1. INTRODUCTION:
In 2024, the Nigeria government took a bold step to overhaul its tax system by proposing significant reforms aimed at increasing revenue generation, reducing economic inequalities, and improving compliance. The revised tax reform bill has generated considerable debate, with a focus on changes to VAT, corporate taxes, inheritance taxes, and the distribution of revenue. This article provides analysis of these changes, taking into account the historical context of Nigerian taxation, the current legislative proposals, and the potential long-term effects on the Nigerian economy
2. THE CONCEPT OF TAXATION AND TAXING POWERS:
Tax has been defined as a monetary charge imposed by the government on persons, entities, transactions or property to yield revenue.1 O. Akanle2 has also defined tax as a compulsory levy imposed on a subject or upon his property by the government having an authority over him.
It is important to distinguish a tax from a charge or fee imposed by a public authority or a government. A charge or a fee is paid by the direct beneficiaries of the services. Examples of this include: license fees, water rates, electricity bills, toll fares etc. While tax on the other hand, is imposed by the authority for public purpose without reference to a particular benefit enjoyed by the taxpayer.
Section 44(2) of the Constitution of the Federal Republic of Nigeria 1999 (as amended) is the basis for taxation in Nigeria. The provision of the law implies that the compulsory imposition of taxes on citizens does not amount to an infringement of their right to own property but a necessary exercise of governmental powers. The section provides thus:"Nothing in subsection (I) of this section shall be construed as affecting any general law...for the imposition and enforcement of any tax, rates and duty.
2.1. Direct and Indirect Taxes:
Direct taxes are taxes levied on the taxpayer's income and goods. These taxes are paid by the intended person or entity and it cannot be passed on to a third party. The Personal Income Tax, Business Tax, Capital Gains Tax, and Company Income Tax are all examples of a direct tax.
However, Indirect taxes are levied in the expectation that the taxpayer will indemnify him/itself at the expense of a third party or entity. Simply put, indirect taxes are the taxes imposed on commodities before they reach the final consumers, yet the consumers pay the taxes, not as 'taxes" but as the price for the commodity. The Value Added Tax (V.A.T), Stamp Duty, Excise Duty, Custom Duty and Sale/Purchase Tax are all examples of indirect taxes.
3. ADMINISTRATION AND ENFORCEMENT OF TAX IN NIGERIA:
A good law is important to a good tax system. Unlike the practice in some western countries, where responsibility for administration of tax is entrusted to the Board of Inland Revenue, tax administration is divided between the Federal government, state governments and local governments, with each setting up its administrative machinery as provided for under enabling statutes. Functional bodies operated by the federal government are: the Federal Board of Inland Revenue, the Body of Appeal Commissioners and the Joint Tax Board. While the states each have a Board of Internal Revenue.
3.1.1. Federal Board Of Inland Revenue:
The board is established by Section 1 of the Company Income Tax Act CAP 21 LFN (2004). The members of the board are drawn from the Federal Ministry of Finance, Board of Customs and Excise, the Nigerian National Petroleum Corporation and the Registrar General of the Corporate Affairs Commission. The establishment of this body was necessitated by a desire to improve tax administration and to cope with the ever increasing volume of rapid economic and spatial expansion in contemporary Nigeria.
3.1.2. The Body of Appeal Commissioners:
Under Section 53(1) of the Company Income Tax Act CAP (2) LFN (2004), the minister of finance may establish by notice in the Federal gazette a body to be known as the Body of Appeal Commissioners. This body is charged with the duty of hearing and determining appeals from any company which may be aggrieved by an assessment made on it and has failed to agree with the Board of Inland Revenue.
The body may confirm, reduce, increase or annul the assessment complained of or make such order thereon as it deems fit. The Appeal Commissioners at the hearing must admit all lawful evidence whether oral or documentary adduced by the Appellant company or the Board. An award of judgment by the Body of Appeal Commissioners shall be enforceable as if it were a judgment of the Federal High Court. In the event of any dissatisfaction of the body's ruling, either of the parties can appeal to the Federal High Court.
3.1.3. Joint Tax Board:
The Joint Tax Board consists of one officer from each state and one nominee of the Federal Public Service. It is concerned with the administration of income tax generally under the Income Tax Management Act 1990. In particular, it coordinates the various aspects of taxation between states as well as promoting uniformity in personnel taxation. It also advises the federal government on request in respect of double taxation arrangements with any other country and in respect of rates of capital allowances as well as on matters connected with the introduction of amendments to the Income Tax Act. It also considers and approves benefits and pension schemes valid for income tax purposes throughout the country.
3.1.4. State Board Of Inland Revenue:
The administrative organization of the state revenue department is basically the same throughout the country except for slight variations in designations and devolution of responsibility. The head of the revenue department–Director of the Board of Internal Revenue is assisted in the execution of his duty by the deputy directors, chief inspector of taxes, principal inspector of taxes, senior inspector of taxes, principal executive officers, senior executive officers and other tax officials of lower ranks. States internal revenue collection is not solely limited to personal income tax, but includes those revenues accruing to and collected by the state internal revenue departments.
4. THE NEW TAX REFORM BILL:
On October 3rd 2024, the President of the Federal Republic of Nigeria, transmitted the Tax Reform Bills to the National Assembly for their consideration. The bill seeks to provide a uniform procedure for consistent and efficient tax administration laws in order to facilitate tax compliance and optimize tax revenue in line with the current realities of the nation. The bill consists of The Nigerian Tax Bill, Nigeria Revenue Service (Establishment) Bill (HB 17, Nigeria Tax Administration Bill (HB1756) and Joint Revenue Board (Establishment) Bill (HB 1758).
4.1. Objective of the Tax Reform Bill:
The Nigeria Tax Bill seeks to repeal the principal taxation legislation, amend fiscal provisions in other legislations and provide a unified fiscal legislation governing taxation in Nigeria. Its specific objectives are as follow:
- The Nigeria Tax Administration Bill seeks to provide the legal framework for the assessment, collection and accounting for revenue accruing to the Federation and the three tiers of government.
- The Nigeria Revenue Service Bill will provide for a legal, institutional and regulatory framework for the administration of taxes and revenue under any law made by the National Assembly and to account for such taxes and revenue collected.
- The Joint Revenue Board Bill will establish the Joint Revenue Board, the Tax Appeal Tribunal, and the Office of the Tax Ombuds for the coordination, harmonisation and settlement of disputes arising from tax administration.
4.2. Key Propositions in the Newly Approved Tax Reform Bill
4.2.1.Value Added Tax (VAT) Adjustments:
The Tax Reform Bill initially proposed a significant increase in VAT, raising the rate from the current 7.5% to 15% by 2030. This would have been a step toward harmonizing Nigeria's VAT with global standards, where rates often range between 15% and 25%. Proponents argued that increasing VAT would improve government revenue and reduce dependence on oil exports.
Some significant changes introduced to the bill include; a 0% VAT rate for essential goods and Clause 188 of the Nigeria Tax Bill services, which account for 82% of average household consumption. This exemption covers critical items such as food, medical services, education, transportation, fuel, and rent,3ensuring that low-income earners are shielded from additional financial burdens.
In addition, businesses will benefit from tax credits for VAT paid on assets and production expenses, effectively lowering production costs by up to 7.5%. This measure eliminates VAT-related cost pass-through to consumers, contributing to price stability. The reform also increases the VAT exemption threshold for small businesses from ₦25 million to ₦50 million4, removing VAT obligations for a larger segment of businesses and directly benefiting their low-income customer base. Importantly, the VAT rate increase will apply only to 18% of consumption items, primarily targeting luxury goods such as beverages, entertainment, and cars, which are predominantly consumed by higher-income earners. These targeted measures ensure that the VAT reforms promote economic equity, protect low-income earners and small businesses, and effectively address concerns about inflation and price increases.
In a parallel move, the government has pledged to expand VAT coverage to include more goods and services, particularly luxury items, which were previously outside the VAT net. This will create a broader and more inclusive tax base.
4.2.2. Revenue Distribution Reforms:
A notable aspect of the tax reform bill is its proposed revision of the VAT revenue distribution formula. Traditionally, VAT revenue has been shared between the federal government, state governments, and local governments. However, this formula has often led to tensions, with some states accusing others of not contributing enough to the national VAT pool.
The original bill proposed allocating 60% of VAT revenues to the states that generated the most VAT, with 20% going to the federal government and 20% to local governments. The proposed formula for distributing revenue generated from Value Added Tax (VAT) has sparked controversy and criticism from members of the Northern Governors Forum. They expressed concerns that Northern states will receive a smaller share of VAT revenue under the new framework, which suggests distributing funds based on where goods and services are consumed.
Northern leaders argued that this approach may place them at a disadvantage and potentially increase the economic disparity between regions, as allocations to States will be made based on how much they contribute. However, the proposed reform represents a significant shift from a headquarters-based remittance model to a consumption-based derivation model, fundamentally altering the basis for revenue allocation among states. In response, the House of Representatives revised the proposal, reducing the revenue allocation to 30% for VAT-generating states, 20% to be distributed based on population and 50% to be distributed equally.
The revised formula aims to balance regional interests while ensuring the sustainability of the tax system across the country5
4.2.3. Adjustments Of Income Tax Rates:
The Bill provides a new corporate income tax rate for companies in Nigeria. Under the extant Companies Income Tax Act (CITA), the tax rate for companies are as follows: 0% for small companies, 20% for medium companies and 30% for large companies. However, under the Nigeria Tax Bill, the proposed rates are: 0% for a small company, and 27.5% in 2025 year of assessment, and 25% from 2026 year of assessment for any other company.6
Under the current regime, a small company is defined as a company with gross turnover of N25,000,000 (Twenty-Five Million) or less while Nigeria Tax Bill now defines a "small company" to mean a company with a gross turnover of N50,000,000 or less per annum with total fixed assets not exceeding N250,000,000, provided that any business providing professional services shall not be classified as a small company.
Similarly, the proposed bill introduces a new progressive tax system for personal income, with different rates applied to specific income brackets. Under this structure, the first ₦800,000 of income will be exempted from taxation, while. income exceeding ₦800,000 but up to ₦3,000,000 will be taxed at 15%. Income between ₦3,000,001 and ₦12,000,000 will attract an 18% tax rate. For income between ₦12,000,001 and ₦25,000,000, a 21% tax rate will apply. Income above ₦25,000,000 but up to ₦50,000,000 will be taxed at 23%, and any income exceeding ₦50,000,000 will be subject to the highest tax rate of 25%. This structure ensures that tax obligations increase progressively with higher income levels.
4.3. The Nigeria Revenue Service (Establishment) Bill 2024
The NRS Bill seeks to provide for a legal, institutional and regulatory framework for the administration of taxes and revenue under any law made by the National Assembly and to account for such taxes and revenue collected. The Bill proposes a repeal of the Federal Inland Revenue Service (Establishment) Act, No.13, 2007 (the "FIRS Act") and in its stead, the enactment of the Nigeria Revenue Service (Establishment) Act to establish the Nigeria Revenue Service (the "NRS or Service").
The Bill will reform the extant Federal Inland Revenue Service (FIRS) into the NRS, stipulating its functions and powers. While the Bill retains most of the provisions of the FIRS Act, some new provisions have been introduced.
Proposed Functions of The NRS:
The functions of the Service under the NRS Bill are similar to the functions of the FIRS under the FIRS Act. They include assessing persons including companies, and enterprises chargeable with tax. One important introduction under the NRS Bill is the power of the NRS to assist, on request, a State or Local Government, in the collection or administration of taxes. This, however, only applies to taxes in respect of which the requesting government has the statutory right to collect or administer. The Bill provides that all powers vested in the FIRS will continue to be vested in the NRS. It also provides that all actions taken by the FIRS are deemed to have been taken by the NRS.
Similarly, the Bill proposes that all enforcement processes or proceedings commenced or pending under the FIRS Act will continue to subsist under the Bill. This also applies to all rights, interests, obligations and liabilities under any contract or instrument, or in law or equity.
4.4. Joint Revenue Board (Establishment) Bill, 2024 (JRB Bill)
The JRB Bill seeks to establish the Joint Revenue Board, the Tax Appeal Tribunal, and the Office of the Tax Ombuds for the coordination, harmonisation and settlement of disputes arising from tax administration. The Bill represents another tax reform which the Federal Government has introduced to refine the tax administration process in Nigeria. By and large, the JRB Bill is designed to streamline tax administration, increase intergovernmental cooperation, and introduce new avenues for dispute resolution, aiming to create a fairer and more consistent tax environment in Nigeria.
Establishment Of Tax Appeal Tribunal:
The JRB Bill seeks to establish a Tax Appeal Tribunal ("Tribunal") for the resolution of tax-related disputes7. The provisions are consistent with the provisions of the FIRS Act relating to the Tribunal. Upon repeal of the FIRS Act, provisions relating to the Tribunal under the FIRS Act will cease to exist and corresponding provisions under the JRB Bill will become effective upon enactment of the JRB Bill. When enacted, the Tribunal will continue to entertain and conclude any proceeding commenced before the coming into effect of the JRB Bill, as if they were commenced under the JRB Bill.8
Establishment Of The Tax Office Of The Ombud:
The JRB Bill also establishes a Tax Ombud to deal with complaints brought against tax authorities9. This office has a mandate, amongst others, to investigate tax-related grievances, mediate disputes, institute proceedings on behalf of the taxpayer, and inspect premises related to tax administration. The Office would also serve as an independent and impartial arbiter to review and resolve complaints relating to tax, levy, regulatory fee and charges, customs duty or excise matters; review complaints against tax officials and authorities and resolve them through mediation or conciliation by adopting informal, fair and cost-effective procedures; receive and investigate complaints lodged by taxpayers regarding the actions or decisions of the tax authorities, agencies or their officials and to also serve as a watch-dog against any arbitrary fiscal policy of the government or by any of its agency and report such policy to the National Assembly.10
An investigation by the Tax Ombud is required to be conducted within 14 days of receipt of the complaint, provided that the Office of the Tax Ombud may, where necessary, extend the period of an investigation by seven days.11
5. HIGHLIGHTS OF THE NEW REFORM
Nigeria's tax system has struggled with inefficiency, non-compliance, and over-reliance on oil revenue. The reforms proposed in the 2025 tax bill are a significant departure from the status quo. The decision to retain the VAT rate at 7.5%, alongside efforts to broaden the tax base, shows a pragmatic approach to revenue generation. Meanwhile, adjustments to the corporate tax regime and inheritance tax demonstrate the government's commitment to supporting businesses and fostering a more equitable wealth distribution system.
Furthermore, the most significant change is the revised revenue-sharing formula, which aims to address long standing regional inequalities and create a more balanced approach to tax collection and distribution. By including more states in the VAT net and incentivizing regional compliance, the government hopes to promote economic growth across all parts of Nigeria.
CONCLUSION
The tax reform bill is a landmark piece of legislation that reflects Nigeria's ambition to modernize its tax system and create a more efficient, equitable, and sustainable fiscal environment. While the bill has faced criticism and revisions, its overall direction suggests a significant shift in how Nigeria will approach taxation in the coming years. The government's ability to implement these reforms effectively will determine the success of the tax system in fostering economic development, reducing inequalities, and improving compliance. Only time will tell whether these ambitious changes will bring about the desired transformation in Nigeria's economy.
Footnotes
1. Black's Law Dictionary 8th Edition.
2. O. Akanle "The Government, the Constitution and the Taxpayer in Tax Law and Tax Administration in Nigeria ed by O. Akanle, Nigerian Institute of Advanced Legal Studies, Ibadan, (1991). (9) 1999 Const
3. Clause 188 of the Nigeria Tax Bill
4. Clause 22 of the Nigeria Tax Administration Bill
5. https://businessday.ng/news/article/ten-tax-reform-bills-amendments-by-house-of-reps/
6. Clause 56 of the Nigeria Tax Bill
7. Clause 23 of the Joint Revenue Board Bill
8. Clause 23 of the Joint Revenue Board Bill
9. Clause 35 of the Joint Revenue Board Bill
10. Clause 40 of the Joint Revenue Board Bill
11. Paragraph 2 of third schedule to the Joint Revenue Board Bill
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