The debate on the tax reform bills has sparked significant pushback, particularly from Northern politicians and elders. The debate is divisive and misses the key elements of federalism, and enhanced tax income for the government.
This underscores the need to address issues related to equity, fiscal federalism, and socioeconomic balance.
Taxation has been a contentious issue in Nigeria. The Federal Government’s introduction of these reforms seek to correct structural imbalances, particularly an overdependence on oil revenues, which has resulted in fiscal challenges, encouraged corruption, stirred regional tensions, and fostered an inefficient rentier economy amid soaring debts.
The four tax reform bills–the Joint Revenue Board of Nigeria (Establishment) Bill, 2024; Nigeria Revenue Service (Establishment) Bill, 2024; Nigeria Tax Administration Bill, 2024; and Nigeria Tax Bill, 2024–are comprehensive and landmark legislations.
Their goal is to collectively improve Nigeria’s revenue profile. They also aim to make the business environment more conducive and internationally competitive, transforming the tax system to support sustainable development.
The aim is to achieve a minimum of 18 per cent tax-to-GDP ratio within the next three years. Nigeria’s tax-to-GDP ratio, at between 6.7 and 10.8 per cent, is one of the lowest in the world.
It is below that of Ghana and South Africa, which boast ratios of 13 per cent and 27 per cent, respectively. The African average is 16.5 per cent. The OECD average was 33.9 per cent in 2023. The IMF recommends a minimum of 15 per cent tax-to-GDP for an economy.
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. This is good economics.
The bills propose the lowering of income taxes for low-income earners and complete elimination for those in the minimum wage bracket. It will reduce companies’ income tax from 30 per cent to 25 per cent.
There will be tax relief for loss-making companies, and transfer of tax collection functions from agencies such as the Nigeria Customs Service and the Nigeria Upstream Regulatory Commission to the new NRS.
The tax reform bills seek to eliminate the so-called nuisance taxes, streamline tax heads to make tax administration modern, simple, adaptive, and become a growth enabler. Progressive taxation will ensure that wealthy persons pay a fairer share of taxes.
The bills will widen the tax base and improve revenue collection efficiency by ensuring that higher-income earners pay a fairer share of taxes; capturing revenues generated from e-commerce and digital platforms; reducing tax evasion and avoidance while the revised revenue sharing formula for VAT should encourage states to mobile more resources to improve productivity and consumption.
Despite these clear benefits, the northern elite represented by some governors, elders, and legislators has rejected the bills and pressured their ranks in the National Assembly to dump them.
Politics is interfering with the passage of the bills. The House of Representatives announced an indefinite suspension of deliberations though they have scaled second reading at the Senate.
Opponents believe that the proposed reforms would disproportionately burden northern states, further deepening the divide between Nigeria’s wealthier South and its economically fragile North.
Governor Babagana Zulum of Borno claimed that the state wouldn’t be able to pay salaries and the northern economy would collapse if the reforms were implemented. He argued that Lagos will benefit more from the reforms. This is not true. Economic analysis has shown that Lagos will lose a significant share of VAT revenues given the revised sharing formula.
Aminu Tambuwal (a former governor and incumbent senator) is opposed to the VAT increase, citing current hardship, but overlooks the fact that the proposed increase is gradual, with a five-year timeline.
Taxes have been eliminated for small businesses with less than N50 million annual turnover. The reforms place more burden on wealthy individuals who have routinely evaded and avoided taxes.
The problem with the northern elite is the fear that true fiscal federalism will be entrenched with the passage of these bills after years of depending on the federal purse for income derived from oil and VAT sourced from other parts of the country. With a predominantly agricultural economy and lower industrial activity, the North fears it may contribute less to the tax pool and receive smaller disbursements.
Yet the increase in VAT allocation to states from 50 per cent to 55 per cent and a review of the allocation formula based on derivation from 20 per cent to 40 per cent to states where goods and services are consumed rather than companies’ head offices should give the impetus to states to scale up opportunities and incentives for commercial activities.
The narrow views being espoused and false alarms about the North being short-changed expose the reluctance of the northern elite to embrace progress and implement sound economic policies that the current situation demands.
The North has been saddled with governors who spend more time in Abuja and overseas rather than running their states.
Insidious politics should not frustrate laws that will recalibrate the tax system and reduce dependence on oil revenues that are subject to increasing uncertainties.
Northern governors should devise strategies to boost investments, raise income levels, and improve tax collection efficiency with accurate data and monitoring.
Increased tax revenue can significantly boost funding for public services, particularly in education, healthcare, and infrastructure.
The tax-to-GDP ratio in Norway has stood at between 40 and 45 per cent since the 1970s despite substantial oil revenues saved in a sovereign wealth fund that holds $1.74 trillion in assets today.
Rather than reject the bill, northern leaders and lawmakers should make specific proposals to address areas of concern and reflect the unique challenges of their region.
However, the Federal Government must remain open to dialogue, demonstrating its commitment to equity and fairness.
The concentration of taxation power in the Federal Government needs to be reviewed to allow states to retain some taxes.
The reforms should encourage state governments to generate more revenue internally rather than relying solely on FAAC disbursements.
This shift would foster healthy competition among states, enhance governance, and ensure accountability in resource management. A situation where billions are lost to illegal mining that benefits a few elite individuals including foreigners must stop.
The agitation from the North could reignite the call for increased derivation by oil-producing states which means less funds from the federal purse.
The tax reform debate transcends regional politics; it speaks to the heart of Nigeria’s economic future. The reforms, if implemented wisely, could mark a turning point in Nigeria’s journey toward sustainable development and reduce the risk of the country stagnating under the weight of unsustainable fiscal policies.
The northern opposition should be constructive in their engagement. However, the government must address legitimate concerns to secure buy-in from all regions.
Crucially, the government must demonstrate transparency and accountability in managing tax revenues. Citizens need to see tangible benefits in terms of better roads, functioning schools, quality healthcare, stable electricity, and sustainable social safety nets for their tax contributions.
