Nigeria's Tax Reform Bills: Key Proposed Changes To The Indirect Tax Framework And What They Mean For Tax Payers

Introduction

Taxation is undeniably a vital tool for national development. Beyond serving as a primary source of government revenue to fund essential goods and services for the people, tax policies play a significant role in driving economic growth and job creation by influencing investment and capital formation within the economy. Reforming the tax system to enhance effectiveness, equity, and efficiency is crucial for maintaining healthy public finances.

In Nigeria, the recent Tax Reform Bills represent a significant stride toward enhancing tax administration, improving revenue generation, and creating a more business-friendly environment. These reforms are aimed at harmonizing taxes, revenue agencies, processes & technology, intelligence and audit and reporting. The Bills have garnered significant attention from stakeholders, with some viewing them as a step toward fiscal sustainability and better tax administration, while others remain opposed.

One of the critical areas of focus of the Bills is the reform of the indirect tax framework. These taxes, which are levied on consumption rather than income, are essential for broadening Nigeria's tax base and driving economic development.

This article explores the key proposed changes to the indirect tax framework, with a specific focus on the reforms introduced by the Nigerian Tax Bill ("NTB" or "the Bill") and the Nigeria Tax Administration Bill ("NTAB"). The article provides a concise overview of the critical provisions of the Bills on indirect tax and analyzes their potential impact on businesses, individuals, and Nigeria's economy.

Overview of the Indirect Tax Regime in Nigeria

The principal indirect tax in Nigeria is the Value Added Tax (VAT), which is a consumption-based tax charged at a rate of 0% or 7.5% on the supply of goods and services in Nigeria, except those expressly exempted under the VAT Act. VAT applies at every stage of the supply chain, but the tax burden is ultimately borne by the end consumer, making it a critical source of revenue for the government.

In addition to VAT, excise duty represents another form of indirect taxation in Nigeria. Excise duty is imposed on certain goods and services. This tax typically targets goods, products or services, or activities deemed to have social or health implications, such as tobacco, alcoholic beverages etc. The primary purpose of excise duties is not only to generate revenue but also to discourage the demand and consumption of these goods and activities due to their potential adverse effects on society.

Customs duties are yet another key component of Nigeria's indirect tax system. These are taxes charged on goods imported into or exported out of the country. Customs duties serve multiple purposes, including protecting local industries from foreign competition, regulating trade, and serving as a significant revenue source for the government.

Key Proposed Reforms and Implications

Proposed VAT Reforms

Centralization of Tax Collection and Harmonization of Tax Laws: The NTB is a comprehensive tax legislation that seeks to integrate all tax laws in the country into a simplified and manageable single piece of legislation that aligns with global best practice.

The Bill vests upon the Nigeria Revenue Service ( "NRS" or "the Service") powers to collect all national taxes. The NRS is a proposed tax authority set to replace the Federal Inland Revenue Service (FIRS), responsible for assessing, collecting, and accounting for federal government revenues. It aims to enhance tax administration, improve compliance, and align Nigeria's revenue collection with global best practices

By this provision, the NRS will collect all national taxes including excise duties currently collected by the Nigeria Customs Service. While a centralized tax collection system may potentially offer benefits such as cost reduction by consolidating resources and streamlining processes, there may be challenges that could hinder its effective implementation and operation. To ensure that the Service functions optimally as a central authority, strict oversight mechanisms and real-time digital tracking systems should be implemented to enhance efficiency and accountability. Additionally, regular audits, independent anti-corruption measures, and well-defined service delivery timelines will help prevent bureaucratic delays and mismanagement.

Enactment of the NTB will lead to the repeal of 11 laws and one subsidiary legislation including the VAT Act and the VAT Act (Modification) Order 2021. The Bill also proposes consequential amendments to 11 laws and two subsidiary legislations including the Customs, Excise Tariffs, Etc. (Consolidation) Act.

Expanded List of Exempt and Zero-Rated Goods and Services: The Bill proposes a 0% VAT rate on essential goods and services, such as food, education, and healthcare, replacing their previous exempt status. This change means that businesses supplying these goods and services can now recover allowable input VAT incurred, potentially lowering operational costs and improving cash flow.

To compensate for this relief, the Bill proposes an increase in the VAT rate for non-essential items, leading to higher prices on luxury and discretionary goods. While the shift from exemption to zero-rating benefits businesses, the higher VAT on non-essential goods may contribute to a higher cost of living, particularly for low-income households, as they may still rely on some affected products or services.

Claim of Input VAT: Under the current VAT framework, the recoverability of input VAT is limited to VAT incurred on goods purchased or imported directly for resale and goods which form the stock-in-trade used for the direct production of any new product on which the output tax is charged. However, the Bill seeks to broaden the scope of input VAT claimable to include VAT incurred on services and purchase of fixed assets for the purpose of consumption, use or supply in the course of making taxable supplies.

Consequently, where the bill is passed into law, companies would be able to claim input VAT on services and fixed assets but only where the input VAT was incurred in making a taxable supply. Companies that supply goods or services taxed at a 0% VAT rate are still required to pay VAT on any taxable goods or services consumed in making those supplies. They may then request a refund from the Service for the VAT paid. However, there are no VAT refunds for input VAT incurred in the making supplies that are VAT exempt. Hence, such companies may continue to expense and capitalize VAT incurred on services and fixed assets.

VAT Rates: The Bill proposes to introduce a phased increment of VAT rate with a view of achieving a VAT rate of 15% by 2030. The VAT increased is proposed to be 10% for 2025 Year of Assessment (YOA), 12.5% for 2026 – 2029 YOA and 15% for 2030 YOA and thereafter.

While some businesses can offset the VAT incurred on their expenses against the VAT collected, businesses whose goods and services are VAT exempt would experience an increase in cost as they are not able to claim the input VAT incurred. Companies in price-sensitive industries may still face challenges such as reduced consumer purchasing power. Small and medium-sized enterprises (SMEs), which often operate with tighter cash flows, may also experience strain in managing compliance and cash flow.

Where the Bill is enacted, taxpayers would need to review existing contracts that provide for ongoing or periodic supplies of goods/service as well as the resulting system and documentation changes that should be effected internally before the effective date, especially given that this would be a phased increase.

VAT Fiscalisation System: Under the provisions of the NTAB, individuals or entities making taxable supplies will be required to use any Electronic Fiscal System (EFS) deployed by the Service to accurately record and report all taxable supplies. The aim of this provision is to streamline the tax reporting process, enhance compliance, and curb tax evasion. Failure to comply with this fiscalisation requirement will result in a significant administrative penalty. Specifically, businesses or individuals who do not utilize the designated EFS (such as electronic invoicing systems) will face a penalty of N200,000, in addition to 100% of the tax due, along with an annual interest rate of 2% above the Central Bank of Nigeria's (CBN) Monetary Policy Rate (MPR).

An example of this EFS is the VAT automation and e-invoicing system currently deployed by the FIRS. This provision underscores the government's push for digitalization in tax administration, requiring taxpayers to adopt the systems and tools provided by the NRS to report their taxable supplies. By mandating the use of such technologies, the government aims to enhance transparency, reduce the risk of underreporting or tax fraud, and improve the efficiency of tax collection. However, businesses—especially small and medium-sized enterprises (SMEs) with limited resources may face challenges in implementing these systems and may need additional support to comply with the new requirements.

VAT Refund: The Bill also proposes a significant improvement in the VAT refund process, aiming to support business cash flow and enhance the efficiency of the tax system. Under the proposed provisions, once a valid VAT refund request is submitted, the NRS is required to process and refund the tax amount within 30 days from the receipt of the request. This expedited refund process eliminates the need for extensive tax audits, which have often delayed refunds in the past, offering businesses quicker access to the funds they need.

If, for any reason, the refund cannot be processed within the stipulated timeframe, the refundable amount will be eligible for set-off against any tax liabilities, including the taxpayer's other tax liabilities such as income Tax. This provision helps businesses avoid cash flow disruptions by ensuring they are not left waiting for extended periods for tax refunds, which can often impact working capital.

The proposal is particularly beneficial for industries with significant VAT input, such as manufacturing, where VAT credits may accumulate. By streamlining the refund process, the government aims to provide businesses with a more predictable and efficient system, ultimately improving their financial liquidity. However, businesses will still need to ensure compliance with the necessary documentation and regulations to benefit from this faster refund mechanism.

Threshold for Compliance: Under the current provisions of the VAT Act, as amended by the Finance Act 2019, taxable persons whose annual taxable supplies exceed N25 million are required to charge, collect, and remit VAT, as well as file monthly returns with the FIRS. This requirement, while essential for ensuring tax compliance, can impose a significant burden on small businesses, particularly those with limited resources. In response to concerns over the compliance burden, the NTAB proposes an increase in the VAT compliance threshold to provide greater relief for small businesses/ companies.

According to the NTAB, businesses with an annual gross turnover of N50 million or less and total fixed assets valued at less than N100 million (excluding those providing professional services) qualify as small companies or businesses and will no longer be required to charge VAT or submit monthly returns to the Service. However, the NTB sets a higher threshold for total fixed assets of small companies, defining it as not exceeding N250 million. We expect that this discrepancy will be resolved before the Bills are signed into law.

The proposed adjustment in threshold is aimed at reducing the administrative workload and costs for small businesses that may struggle with the complexities of VAT registration and reporting. The increase in the threshold would allow small businesses to focus on their core operations without the added strain of complying with VAT obligations, potentially stimulating growth and encouraging more informal businesses to formalize their operations. However, businesses that fall under this threshold must still ensure that they are aware of other tax obligations and maintain accurate records, as the VAT exemption only applies to VAT reporting and collection, not to other potential taxes.

VAT Distribution: Based on the current provisions of the VAT Act, the allocation of VAT revenue is divided among the Federal Government (15%), State Governments, including the Federal Capital Territory (50%), and Local Governments (35%). For the portion that is attributed to states and local governments, states retain 20% of the VAT revenue collected within their borders. Additionally, 30% of the revenue is distributed based on state population, while the remaining 50% is equally shared among all states. However, this allocation formula has been criticized for failing to take the principle of derivation into account, leading to perceptions of inequity, where regions contributing more to VAT collection may not receive a fair share of the benefits.

The NTAB proposes a shift in this distribution formula, adjusting the allocation to 10% for the Federal Government, 55% for the states, and 35% for local governments. The key change under this proposal is the introduction of a 60% derivation-based allocation, meaning that VAT revenue would be distributed in part according to where it is collected. This change underscores the importance of the location of consumption activities and could potentially favor regions with higher consumption.

The introduction of the derivation principle is intended to address long-standing concerns about the fairness of VAT revenue distribution, particularly for states that contribute more significantly to the national VAT pool.

While the formula aims to ensure an equitable distribution of VAT, determining the source of VAT may be complex. For example, consider a bank headquartered in Lagos that pays a cybersecurity firm for services protecting its network nationwide. The VAT paid cannot be simply allocated to Lagos state; it must reflect where the cybersecurity services are actually benefitting, which could be across the entire country. Another example involves VAT on telecommunications services. With subscribers moving between states, it becomes challenging for a telecom company to determine which state's VAT pool a call or data usage should contribute to The proposed change is highly controversial, and there remains ongoing debate among stakeholders regarding the fairness and implications of this new formula.

Revised Excise Duty Framework

The proposed Bill seeks to repeal Section 21 of the Customs, Excise Tariffs, Etc. (Consolidation) Act. Section 21, as amended by the Finance Act of 2020, currently imposes excise duty on imported and locally manufactured goods, as well as on telecommunication services.

Under the proposed amendments, excise duty would be broadened to include post-paid and pre-paid telecommunication services, along with all services regulated by the Nigerian Communications Commission (NCC), at an ad valorem rate of 5%. Additionally, the Bill proposes the introduction of a 5% excise duty on gaming-related activities such as gambling, betting, lotteries, and other similar services as defined under the Act.

Another notable aspect of the amendment is the application of excise duty on unofficial foreign exchange transactions. Where a currency exchange transaction involving the Naira is conducted within or outside Nigeria and the exchange rate exceeds the prevailing exchange rate at the official market, the seller will have to pay an excise duty equal to the extra amount charged over the official rate.

These amendments aim to facilitate harmonisation of multiple taxes and address certain economic and social behaviours.

Navigating the Possible Change Ahead

As Nigeria's Tax Reform Bills continue to take shape, it is essential for taxpayers to stay informed about the evolving indirect tax framework. The proposed changes are significant, and understanding their potential impact will help businesses and individuals adapt smoothly.

By staying prepared, taxpayers can not only comply with the new system but also position themselves for future growth in an increasingly dynamic tax environment.

The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.