Opeyemi Bamidele: Key Insights from the New Tax Bills
1. VAT Sharing Formula Overhaul
One of the significant changes proposed in the Tax Bills is the revision of the Value Added Tax (VAT) distribution formula. According to Section 77 of the Nigeria Tax Administration Bill, the share of VAT allocated to the federal government will be reduced from 15% to 10%, while state governments will receive 55% and local governments 35%. This adjustment aligns with Section 40 of the 2004 VAT Act, which previously allocated 20% of VAT to the states and local governments. However, the reform bill increases this to 60% in favor of the sub-national governments.
This adjustment aims to address several issues, including the ongoing litigation between the federal government and states over VAT collection rights. By increasing the VAT derivation share for states and local governments, the reform is intended to encourage more robust economic activity at the regional level, improve fiscal autonomy, and boost competitiveness. The shift is seen as a way to enhance the financial independence of states, ensuring a fairer and more balanced fiscal system across Nigeria.
2. Tax Incentives for Exports and Essential Goods
Section 22 (5-9) of the Nigeria Tax Administration Bill introduces significant tax incentives designed to foster economic growth. Key provisions include zero-rated VAT for exports and essential goods consumed by the general public. This will help Nigeria’s global competitiveness by making exported goods, services, and intellectual property more attractive, boosting international trade. Additionally, exempting essential food items from VAT aims to curb rising prices, offering relief to the approximately 133 million Nigerians living in multidimensional poverty. These measures are poised to stimulate economic activity while making basic goods more affordable for the masses.
3. Tax Exemption for Low-Income Earners
A standout feature of the proposed Tax Bills is its focus on the vulnerable working class. Under Chapter 2 of the Bill, individuals earning N800,000 or less annually, including minimum wage earners, will be exempt from personal income tax. This provision is expected to ease the financial burden on a large portion of the population, helping to increase purchasing power and reduce inflationary pressures, especially on food. As many as 90% of workers across various sectors are expected to benefit from this exemption, making it a crucial step toward alleviating the financial strain on households, particularly in times of global economic uncertainty.
4. Tax Relief for Small Businesses
The Tax Reform Bills also provide significant relief to small businesses. The proposed financial threshold for tax exemptions has been raised from N25 million to N50 million in annual turnover, effectively doubling the limit. Additionally, businesses with total assets up to N250 million will also be exempt from taxes. This initiative is designed to foster growth among micro, small, and medium enterprises (MSMEs), which account for nearly half of Nigeria’s GDP and 87% of total employment. By reducing the tax burden on MSMEs, the bill aims to create a more supportive environment for entrepreneurship, particularly at the local government level, where most of these businesses operate.
5. Reduction in Corporate Taxes and the Introduction of a Development Levy
For large corporations and multinational companies, the Tax Bills propose a reduction in company income tax (CIT) rates. The current CIT rate of 30% would decrease to 27.5% in 2025 and further to 25% by 2026, bringing Nigeria’s corporate tax rate closer in line with other African countries like South Africa (27%) and Kenya (30%). Additionally, a 4% development levy is proposed to replace multiple taxes and levies that companies currently pay. This levy would be directed toward funding the Nigerian Education Loan Fund (NEFUND), which supports students in higher education. In 2030, this levy is set to reduce to 2%, streamlining the tax structure for companies while ensuring sustainable funding for education and other development initiatives.
These five takeaways highlight how the proposed tax reforms aim to promote economic fairness, reduce the tax burden on vulnerable groups, and foster a more competitive and inclusive economy. While the new formula and incentives could potentially reshape Nigeria’s fiscal landscape, the full impact will depend on how these changes are implemented and received by different stakeholders across the nation.
