Tax Reforms: What’s Changing and Why It Matters
A few weeks ago, did you hear that VAT was going up? How about it going down? 👀 Well, there’s been a lot of talk about changes in Nigeria’s tax system lately, and we’re here to break it all down for you.
From talks of renaming the Federal Inland Revenue Service (FIRS) to the Nigeria Revenue Service (NRS), to updates on withholding tax and cutting down the number of taxes—there’s a lot going on. These changes, led by Taiwo Oyedele’s Fiscal Policy Committee, aim to make tax collection more efficient and easier.
But what does this mean? And how could these reforms impact everyday life for Nigerians? Let’s get into it on this blog post.
Early July 2023, the President hinted at creating a fiscal committee to provide guidance on national fiscal matters. On August 8, 2023, this committee was officially inaugurated, featuring a diverse group of representatives:
- Taiwo Oyedele – Chairman
- Representatives from tax law, accounting firms, and various tax committees
- Members of the Chartered Institute of Taxation of Nigeria (CITN), Institute of Chartered Accountants of Nigeria (ICAN), and Nigerian Bar Association (NBA)
- Influential groups such as the Nigerian Economic Summit Group (NESG), Women in Business (WIMBIZ), and private sector leaders
- Government bodies like the Federal Inland Revenue Service (FIRS), Customs, Ministries, and the Nigerian Investment Promotion Commission (NIPC)
- Partners and observers like the World Bank, IMF, and BudgIT.
Since their formation, the committee has held multiple consultations, engaging stakeholders from across various industries to develop comprehensive policy proposals. Below is an overview of the reforms they have suggested.
Key Proposals to the Tax System
1. Renaming FIRS to NRS
The Federal Inland Revenue Service (FIRS) to be renamed the Nigeria Revenue Service (NRS). This new entity would operate at both the federal and state levels, making tax collection more efficient nationwide.
2. Consolidating Revenue Agencies
To simplify the complex tax collection system, the committee recommends merging all revenue agencies into one. This would eliminate overlap, making tax collection more efficient and increasing revenue generation.
The committee is also proposing reducing the cost of tax collection to 1%. The current cost of collection in the 36 states ranges from 4 percent to 35 percent.
3. Reducing the Number of Taxes
Nigeria currently has over 60 taxes and levies, which burdens businesses. The committee proposes reducing these to just eight major taxes, including income tax, value-added tax (VAT), property tax, and customs duties. This would improve the ease of doing business and ensure a more sustainable tax system.
4. Updates to Withholding Tax Regulations (2024)
Key changes include:
- Exempting small businesses from withholding tax
- Reducing rates for businesses with narrow profit margins
- Offering exemptions to manufacturers, producers, and farmers
- Introducing measures to combat tax evasion and avoidance
The Nigerian government has officially gazetted new regulations on withholding tax. The commencement date of the new regulations is 30 September, while implementation begins on 1 January 2025.
*to “gazette” in this context means that the Nigerian government has officially published and recorded the new withholding tax regulations in its official government journal, known as the Federal Government Gazette. This formal publication makes the regulations legally enforceable and accessible to the public, ensuring transparency and compliance across all sectors.
5. Executive Orders for Economic Growth
The committee suggests several executive orders aimed at boosting the economy. These include:
- Price stability and inflation control
- Job creation through tax relief
- Promoting non-oil exports and international trade
- Financial sustainability and improved tax information sharing.
*An executive order is a directive by the president that manages operations of the federal government.
6. Reforming the Way Federal Government Budget is Presented
The committee suggests changes to the way the Federal Government presents its yearly budget in its suggestions for the suggested National Fiscal Policy.
This makes sure that the government spends more of its money on important areas that will help the business and give people more chances. It wants the budget to be broken down into several important areas, such as Infrastructure, Human Capital Development, Personnel Costs, and Administrative Overhead.
7. Incentives for Priority Sectors
A more comprehensive incentive program would replace the existing Pioneer Tax Incentive Scheme. Businesses driving economic growth would receive tailored, transparent, and long-term tax incentives.
*The Pioneer Tax Incentive Scheme is a tax holiday which grants qualifying industries and products relief from payment of corporate income tax for an initial period of three years, extendable for one or two additional years.
8. Reducing Corporate Income Tax by 5%
Nigeria’s current Company Income Tax rate is 30%, and the committee is proposing to reduce it by 5% over the next two years, encouraging business expansion, job creation, and increased investment.
9. Revisions to VAT and Excise Duties
- Businesses would be allowed to fully deduct input VAT
- Essential items like agricultural goods, medical supplies, and education would be exempted from VAT.
- Intellectual property exports and services would also enjoy a zero VAT rate
- Increase of VAT for non-essential items, with rates rising from 7.5% to 10% by 2025 and 12.5% by 2026.
- Simplified excise tax rates and processes
- Adjustments to VAT sharing, including its inclusion in the Exclusive Legislative List
Conclusion
These reforms aim to increase Nigeria’s tax-to-GDP ratio from its current level to around 18%, which is closer to the average for sub-Saharan Africa.
Recently, the chairman of the committee, spoke of The Economic Stabilization Bills (ESB), which were passed by the Federal Executive Council, invariably these bills will include some of the above suggestions and form part of the government’s ASAP (Accelerated Stability and Advancement Plan).
The goal of these bills is to change 15 tax, fiscal, and establishment laws in order to make the economy more stable and promote overall growth. For more details on the committee and their work kindly visit: https://fiscalreforms.ng/index.php/about-the-committee/
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