Nigeria Tax Bill: A Landmark Reform with Far-reaching Implications

Since President Bola Tinubu presented four major tax reform bills to the National Assembly on October 3, 2024, the country has been polarised. The bills— the Nigeria Tax Bill 2024 (NTB), the Nigeria Tax Administration Bill, the Nigeria Revenue Service Establishment Bill, and the Joint Revenue Board Establishment Bill—aim to overhaul tax administration and revenue generation in Nigeria, with several provisions at their core.

These proposed reforms are not the result of sudden decision-making; rather, they are the culmination of a year of careful planning and consultation by the Presidential Committee on Fiscal Policy and Tax Reforms, led by Taiwo Oyedele. The committee was established in August 2023, two months after Tinubu assumed office as President, to address Nigeria’s tax challenges.

The NTB is a sweeping piece of legislation intended to consolidate various tax laws into a single, simplified framework. One of its key provisions is the empowerment of the Nigeria Revenue Service (NRS), which is set to replace the Federal Inland Revenue Service (FIRS), with the authority to collect all national taxes. This includes taxes previously managed by other bodies, such as royalties collected by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC),  excise duties and import VAT previously overseen by the Nigeria Customs Service.

Key Sections Of The Tax Bill for Individuals and Businesses

Contrary to claims, including those made by a ferocious critic of the bill, Senator Ali Ndume, that the proposed Nigeria Tax Bill (NTB) focuses solely on tax increases, the bill seeks to reduce the tax burden for individuals and businesses in many cases, alongside simplifying Nigeria’s complex tax laws.

Reduction in Personal Income Tax: The new provisions introduce a progressive decrease in tax rates, with lower-income earners either being exempt from paying PIT or benefiting from reduced rates compared to the current system. According to the fourth schedule of the bill, the annual tax rates will be as follows:

A comparison of the current tax rates with those proposed in the Nigeria Tax Bill (NTB) highlights the bill’s pro-low income earners approach. Under the current system, a person earning N25,000 monthly (N300,000 annually) pays a 7% income tax. However, the new rates in the NTB propose that individuals earning N800,000 or less annually be exempt from paying any income tax. Given that more than 70% of Nigerians earn below N800,000 annually, this change significantly benefits lower-income groups.

In theory, this means that all minimum wage earners in Nigeria would be exempt from personal income tax. Additionally, Section 13(2a) of the NTB provides a major incentive for young people working in the tech sector, as it exempts employees of start-ups and technology-driven service providers from income tax. 

The NTB introduces a progressive tax rate, ensuring that individuals who earn above N50 million annually will be subject to the top income tax rate of 25%. This approach seeks to make wealthier individuals pay a fairer share of taxes, addressing the inequality where low-income employees are made to pay taxes by their employers by deducting from their salaries.

Reduction in Company Profit Tax: The Nigeria Tax Bill (NTB) is designed to be business-friendly, offering tax relief for both small and large companies. Under the bill, small businesses with an annual turnover below N25 million will be exempt from paying profit tax, a major boost for the sector. For larger businesses, the NTB introduces a progressive reduction in the corporate tax rate, cutting the top rate from 30% to 25%.

According to Section 56 of the NTB, small businesses will be taxed at 0% (zero-rated), while medium to large businesses will face a tax rate of 27.5% in 2025, dropping to 25% from 2026 onwards. This contrasts with the current structure, where large companies with turnovers over N100 million pay a 30% corporate income tax (CIT), and medium-sized businesses with turnovers between N25 million and N100 million pay 20%.

For most companies, the NTB will simplify the tax system by consolidating taxes into a maximum of two categories: income tax and development levy. This reduction provides relief to businesses, making the NTB a welcomed change for many.

A Progressive Value-Added Tax: The proposed Nigeria Tax Bill (NTB) has sparked controversy, particularly regarding the Value-Added Tax (VAT) provisions, with some governors and senators voicing concerns. Chapter Six of the NTB outlines the gradual increase in the VAT rate, which will rise from the current 7.5% to 10% in 2025, 12.5% in 2026, 2027, 2028, and 2029, and finally, be set at 15% from 2030.

However, the bill also includes provisions to protect lower-income Nigerians from the impact of higher VAT rates.  These include food, medical products, baby items, transportation, electricity, LPG, CNG, and petroleum products, all of which are listed in Part IV of Chapter 8 of the NTB. As a result, the planned VAT increases will not affect the essential items that low-income individuals typically purchase.

Another contentious issue surrounding the VAT provisions is the derivation formula for its distribution. It’s important to clarify that the NTB itself does not address VAT distribution; instead, this is covered in the Nigeria Tax Administration Bill. Section 77 of this bill outlines the distribution of VAT revenue as follows: 10% to the federal government, 55% to state governments and the Federal Capital Territory (FCT), and finally 35% to local governments

Additionally, Section 77 specifies that 60% of the VAT revenue allocated to states and local governments will be distributed based on derivation. Section 22(12) of the Nigeria Tax Administration Bill further clarifies that VAT will be attributed to the place of supply and consumption, rather than the place of remittance. 

“[This means]under the new Tax policy when any State hosts an event with a lot of new “visitors” e.g. festivals, sporting events, concerts, Durbar, even Christmas “migration” the VAT on phone calls will increase to the State. My tiny town in Abia will get more money in December as folks travel back for Christmas and make phone calls using the base station in my village,” Kalu Aja, a Nigerian financial expert pointed out. “Population is now VAT money,” he added. This shift could impact areas that currently benefit from the concentration of company headquarters, as VAT will now be tied to the location of actual consumption.

The Nigeria Tax Bill (NTB) stands as one of the most significant reforms since the country’s independence. Once enacted, it will overhaul Nigeria’s tax system by repealing 11 existing laws, including the Capital Gains Tax Act, the Companies Income Tax Act, and the Value Added Tax Act. Additionally, 13 other laws will undergo consequential amendments, and one subsidiary legislation will be revoked, with two others adjusted. For example, the Value Added Tax (Modification) Order 2021 will be repealed, and the Company Income Tax (Significant Economic Presence) Order 2020 will be amended. Certain regulations in the Petroleum (Drilling and Production) Regulations 1969 will also be repealed.

One of the most contentious aspects of the NTB is its supremacy clause in Section 202. This provision states that the NTB will take precedence over other laws relating to taxes, royalties, levies, excise duties, and other similar charges. If any other law contradicts the NTB, its provisions will be rendered void, positioning the NTB as the supreme authority on tax matters in Nigeria. This clause grants the NTB unprecedented power.

In retrospect, despite the controversies, the NTB offers a substantial opportunity to streamline tax processes, ease the burden on businesses and individuals, and boost revenue collection. By clarifying tax laws, it promises to remove confusion, simplify compliance, and improve the ease of doing business in Nigeria.

The reform could have a transformative impact on the country’s economy, making it one of the most comprehensive pieces of legislation in Nigeria’s history. “Does Nigeria need tax reform? Yes, are you against the reform because it’s an executive bill from Tinubu? Read the merits and demerits of the bill, then make an informed decision,” Aja said allaying the fears of Nigerians on the bill, urging those who genuinely care about Nigeria’s progress and the welfare of its citizens not to dismiss this bill as “dead on arrival.”