Nigeria’s tax reforms must ensure equity

Nigeria’s tax system has long been riddled with gross inefficiencies, leakages, structural imbalances, and a glaring lack of equity in income distribution and the tax burden.

But there is light at the end of the tunnel after the extensive work by the Presidential Tax Reform Committee, led by Taiwo Oyedele (a tax expert), was aggregated into four new bills designed to overhaul the tax system.

The Nigeria Tax Bill 2024, the Tax Administration Bill, the Nigeria Revenue Service Establishment Bill, and the Joint Revenue Board Establishment Bill, currently undergoing legislative consideration, seek to deliver on the committee’s mandate, which covers tax reform, fiscal policy design and coordination, and revenue administration, among other items.

According to President Tinubu, the target includes improving Nigeria’s revenue profile, making the business environment more conducive and internationally competitive, transforming the tax system to support sustainable development, and achieving a minimum of 18 per cent tax-to-GDP ratio within the next three years. At 10.8 per cent, Nigeria’s tax-to-GDP ratio is below the African average of 16.5 per cent and one of the lowest in the world.
Some of the significant provisions of the bills are the elimination of subnational consumption levies – except for VAT –, review of the derivation model for VAT collection and distribution, and reduction or elimination of VAT on essential goods and services like food, education, health, transportation, and accommodation.

However, VAT rates will be increased for other goods and services from 7.5 per cent to 15 per cent by 2030 to balance the government’s revenue.

The bills propose lowering income taxes for low-income earners and completely eliminating them for those in the minimum wage bracket.
It will reduce companies’ income tax from 30 per cent to 25 per cent and give tax relief for loss-making companies.

It will transfer tax collection functions from agencies such as the Nigeria Customs Service and the Nigeria Upstream Regulatory Commission to a new National Revenue Service that will collect taxes at local government, state, and national levels.

The tax reform bills seek to eliminate so-called nuisance taxes, streamline tax heads, make tax administration modern, simple, adaptive, and become a growth enabler.

Taxation is a fundamental pillar in any modern economy. Tax revenues are essential to finance public services, education, health, infrastructure, and social programmes.

Taxes are used to redistribute wealth, reduce social inequalities, and promote economic equity. It confers ownership of government by the people. The current effort to strengthen the tax system should be considered prudent at the very least.

However, some aspects of the tax reform bills are facing pushback by Northern state governors. They claim that the new derivation formula for VAT is contrary to the interests of the North.

Under the existing Section 40 of the VAT Act, the Federal Government collects 15 per cent, of states and FCT, 50 per cent, while 35 per cent goes to LGs. The allocation to states and LGs incorporates a derivation principle of at least 20 per cent.
The northern governors are unhappy that the Nigeria Tax Bill 2024 puts VAT on the Exclusive List and proposes a 60 per cent derivation principle for VAT allocation to states with a 55 per cent share of the total while the Federal Government’s share drops to 10 per cent.

The country’s VAT revenue has grown significantly in recent years. In the first half of 2024, VAT collections rose to N3.62 trillion, a 102 per cent rise over the 2023 period.

In 2023, VAT revenues rose by 45 per cent to N3.64 trillion compared with 2022. In the second quarter of 2024 alone, VAT revenue increased by 99.82 per cent year-on-year, reaching N1.56 trillion. In 2014, VAT collections were just N804 billion.
The current tax reform efforts are audacious and a real attempt to reintroduce the principles of fiscal federalism. Nigeria’s sub-nationals have largely underperformed with state governors failing to develop innovative ideas to attract investments, build social infrastructure, and even collect adequate taxes because of the overreliance on monthly allocations from FAAC.

Many states have been saddled with a breed of lazy and incompetent governors foisted by a warped political system. Only Lagos, Kano, and Rivers can survive on internally generated revenue.

An increase in the VAT derivation formula should ordinarily be a welcome development for states.

The opposition by the northern governors betrays a lack of confidence in the potential of their respective states to become centres of prosperity and consumption.
Oyedele has clarified that VAT derivation will be calculated based on the value of goods or services in states where such is consumed not the location of the company’s headquarters as it applies currently. What needs to be done is to boost the reporting and collection systems. It will be unfair for some states to collect a disproportionate share of VAT collections on goods and services consumed elsewhere.

The northern governors should not hope to benefit from commercial activities some of which are contrary to state laws. In February 2022, the Kano State Hisbah Board, which enforces Shariah law, destroyed nearly four million beer bottles using bulldozers.

In March 2023, it destroyed 2.5 million bottles of alcohol worth N500 million. Other northern states have destroyed alcohol albeit in much more limited quantities. It is sheer hypocrisy to expect VAT collected on alcohol consumption in Lagos or Rivers to accumulate in Kano State’s treasury.

The North already enjoys an advantage in population (45 per cent) and landmass/terrain (10 per cent) in the Federal Accounts and Allocation Committee revenue allocation formula, while calls to increase the 13 per cent derivation for oil-producing states have been ignored.

The National Assembly must retain the fiscal federalism principle the VAT provisions seek to entrench.

The provisions to eliminate taxes for low-income earners disproportionately saddled with tax burdens will foster equity in the tax system and correct some systemic anomalies. Poor people are forced to pay official and unofficial taxes.

Ordinary, workers are subjected to PAYE taxes that are often not remitted by employers to tax authorities. Unofficial taxes paid to non-state actors extracted from transport fares paid by low-income earners to transport sector unions in Lagos alone were estimated at N200 billion a year. Better tax management will redirect these revenues to government coffers.
The new bills have proposed a 25 per cent tax rate for those earning N100 million and above monthly. While this could rebalance the weight of the tax burden, enforcement is critical. Nigeria’s elite are notorious for tax evasion and tax avoidance.

In October, the Nigeria Customs Service and Nigeria Civil Aviation Authority had cause to descend on private jet owners suspected of not possessing proper documentation to recover an estimated N30 billion in unpaid import duties.

Some private jet owners were cheating the system by using their planes for commercial purposes. Lagos State was able to trap many wealth tax evaders through property documentation processing systems. The government must link high-value acquisitions and purchases to tax returns.

Nigeria has a serious revenue problem that oil exports are unlikely to offset in the near term. The 2024 budget deficit has climbed to N15.5 trillion. Nigeria’s debt stock hit N66.9 trillion in the first quarter per Debt Management Office.

The tax reforms, which are significant and comprehensive, can elevate taxation as the key revenue earner for the government and correct the distortions created by Nigeria’s oil-dependent rentier economy that has failed to foster equitable distribution of resources and hobbled socioeconomic development for decades.

A good tax system should meet basic conditions of fairness, adequacy, simplicity, transparency, and administrative ease. The NASS must prioritise these in considering the tax reform bills.