Tax reform as the path to economic renewal

On October 3, 2024, President Bola Tinubu took a significant step toward reshaping Nigeria’s economic future by transmitting four ambitious tax reform bills to the National Assembly. These bills—the Nigeria Tax Bill 2024, Nigeria Tax Administration Bill, Nigeria Revenue Service Establishment Bill, and the Joint Revenue Board Establishment Bill—aim to overhaul Nigeria’s tax system, addressing long-standing inefficiencies, structural imbalances, and inequities. This is a transformative moment for the country, and if properly implemented, these reforms could lay the groundwork for sustainable economic growth.

These tax reform bills are the result of over a year of careful research, consultations, and collaboration led by the Presidential Committee on Fiscal Policy and Tax Reforms, under the chairmanship of tax expert Taiwo Oyedele. Inaugurated just two months into Tinubu’s presidency, the committee’s work clearly reflects the administration’s recognition that a revamped tax system is critical for building a strong fiscal foundation. This effort is aimed at tackling one of Nigeria’s most pressing challenges: its deeply flawed tax structure.

Nigeria’s tax system has long been characterised by inefficiency, leakages, and an inability to generate sufficient revenue. At just 10.8%, Nigeria’s tax-to-GDP ratio is one of the lowest in the world—well below the African average of 16.5%. This low ratio has stymied the country’s capacity to fund critical infrastructure, healthcare, education, and other public services. It has also contributed to a situation where reliance on oil revenues has overshadowed domestic tax generation, leaving the country vulnerable to global price fluctuations.

The four bills transmitted by President Tinubu are designed to reverse this trend. They focus on improving the tax administration process, enhancing the ease of doing business, and fostering a more competitive economic environment. One of the boldest objectives is to raise Nigeria’s tax-to-GDP ratio to 18% within three years—an ambitious target that will require comprehensive changes in how tax is collected and distributed.

Among the significant provisions of the bills are reforms to the Value Added Tax (VAT) system, which have the potential to reduce the tax burden on essential goods and services. The elimination of subnational consumption levies, except for VAT, aims to streamline tax collection and reduce confusion. Additionally, the review of the VAT derivation formula is likely to be a game-changer for states that rely heavily on federal allocations. By allowing for a more equitable distribution of VAT revenue, this change could give states more financial autonomy and reduce their dependence on the Federal Accounts Allocation Committee (FAAC).

Perhaps most notably, the Nigeria Tax Bill 2024 introduces provisions that will directly benefit small businesses, which constitute around 90% of Nigeria’s business landscape. Under the new tax regime, most small businesses will be exempt from profit tax, which should ease their financial burden and encourage growth. The bill also reduces the tax burden on large companies, freeing up resources that could be reinvested into their operations, leading to job creation and economic expansion. Furthermore, it eliminates the minimum income tax that was previously imposed on companies, even if they did not report profits—an obstacle that had deterred investment and growth for many businesses.

One of the most significant aspects of this tax reform is the attempt to reintroduce the principles of fiscal federalism. Nigeria’s state governors have long relied on monthly federal allocations, rather than developing innovative strategies to boost their states’ internal revenue generation. Many states have struggled with poor governance, resulting in a lack of investment in infrastructure, education, and healthcare. Only a few states, such as Lagos, Kano, and Rivers, have been able to survive on internally generated revenue.

By increasing the VAT derivation formula for states, the proposed tax reforms aim to encourage states to look beyond federal handouts and develop strategies for economic self-sufficiency. This will not only incentivize states to improve governance and attract investment, but it could also spur competition among states, leading to better services and higher standards of living for citizens.

While the proposed reforms are visionary, they will not come without resistance. For example, the northern governors’ opposition to the increased VAT derivation formula reveals a lack of confidence in their own states’ potential for prosperity. This opposition is rooted in an ingrained reliance on federal allocations, rather than fostering the conditions for sustainable local economies. However, these reforms should be viewed as an opportunity for all states to grow their economies, reduce poverty, and enhance the quality of life for their citizens. Rather than opposing these changes, governors and political leaders should embrace them as a means of securing their states’ economic futures.

The Nigeria Tax Bill 2024 stands as the most comprehensive attempt to reform Nigeria’s tax system in the country’s history. If passed, it could fundamentally reshape the business environment, facilitate economic growth, and increase government revenues without unduly burdening businesses or individuals. It has the potential to remove many of the systemic inefficiencies that have plagued the country’s tax system for decades.

This reform package offers a historic opportunity to modernise Nigeria’s tax system, promote equitable growth, and foster fiscal independence at the state level. President Tinubu’s commitment to these reforms demonstrates his determination to address the country’s fiscal challenges head-on. The Nigeria Tax Bill 2024 and the other accompanying bills should be seen as an opportunity to reset Nigeria’s economic trajectory, not just for the current generation but for future ones as well.

The reform process will require careful implementation, robust political will, and broad consensus-building. It is crucial that the federal and state governments, as well as the private sector, work together to ensure these reforms deliver tangible benefits to all Nigerians. The time for meaningful tax reform is now, and this legislative package, if passed, will be a major milestone in Nigeria’s quest for long-term economic stability and growth.

Let’s not allow this landmark opportunity to slip through our fingers. If Nigeria is to secure a prosperous future, these tax reforms must be embraced, not rejected. The nation deserves a tax system that is fair, efficient, and capable of financing the growth and development its people need.