesses constitute about 48% of the nation’s Gross Domestic Products(GDP) and provide employment all over the country. The exemption of such businesses from the tax net or burden will positively impact their operations and engender the growth of the nation’s entrepreneurial class.
It is a plus that the bills also attempt to streamline multiple taxation. To address the perennial concerns of the business community about multiple taxation, Clause 56 of the the proposed laws provides for a significant reduction in company income tax, which will be effected in two stages. They propose a reduction from the current 30% to 27.5% in 2025 and 25% in 2026. The laws also impose a development levy of four per cent to harmonise the multiplicity of taxes and levies companies pay. The levy will be reduced at intervals to two per cent in 2030 and devoted to funding the Nigerian Education Loan Fund (NELFUND), thereby phasing out the 2.5% education tax, the 0.25% National Agency for Science and Engineering Infrastructure tax and the one per cent National Information Technology Development levy.
Thus, in place of all these taxes and levies, companies will only pay a four per cent development levy from 2025 to 2029 and two per cent after that to fund the student loan scheme. Given the millions of indigent Nigerians expected to benefit from the NELFUND scheme, the provision is commendable as it will bring succour to the low-income bracket of the population.
Similarly, the Nigerian Revenue Service Bill seeks to promote synergy between and among the three tiers of government. This includes discretionary power to delegate tax collection functions, harmonise revenue administration, reduce the cost of revenue collection and remove all forms of bottlenecks inhibiting revenue remittances to the federation by government agencies.
However, a critical analysis of the proposed tax laws reveal some sour points that can negatively impact individuals and corporate entities, among others. This includes tax burden. Experts believe the VAT tax rate increase is not in the interest of Nigerian consumers and small businesses, in spite of the waivers granted.
The blight is the proposed increase in VAT from 7.5% to 10%, which is potentially an increase in the prices of products. According to tax buffs, for a tax system to be used as an instrument to uplift the welfare and living standard of the people, put smiles on their faces and direct the course of the economy towards growth and development without losing its traditional grip of revenue generation, it must strive to balance the need for revenue generation against the desire to preserve the taxpayer.
In other words, the Nigerian taxpayer should not be taxed to death. The VAT rate increase is, therefore, ill-timed, coming in the heat of the effects of the withdrawal of subsidy on petrol. The redistribution of income argument, where higher taxes are imposed on the rich to provide social services in favour of the poor, is not even obtainable under a regime of a general increase in VAT rate as proposed. VAT as a consumption tax can favour the poor only if the increase taxes only the rich and reduces the rate for the poor. In other words, the increase proposed should not have been a flat rate for both the poor and the rich.
Prof. Segun Ajibola, a policy analyst, professor of Economics and former President of the Chartered Institute of Bankers(CIBN), put this succinctly pungently: “The(tax) law must be able to strike a balance in generating revenue for the government through taxation without incapacitating individuals and corporate institutions.
“Taxation is an instrument of redistribution. It should take away from the rich and give to the poor, so that the rich will not be super rich and living in opulence, while the poor will be multidimensionally poor and unable to provide for their needs. So, you tax the rich heavily to subsidize the living conditions of the poor.” So, we admonish that the increase in VAT should be corrected accordingly by raising the rate for the rich and reducing the rate for the poor.
The VAT sharing formula has elicited the most vociferous protest,with the northern governors rejecting the proposed tax laws because they feel the derivation clause will emasculate them financially and favour only Lagos State. But Taiwo Oyedele, the chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, disagrees, highlighting that the clause is to correct the current framework that allocates VAT revenue to states based on where payments are made rather than where consumption occurs.
This approach, he contends, disproportionately benefits states such as Lagos, where many businesses have their headquarters and process payments, regardless of where the actual consumption takes place. “To promote equity and stimulate economic activities across the country, the reform proposes attributing VAT to where consumption takes place and increasing the share of VAT-revenue states retain,” Oyedele had said.
One oblique message that is embedded in the proposed tax laws is that the era of free money is over. Every state must be productive to put something on the revenue table. We, therefore, urge the northern governors to stop whingeing over the issue. They should rather turn what they see as adversity in the derivation provision in the proposed tax laws into advantage through creative thinking and hardwork. They should look inwards for what they can do to start generating money that would boost their internally generated revenue(IGR). That way, they will benefit immensely from the VAT revenue too like some other states based on the new derivation provision.
Prof. Ajibola, on this cause, advises the governors to start generating revenue by promoting local economic activities and entering into bilateral agreements with top-level institutions to attract businesses to their states. He noted that while some businesses may not have head offices in major northern cities despite sourcing raw materials from there, certain companies could be persuaded to relocate to the northern states for reasons like the ease of doing business.
In the final analysis, let Federal Government listen to the various segments of the nation that are opposed to the tax bills and carry them along. Former Attorney-General of the Federation and Minister of Justice, Mohammed Adoke, reacting to the issue, expressed shock at the degree of dissension that has attended the otherwise laudable bills.
“Despite the laudable objectives of the reform bills” he wondered, “they(bills) have not been received with the requisite enthusiasm from the sub-regional governments. The bills have been criticized as ii-timed, regressive and antithetical to the aspirations of the people, as well as detrimental to the interests of other segments of the federation.” He, therefore, advised the Federal Government to stand down the bills to allow for wider consultations.
We cannot agree more. Let the Senate take a cue from the Lower Chamber and halt further action on the proposed tax laws and dispatch the senators to feel the pulse of their constituents over the bills, just like the Representatives have done. Then, let the Federal Government put the machinery in motion for a nationwide consultation with stakeholders like the governors, Organised Private Sector(OPS), the Labour unions and the general populace with a view to restoring Nigerians’ confidence in the proposed tax instrument. There could be seminars and town hall meetings to also engage various strata of the society and secure more buy-in for the bills. Views collated from these forums can then be used to review the bills before they are passed into laws, in line with the aspirations of the generality of Nigerians.
