Transformation of taxation in Nigeria: Insights into 2024 tax reforms, By Bolutife Oluwadele

Nigeria Tax Reform Bills 2024 would be an ambitious step towards rectifying the inefficiencies and unfairness that have been ingrained into the country’s tax structure from years ago. By making taxes more comprehensible, their administration simpler, and equity more equal through progressive action, the reforms represent an opportunity for a more inclusive and economically sound fiscal future.

Taxes are the lifeblood of a country’s economy, fuelling public services and government operations. In Nigeria, however, this vital system has long been plagued by inefficiencies, public distrust, and an overreliance on oil revenue. Yet robust and efficient taxation is no longer a luxury in a country striving to diversify its economy. The Nigeria Tax Reform Bills 2024 represents a courageous step towards addressing these systemic issues, with the potential to foster growth, equity, and efficiency.

These initiatives, announced by President Bola Ahmed Tinubu, aim to improve Nigeria’s taxation by harmonizing the tax codes, simplifying the administration, and offering concessions to businesses and low-income individuals. Beyond raising revenues, these reforms also aim to restore faith in government, make paying taxes easier, and distribute the tax burden more equitably. However, their implementation has sparked debates over how taxes will be raised, the contentious VAT sharing formula, and whether the government is truly committed to delivering tangible benefits to taxpayers.

In this article, I delve into the major aspects of the 2024 Tax Reform Bills, their potential to reshape the Nigerian economy, and the areas where they might fall short. I also explore the issue of public confidence, a factor that could either bolster or impede these reforms. As Nigeria undergoes this transition, the government, corporations, and citizens must comprehend the comprehensive impact of these changes.

Pros and Cons of the Nigeria Tax Reform Bills 2024

1. A Single Tax Act (Nigeria Tax Bill 2024)

The Nigeria Tax Bill 2024 will reform Nigeria’s various taxation systems into a single framework. This change aims to eliminate confusion, simplify compliance, and make things clear for taxpayers and administrators. When the tax codes are combined under a single system, the administration will be able to make life easier, help compliance increase, and encourage voluntary compliance. For taxpayers, small businesses in particular, this simplification would remove hurdles that currently discourage registration and formalization.

2. Simplified Taxation (Tax Administration Bill)

The Tax Administration Bill creates comprehensive reforms to collect and process taxes. The bill will attempt to minimise human involvement, errors, and corruption using advanced technology like automation and digital platforms. For example, online tax filing and payment will make it easier for people and corporations to comply. These improvements are supposed to reduce bureaucratic red tape, facilitate better services, and raise revenue promptly.

3. Creation of the Nigeria Revenue Service

One of the most significant changes is the establishment of the Nigeria Revenue Service (NRS), a centralized body responsible for administering all taxes. This move is set to replace the current fragmented approach of multiple tax collection agencies, which often leads to inefficiencies and overlaps. The NRS will not only streamline tax reform but also enhance the operations of federal, state, and local governments, reducing administrative burdens. Crucially, this office will work to increase accountability and compliance across the board, instilling confidence in the reform process.

4. Stability in Taxation (Joint Revenue Board)

The Joint Revenue Board will coordinate taxation at Nigeria’s three levels of administration—federal, State, and Local. This harmonisation will aim to address inequalities, solve disputes, and form a unified structure that provides tax administration with equality. The harmonisation of policies is especially important when it comes to fixing the double taxation problem that has plagued companies across states.

5. Incremental VAT Increases

The reforms call for a progressive increase of Value-Added Tax (VAT) from 7.5 per cent to 10 per cent by 2025, 12.5 per cent by 2026, and 15 per cent by 2030. Though the government posits that they need to be done to pay for vital services and infrastructure, the opposition worries that they will raise prices and the cost of living for consumers and people experiencing poverty. Finding a balance between revenue generation and economic fairness is still a struggle.

6. Telecommunications Excise Duty

Another important part of the reforms is a 5 per cent excise duty on telecommunications services. The size of the industry and its economic importance means this measure will likely bring a lot of money. However, it has been criticised for increasing the price consumers pay, which has become critical to modern commerce and communication.

7. Corporate Income Tax Adjustments

To assist SMEs, the changes exempt corporations with an annual turnover of less than N50 million from corporate income tax. For larger businesses, progressive taxation means their tax contributions equal their revenue. The combination embodies the government’s commitment to equity as well as the centrality of SMEs to job creation and economic growth.

Trust Gap: The Achilles’ heel of Nigeria’s Taxation System.

Nigeria’s biggest but most overlooked obstacle to tax reform is the underlying trust gap between the people and the government. Most Nigerians are deeply suspicious of the efficiency of tax policies due to fears of wrongdoing, unfairness, and secrecy.

Sources of Mistrust 

1. History of Corruption and Inefficiency: Decades of corruption have damaged public trust in the government’s capacity to spend tax naira properly.
2. Intransparency: Lack of transparent reporting of how taxes are spent creates uncertainty among taxpayers.
3. Feelings of Injustice: Policies that appear to favour the rich or burden the poor only fuel feelings of injustice.

Restoring Trust 

Regaining trust will require not only reforms of policy but also a governmental cultural adjustment. Key steps include: 

• Measurable Impact: The direct spending of higher revenues on tangible, visible infrastructure, such as roads, hospitals, and schools, could help establish the value of taxes.
• Public Accountability: Regularly publishing full-length expenditure reports can increase transparency and accountability.
• Citizen Involvement: Establishing forums for taxpayer-policymaker engagement will help people better understand each other and decrease resistance to reform.

Even the best-intended reforms risk disobeying and provoking a public backlash if these trust challenges are not addressed.

The VAT Sharing Formula Debate 

Perhaps the most controversial feature of the 2024 reforms is the envisaged redistribution of VAT income:

• Federal Cost of Collection: Cut from 15 per cent to 10 per cent.
• State Share: Upped from 50 per cent to 55 per cent.
• Local Share: Pertained at 35 per cent.

Pros 

• State governments will have more resources to serve local demands in infrastructure, social services, etc.
• The derivation principle provides regions with more VAT revenue a proportionate share, thus guaranteeing equality.

Cons 

• The operational complexity of mapping VAT collections geographically might lead to administrative problems.
• The chances of disputes between states and the federal government are high.

What are the benefits and Disadvantages of the 2024 Tax Changes?

Any big policy change has its perks and downsides, and the Nigeria Tax Reform Bills 2024 are no exception. The reforms have enormous potential to modernise the country’s tax system and stimulate growth, but they also pose issues that must be carefully evaluated and mitigated.

Pros of the Reforms 

1. Simplification of Tax Laws

What Does It Mean: By merging various tax rules under one umbrella, the reforms remove all the hoops and redundant rules that impede compliance.

Why It Matters: Simplified laws make it more accessible to businesses and individuals to understand their taxes, which reduces the likelihood of mistakes and increases voluntary compliance. This clarity is precious for small and medium enterprises (SMEs) facing bureaucratic hurdles in traversing Nigeria’s split tax system.

Case Study: A small business in Lagos that used to have many multiple taxation interplays now follows a more straightforward structure and saves time and resources.

2. Improved Efficiency Through Technology

Definition: The Tax Administration Bill established automation and digital platforms to minimize human intervention and streamline tax collections.

Why it’s Important: They reduce processing times, increase the potential for corruption, and help make tax collection and administration more efficient.

Case Study: One individual can now file his taxes online and without intermediaries and queues, so it’s faster and with fewer mistakes.

3. Support for SMEs

How It Works: Under the reforms, companies with turnovers below 650M will not be subject to corporate income tax.

Why It Is Important: This measure relieves SMEs by helping them redirect their earnings back into expansion and the creation of employment. The reforms foster entrepreneurship and formalization by encouraging such businesses, which form a big chunk of Nigeria’s economy.

Example: A local Kano manufacturing startup can now use its tax savings to buy new machines or hire employees.

4. Equity Through Progressive Taxation

What It Means: Larger corporations will receive progressive tax rates that match the tax they pay to their profits.

Why It Matters: It ensures that the rich receive their fair share of taxation, helping to close income inequality and creating an atmosphere of fairness in the system.

Case Study: Multinationals in Nigeria will raise more taxes for the country, funding infrastructure and public works.

5. Strengthened Revenue Allocation

What It Is: Changing the VAT sharing formula from 50 per cent to 55 per cent raises state governments’ share of income to make it more appropriate to local development requirements.

Why It’s Relevant: More money at the state level can support critical infrastructure, healthcare, and education investments, especially in underserved areas.

Example: A state such as Rivers, which takes in substantial VAT, will be allocated an equal amount to invest back into its development.

6. Social Welfare Funding

What It Is: Income generated from VAT increases and excise duty are directed to social welfare programmes to alleviate the burden on low-income families.

Why It’s Important: It’s designed to balance revenue generation and save marginalised populations from a budget crunch.

For instance, subsidies for necessities or cash handouts directly to low-income people can cover the cost of living.

Cons of the Reforms 

1. A Higher Financial Toll On Low-income Families

What It Means: The gradual VAT hike and new excise taxes on telecommunications may raise the price of goods and services.

Why it’s Important: Poor households, which already face rising living costs, bear the brunt of such rises, which could push more families further into poverty.

Example: A household in rural Nigeria may see their everyday items like food and utility bills rise because of the increase in VAT.

2. Complexity in Federal-State Dynamics

What it means: The VAT sharing formula seeks to encourage equity, but the reduced federal portion (down from 15 per cent to 10 per cent) may reduce the central government’s capacity to finance national projects.

Why It’s Important: This redistribution could harm the federal-state relations, resulting in tax-sharing contentions.

For instance, Federal projects such as building nationwide roads could be delayed due to funding issues.

3. Implementation Challenges

What Does It Mean? Introducing systems like automated tax platforms requires infrastructure, training, and public awareness investment.

Why it is Important: The early adoption phase can be full of technical pitfalls, stakeholder resistance, and regional variation.

Case study: Rural companies that lack access to the Internet may not find it easy to adjust to the new digital filing of taxes.

4. Higher Costs for Telecommunications

What It Is: The 5 per cent excise duty on telecommunications services will be steeper for consumers and businesses dependent on digital connections.

Why It Is Important: This could discourage digital adoption and economic activities that rely on cheap communication.

Case Study: For instance, a startup using cloud-based tools may incur additional operating costs and lose market share.

5. Potential for Compliance Resistance

What it Will Do: Even if the reforms are good, some businesses and individuals will try to resist compliance, citing unjustified or misgivings that the government will properly use tax money.

Why it’s important: Failure to comply destroys the reforms’ revenue capacity and feeds the tax system into inefficiency.

For instance, Private sector companies could remain unregistered to circumvent perceived formalisation costs.

Conclusion

Nigeria Tax Reform Bills 2024 would be an ambitious step towards rectifying the inefficiencies and unfairness that have been ingrained into the country’s tax structure from years ago. By making taxes more comprehensible, their administration simpler, and equity more equal through progressive action, the reforms represent an opportunity for a more inclusive and economically sound fiscal future. Their priority of helping small businesses and bringing in revenue for social welfare measures reflects the government’s determination to balance economic development with the welfare of the weak.

But these reforms are not without difficulties. These concerns are not exempt from consideration: the costs to low-income households, the challenges of implementation, and regaining public confidence. To maximise the effects of the reforms, the state would need to be transparent about how the revenue is used, focus on infrastructure and social development, and engage with the people in promoting a tax-compliance culture.

After all, the effectiveness of the 2024 Tax Reforms depends on whether it will bring real solutions for ordinary Nigerians. When citizens can see their tax dollars put into good roads, good electricity, good education and better healthcare, taxation won’t feel like an obligatory burden but as an equal investment in the nation’s success. Whether implemented effectively or not, these reforms will have the potential to remake Nigeria’s tax structure and give it a foundation for economic resilience and equitable growth for the next generation.

Bolutife Oluwadele is an author, chartered accountant, and public policy scholar based in Canada; email: [email protected]