EXPLAINED: Proposed tax bills, what they would mean for Nigerians

Proposed tax reforms bills

EXPLAINED: Proposed tax bills, what they would mean for Nigerians

In August 2023, President Bola Ahmed Tinubu inaugurated the Presidential Committee on Fiscal Policy and Tax Reforms in Abuja. As nominally suggested, the committee has been working on reforming how taxes are administered, charged and remitted in Nigeria.

This committee’s activities have culminated in the proposal of the Tax Reform Bills which have caused a stir within policy circles and public debates in Nigeria. The bills include the Nigeria Tax Bill, Nigeria Tax Administration Bill, Nigeria Revenue Service (Establishment) Bill, and Joint Revenue Board (Establishment) Bill.

In the following paragraphs, FIJ simplifies the key aspects of the bills that have become major talking points.

The topic of Value Added Tax (VAT) in the proposed Tax Reform Bills is a major talking point. VAT is an extra fee paid whenever one buys an item, a small slice added to the price that goes to the government to fund public services.

In Section 40 of the current VAT law in Nigeria, the government takes everything collected and splits it into three big pots. If N1,000,000 is collected in a year, N150,000 goes straight to the Federal Government (15%) and N350,000 (35%) is shared among the 774 local governments. The remaining N500,000 (50%) is shared among the states.

But here is where it gets interesting. The N500,000 is not split among states randomly. Half of it — N250,000 — is shared equally among all 36 states. So, every state gets about N6,944 regardless of how economically viable or large they are.

N150,000 (30%) is shared with the states based on their population. The states with larger populations get a larger cut of this N150,000. The last N100,000 goes to states based on derivation, a fancy word that means “Who brought in the money?” States that generate more VAT get a bigger portion of the amount.

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In the proposed tax reform bill, however, FG gets N100,000 (10%) and states have N550,000 (55%) to share. Most importantly, the derivation pot in the proposed reform is bigger. N330,000 (60%) out of the N550,000 will be shared with the 36 states based on how much VAT they generate.

On the more individual level, the current tax system only shares a 7.5% VAT on the goods and services Nigerians use. In the proposed bill, VAT charged on goods and services will go up from 7.5% to 10% first and then progressively to 15% by 2030.

In short, Nigerians will pay more VAT, and it will increase as the years go by.

However, core services such as rent, (public) transportation, health, food and education are exempted from VAT.

PERSONAL INCOME TAX CHANGES

Under the current tax system in Nigeria, people earning less than N300,000 annually don’t pay any tax. Those earning exactly N300,000 are taxed at 7% of their earnings, which amounts to N21,000. For individuals who earn between N300,000 and N600,000, the first N300,000 is taxed at 7% (N21,000), while the next N300,000 is taxed at 11% (N33,000), bringing the total tax to N54,000.

For incomes between N600,000 and N1.1 million, the first N600,000 is taxed as explained (N54,000), and the next N500,000 is taxed at 15%, adding another N75,000. This means you’ll pay a total of N129,000.

Those earning between N1.1 million and N2.7 million pay N129,000 on the first N1.1 million and 21% (N336,000) on the next N1.6 million, which brings their total tax to N465,000. For the people who earn more than N3.2 million, the first N3.2 million is taxed at N465,000, and anything above that is taxed at 24%.

Under the proposed reforms, the tax brackets change significantly. People earning up to N800,000 annually won’t pay any tax at all. For those earning between N800,000 and N3 million, the first N800,000 remains tax-free, while the next N2.2 million is taxed at 15%, amounting to N330,000.

For incomes between N3 million and N12 million, the first N3 million is taxed at N330,000, and the next N9 million is taxed at 18%, which adds N1,620,000, making the total tax N1,950,000.

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For those who earn between N12 million and N25 million, the first N12 million is taxed at N1,950,000, and the next N13 million is taxed at 21%, adding N2,730,000 and bringing the total tax to N4,680,000.

For those earning between N25 million and N50 million, the first N25 million is taxed at N4,680,000, and the next N25 million is taxed at 23%, adding N5,750,000 and bringing the total to N10,430,000. Finally, anyone earning above N50 million pays N10,430,000 on the first N50 million and 25% on anything above that.

Essentially, anyone earning below a million naira a year would not pay taxes under this structure. Also, those who earn a higher income will pay more.

CORPORATE INCOME TAXES CHANGES IN THE BILL

Under the current tax system, companies in Nigeria pay different rates of Corporate Income Tax (CIT) based on their size. Small companies with a total revenue of N25 million or less don’t pay any taxes.

Medium companies, earning between N25 million and N100 million, pay 20% (between N5 million and N20 million). Large companies, making over N100 million, pay the highest rate of 30%. For example, if a company makes N200 million in profits, it owes N60 million in taxes under the current rules.

The proposed reforms simplify this system and reduce rates for many companies. Small companies still won’t pay any taxes, but medium and large companies will pay the same rate.

In 2025, the rate will be 27.5% for both medium companies and larger ones. This will drop to 25% from 2026 onward. That same company making N200 million would pay N55 million in 2025 and N50 million in 2026.

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There’s also a new rule in the proposal to make sure big companies don’t get away with paying too little tax. If a company’s effective tax rate (what it actually pays after deductions) is less than 15%, it will have to pay extra to meet that minimum.

For instance, if such a company earns N20 billion and calculates its taxes at 12%, it would owe N2.4 billion. Under the new rule, it must add N600 million to meet the 15% minimum, bringing its total tax to N3 billion.

SCRAPPING FIRS AND UNIFYING TAXATION

The Nigeria Revenue Service Bill, proposed by the Presidential Tax Reform Committee, proposes replacing the Federal Inland Revenue Service (FIRS) with a new body called the Nigeria Revenue Service (NRS). In simple terms, the NRS will take over from FIRS but with more responsibilities.

One major change is the plan to centralise tax collection. Currently, some taxes are paid to state and local government agencies, but the NRS will handle all tax collection. It will also assist states and local governments in collecting their taxes and ensuring the funds are properly sent to them.

The bill also aims to simplify Nigeria’s complex tax laws. At the moment, taxes are governed by multiple acts, such as the Company Income Tax Act, VAT Act, and Petroleum Profits Tax Act. The proposed law will merge these into a single act, making taxes easier to understand and manage.

Businesses will no longer have to deal with different agencies for different taxes. Instead, the NRS will handle everything in one place, reducing any existing confusion for taxpayers.

The reforms also promise to introduce new tools to make the tax system fairer and more efficient. A Tax Appeal Tribunal will be set up to resolve disputes quickly and without the need for regular courts.

Meanwhile, a Tax Ombudsman will step in when taxpayers face issues like delays, errors or poor service. This office will investigate complaints and recommend solutions to ensure everyone is treated fairly.

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If the bill becomes law, the Joint Revenue Board will also be established to coordinate tax matters across all levels of government. Altogether, these changes promise a simpler, more streamlined tax system for businesses and individuals alike.

WHAT ARE DEVELOPMENT LEVIES AND WHAT HAPPENS TO THEM

The remittance of development levies is one of the major talking points in the Tax reform bill.

Critics like Borno State Governor Babagana Zulum have called the Federal Government out, for ‘planning to merge or scrap’ agencies like the National Information Technology Development Agency (NITDA), the National Agency for Science and Engineering Infrastructure (NASENI), and the Tertiary Education Trust Fund (TET Fund).

Under the current system, Nigerian companies are mandated to pay certain levies to these agencies. Legislations like the NITDA Act, the Finance Act and the TETFUND Act, enforce these levies.

In that system, firms 3% of the assessable profit for each year of assessment to fund education in Nigeria through TEFUND. Companies earning N100 million or more annually also contribute 1% of their pre-tax profits to the National Information Technology Development Fund to boost IT innovation.
Additionally, some industries, such as banking and telecommunications, would pay a newer 0.25% levy to fund science and engineering projects through NASENI.

The proposed bill simplifies this structure with just one development levy. Medium and large companies will contribute, but small businesses and foreign companies are exempt. From 2025 to 2026, the companies pay 4% of profits. This covers remittances to education, science and research, and innovation funds.

The levy drops to 3% between 2027 and 2029, and stays at 2% from 2030 onward. The collected funds will be split among key agencies if the new bill becomes law.

In the first year post-signing (2025-2026), The TET Fund gets the lion’s share — 50%. This share of the development levy will increase to nearly 67% by 2027. But after 2029, the TETFUND will phase out.

A new Student Education Loan Fund starts smaller at 25% in 2025–2026, grows to 33% in 2027, and takes over the entire levy by 2030. After 2026, funding for tech, innovation and engineering will stop.