The Controversial Tax Reform Bill in Nigeria: A Comprehensive Examination in Support

In recent years, Nigeria has faced a persistent challenge with its tax system. The country’s tax base has been insufficient, and revenue collection has remained suboptimal, contributing to Nigeria’s budget deficits and an over-reliance on oil revenues. In response to these issues, the Nigerian government has been working on a series of tax reforms aimed at addressing these systemic problems, boosting national revenue, and fostering a more inclusive economy. One of the most debated elements of this reform is the Finance Act of 2020, which includes significant changes to Nigeria’s tax code.

While the tax reform bill has attracted its fair share of criticism and controversy, particularly from business groups and individuals concerned about the burden it may place on citizens and companies, there are compelling reasons to support it. This article provides an in-depth examination of the controversial Finance Act, highlighting the rationale behind the changes and the potential long-term benefits of a well-executed tax reform.

Background: Nigeria’s Tax Challenges

Nigeria, despite being one of Africa’s largest economies, has a tax system that remains heavily underdeveloped. According to the World Bank, Nigeria’s tax-to-GDP ratio has been below the average for sub-Saharan Africa, indicating inefficiencies in tax collection. The government relies heavily on oil revenues, which exposes the nation to the volatility of global oil prices.

A key factor contributing to Nigeria’s weak tax system is the low number of registered taxpayers. According to the Federal Inland Revenue Service (FIRS), only about 14 million Nigerians were formally registered for tax purposes as of 2020, a figure that constitutes less than 10% of the country’s estimated working-age population.

These structural issues prompted the government to initiate tax reforms, with the Finance Act being one of the most significant steps taken to reshape Nigeria’s fiscal landscape.

The Finance Act of 2020: Key Features

The Finance Act of 2020, which was signed into law by President Muhammadu Buhari, introduced several important provisions designed to overhaul Nigeria’s tax system. The main goals were to boost revenue, enhance compliance, and improve economic fairness. Here are some key provisions that have sparked debate:

1. Corporate Income Tax (CIT) Changes: The reform lowered the Corporate Income Tax (CIT) rate for small businesses with a turnover of less than ₦25 million. This adjustment was aimed at easing the financial burden on small and medium-sized enterprises (SMEs) and stimulating growth in this crucial sector of the economy.
2. VAT Increase: One of the most contentious changes was the increase in the Value Added Tax (VAT) rate from 5% to 7.5%. This raised concerns among the public and businesses, with critics arguing that the increase would disproportionately impact the poor and small businesses.
3. Introduction of Digital Economy Tax: The reform introduced a tax on digital businesses. This was designed to address the growing presence of international technology firms (like Facebook, Google, and Twitter) in Nigeria, who were previously able to generate significant revenue in the country without being subject to Nigerian taxes.
4. Tax Incentives for Investment: In an effort to attract both foreign and local investment, the Finance Act included provisions for tax incentives, including the promotion of capital allowances and the establishment of free trade zones.
5. Personal Income Tax: The Finance Act amended personal income tax rates to encourage high-income earners to contribute more to the economy while maintaining a progressive tax structure.

Support for the Tax Reform Bill

Despite the opposition from certain sectors of society, several compelling arguments support the tax reform bill and its long-term benefits to Nigeria.

1. Diversification of National Revenue Sources

Nigeria’s over-reliance on oil revenues has left the country vulnerable to fluctuations in global oil prices. A sharp decline in oil prices in 2020 during the COVID-19 pandemic severely impacted Nigeria’s national budget, leaving the country scrambling for alternatives to plug the budget deficit. According to the National Bureau of Statistics (NBS), oil revenues contributed just over 60% of total government revenue in 2020.

By expanding the tax base, the Finance Act seeks to diversify Nigeria’s sources of revenue. The reform aims to capture revenue from under-taxed sectors such as the digital economy, as well as ensuring that SMEs and large corporations alike contribute their fair share. With a stronger tax base, Nigeria can reduce its dependence on oil revenues, which in turn can lead to more economic stability.

2. Boosting Economic Fairness

One of the major goals of the tax reform is to promote greater economic fairness. Nigeria’s tax system has been criticized for being regressive, where the wealthy have historically evaded tax obligations, while the poor and middle-class have borne a disproportionate tax burden. For instance, the introduction of digital economy taxes ensures that multinational companies operating in Nigeria contribute to the country’s revenue.

Additionally, the progressive nature of the personal income tax changes ensures that higher earners contribute more, while low-income earners continue to be protected from high tax rates. In a country with stark income inequality, such measures are critical to creating a fairer economic system.

3. Promoting Small and Medium-Sized Enterprises (SMEs)

SMEs are critical to job creation and economic development in Nigeria. By reducing the corporate income tax rate for small businesses with turnover under ₦25 million, the Finance Act aims to create an enabling environment for SMEs to thrive. These businesses represent a significant portion of the Nigerian economy, and by providing tax relief to them, the government is encouraging entrepreneurship, which can spur innovation and job creation.

The SME Business Confidence Index by the Lagos Chamber of Commerce and Industry (LCCI) has consistently shown that tax relief is one of the key factors that could enhance the growth of SMEs in Nigeria. Reducing the tax burden on SMEs will allow them to reinvest in their businesses, thereby stimulating local economies and contributing to long-term economic growth.

4. Improved Tax Compliance

The Finance Act also enhances the legal framework for tax collection, making it harder for businesses and individuals to evade taxes. The introduction of electronic tax filing and digital payments has made it more convenient for taxpayers to comply with the tax code, thereby increasing the overall compliance rate.

The FIRS has reported a steady increase in tax collections since the introduction of digital tax solutions, and the continued improvement of these systems could help increase tax revenue. This will not only improve government services but also reduce corruption by eliminating opportunities for tax evasion.

5. Increased Public Sector Funding for Development Projects

The revenue generated from the increased taxes could be used for development projects, particularly in infrastructure and healthcare, which are critical areas of concern in Nigeria. According to PwC Nigeria, the government can allocate funds raised from VAT and corporate income taxes towards projects like road construction, electricity expansion, and healthcare improvements, all of which are necessary to stimulate economic growth and improve living standards.

6. International Alignment and Global Best Practices

The introduction of the digital economy tax is a step toward aligning Nigeria with global tax standards. As the digital economy continues to grow, many countries, including France, the UK, and India, have implemented taxes targeting multinational corporations that operate within their borders. This makes Nigeria’s efforts to tax foreign digital businesses part of a broader global trend, ensuring that the country doesn’t fall behind in the international economic race.

Conclusion: The Case for the Tax Reform Bill

Despite the controversy surrounding the Finance Act of 2020, its long-term potential to improve Nigeria’s fiscal stability cannot be overlooked. By diversifying revenue sources, promoting economic fairness, supporting SMEs, and increasing tax compliance, the reform sets the stage for a more resilient economy.

Critics of the tax reform argue that the increased VAT rate and the new tax measures will disproportionately hurt low-income Nigerians. However, the broader objectives of the reform—building a stronger tax base, improving infrastructure, and boosting job creation—ultimately outweigh these concerns.

As Nigeria continues to face challenges related to oil price fluctuations, corruption, and underdevelopment, tax reform presents a key opportunity for the country to create a more sustainable and equitable economy. If properly implemented and supported by effective public policies, the Finance Act could mark a turning point in Nigeria’s quest for economic prosperity.