In this write-up, JOSEPH INOKOTONG explores the need for tax reforms, their potential impact on businesses, households, the government and the broader implications for economic growth and stability.
Nigeria’s economic landscape has been shaped by numerous structural challenges, including exchange rate instability, high inflation, and a complex taxation system that burdens both businesses and individuals. These factors, coupled with rising poverty, social tensions and high interest rates, have constrained economic growth and investment.
However, recent developments, such as a trade surplus, declining budget deficits, rising crude oil production, and improving investor confidence indicate a positive trajectory. For Nigeria to harness its full economic potential, comprehensive tax reform is essential.
Nigeria’s Economic Challenges and Opportunities
Despite Nigeria’s vast economic potential, several issues continue to hinder sustainable growth. One of the primary concerns is the instability in exchange rates, which has led to uncertainty for investors and businesses. High inflation has further exacerbated the cost of doing business, making it difficult for enterprises to thrive and for citizens to afford necessities. Additionally, the country faces challenges related to rising poverty and a decline in decent job opportunities. The high-interest rate environment has made borrowing costly, limiting the ability of businesses to expand and create employment.
Another significant issue is the lack of efficient public financial management. Poor coordination among government agencies and weak public communication of policies have created inconsistencies in economic governance. Furthermore, insecurity and social tensions have contributed to an unfavorable investment climate, deterring both local and foreign investors.
Despite these challenges, Nigeria also has several positive economic indicators. The country has recorded a balance of trade surplus and a declining budget deficit at both federal and state levels. Global inflation rates are stabilising, leading to expected interest rate cuts that could ease financial pressures. Additionally, revenue generation has increased, allowing for greater capital expenditure and repayment of debts. The energy sector is experiencing growth, with rising crude oil and gas prices, increased production, and the commencement of local crude oil refining. Improved foreign exchange inflows through foreign portfolio investments (FPI) and remittances further highlight the country’s economic potential.
Optimising Government Revenue
One of the critical aspects of Nigeria’s fiscal policy is the need to optimize revenue collection at all levels of government. A significant portion of Nigeria’s major revenue sources—approximately 85 percent—belong to state and local governments. This includes personal income tax, property tax, stamp duties, value-added tax (excluding the Federal Capital Territory (FCT), and land-related revenues.
A common misconception is that the Federation Account Allocation Committee (FAAC) distributes federal allocation, whereas, in reality, it manages federation revenue belonging to all tiers of government. Therefore, it is essential to align government responsibilities with revenue allocation to ensure financial sustainability. Additionally, tax optimization remains a pressing concern, as personal income tax contributes less than 10 percent of total tax revenue in Nigeria, compared to the global average of 30 percent.
The Chairman of the Presidential Fiscal Policy and Tax Reforms Committee, Mr. Taiwo Oyedele, says that to improve tax efficiency, Nigeria must address multiple taxation and the multiplicity of taxing agencies, which create a burdensome and complex tax environment. Implementing budgetary reforms with a focus on robust accountability and transparency is crucial to fostering trust in the system. Furthermore, tax reforms must be people-centric, ensuring that citizens participate in the process and benefit from economic improvements.
Challenges in Nigeria’s Current Tax System
The Nigerian tax system is characterized by numerous inefficiencies that discourage business growth and economic development. The presence of multiple taxes and taxing agencies creates confusion and increases compliance costs for businesses and individuals. Moreover, businesses face a high corporate tax burden, which discourages investment and expansion. The taxation of poverty, capital, and investments further exacerbates the economic strain on businesses and individuals alike. Additionally, Nigeria’s tax laws are outdated and contain ambiguous provisions, making compliance challenging and enforcement inconsistent.
Impact of Proposed Tax Reforms on Businesses
The proposed tax reforms aim to create a more business-friendly environment by reducing risks and lowering the tax burden. Key measures include the elimination of minimum tax, improved interest deduction policies, and the introduction of tax ruling reforms and a statute of limitations. These changes will provide greater clarity and predictability for businesses, encouraging investment and long-term planning.
To further ease the tax burden, the reforms propose a reduction in corporate tax rates, allowing businesses to make tax payments in naira and streamlining the tax refund process. These initiatives will enhance liquidity for businesses, enabling them to reinvest in operations and workforce expansion.
Additionally, the introduction of a competitive tax regime is expected to attract more investors. The reforms will facilitate input VAT credits, tax reliefs, and economic development incentives. Special provisions for business reorganization and research and development (R&D) will support innovation and industrial growth, positioning Nigeria as a more attractive destination for both local and international investors.
For households, the tax reforms aim to provide economic relief and reduce financial pressures. Measures such as wage awards, transport subsidies and tax waivers on food imports will help lower living costs. The suspension of tax on fuel products will further ease the burden on consumers, particularly low-income earners.
A key component of the reforms is the reduction of the tax burden on individuals. Low-income earners will be exempt from certain taxes, while middle-class earners will benefit from reduced tax rates. VAT zero-rating and exemptions on essential goods will ensure that necessities remain affordable.
The reforms will also create new economic opportunities, particularly for small businesses and startups. Special tax regimes will be introduced to support these enterprises, alongside incentives for remote jobs and fair taxation of investment income. These measures will encourage entrepreneurship and job creation, contributing to overall economic growth.
From the government’s perspective, the tax reforms are expected to drive macroeconomic stability and sustainable growth. By improving revenue mobilization, the government can maintain a healthier fiscal balance and enhance the country’s tax-to-GDP ratio. This will strengthen Nigeria’s financial position and reduce its reliance on external borrowing.
A more efficient tax system will also improve the country’s credit ratings, lower the cost of debt and make Nigeria a more attractive investment destination. Additionally, the reforms will address distortions in the current incentives regime, including issues related to free zones and tax exemptions. The government and taxpayers will benefit from a more transparent and accountable fiscal framework by ensuring equity and fairness in the tax system.
Tax reform is a critical pillar for Nigeria’s economic prosperity. The country can create a more sustainable and growth-oriented fiscal environment by addressing inefficiencies, reducing the tax burden on businesses and households, and optimizing revenue collection. The proposed reforms will enhance investor confidence, stimulate job creation, and improve public financial management. However, for these changes to be effective, they must be implemented with transparency, accountability, and active citizen participation. By embracing a comprehensive and people-centric tax reform strategy, Nigeria can unlock its economic potential and achieve long-term prosperity.
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