Much ado about taxes
12th December 2024

Taxation arguments are inherently more political than economic, but it is unarguable that Nigeria’s tax system needs reform. The recent suspension of President Tinubu’s tax reform bills underscores the complexities of overhauling Nigeria’s tax system. These bills aim to simplify taxation, reduce the burden on ordinary Nigerians, and boost government revenue. However, they have sparked heated debate, particularly regarding the proposed shift in how Value Added Tax (VAT) revenue is shared among states.
Nigeria runs a complex tax system that has led to multiple taxation, with up to 98% of the informal economy paying some form of daily tax, sometimes up to three times a day. Under the current system, VAT is remitted based on the location of company headquarters, often in more developed southern states. VAT is not spelt out in any of the legislative lists in the 1999 Constitution. The legal consensus is that issues not spelt out in any of the legislative lists will be under the purview of the states’ administration.
The new model aims to attribute VAT to the place of consumption, which northern governors fear could reduce their revenue, given their lower consumption levels and economic activities. This has ignited a North-South divide in the VAT discourse, reflecting broader economic activity and development disparities. While some Southern states have long argued for greater control over VAT generated within their territories, citing their significant economic contributions, many Northern states emphasise the importance of the existing formula in promoting national equity and addressing regional imbalances.
Conversely, the South argues that the current system is unfair, as states like Lagos and Rivers generate significant VAT revenue but don’t receive a proportional share. They believe a derivation-based model would ensure fairness and incentivise economic growth within their states. States have considerable control over trade and commerce in their territories to regulate and prohibit any business or trade, such as the sale and consumption of alcohol. The justification for states enacting their own Sales Tax laws was to generate additional revenue to foster economic development within the states. Despite the revenue-sharing formula favouring states, there have been consistent calls for a review, especially from Lagos and Rivers. Beyond the revenue-sharing debate, the bills aim to streamline tax administration and reduce the burden of multiple taxation, a significant issue for businesses and individuals, particularly in the informal sector. A 2021 SBM report revealed that 98% of those operating in the informal economy pay taxes daily, with some businesses taxed up to three times daily.
The proposed reforms could bolster government revenue while reducing reliance on crude oil earnings, aligning with President Tinubu’s push to diversify government revenues. However, concerns remain about the potential impact on businesses and the potential for increased tax burdens on citizens. In preparing this report, we spoke to people in all six geopolitical regions of the country to find out their views on the matter. Most respondents were aware of the proposed reforms and generally viewed them favourably, particularly regarding the potential benefits for their businesses.
The suspension of the bills provides an opportunity for further dialogue and consultation. It is crucial to find a balance between the need for reform and the need to ensure equity and fairness. All stakeholders’ concerns must be addressed to ensure the successful implementation of the tax reforms. The success of these reforms hinges on transparent communication, effective stakeholder engagement, and a commitment to addressing the concerns of all Nigerians. The Senate must actively support consultations in the new year and bolster efforts to refine the bill and ensure that tax reform is successfully passed.
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