First, credit where it is due. President Bola Tinubu has approached tax reforms with admirable tenacity. He set up a presidential committee on tax policy and fiscal reforms on 7th July 2023, exactly his 40th day in office; and he inaugurated the committee led by Mr. Taiwo Oyedele, a tax expert, about a month later. Tinubu signalled very early on that overhauling Nigeria’s creaky and leaky tax system would be a major item on his agenda.
On 3rd October 2024, he sent four bills to the National Assembly, and he signed the bills passed by the parliament on 26th June 2025. Despite the needless storm and political heat that followed some controversial and over-reaching aspects of the mostly sensible bills, Tinubu succeeded in passing the consequential legislations under nine months. This is commendable. He and Nigeria would be better served if he applies the same energy to other pressing matters of state.
Tinubu and his tax experts have attracted effusive praises for some of the landmark, and potentially transformative, provisions of the laws. These praises may well be justified. They may be hasty too. Experience has shown, especially with the Petroleum Industry Act (PIA)—a supposedly transformative law that took two decades to bring to fruition—that passing major laws is one thing and achieving the desiredimpact is another. In fact, the expected gains may fail to materialise, certain things may deteriorate and unintended consequences may pop up, as some of us have learnt from the PIA that we once wildly celebrated.
Affected government officials need to enjoy the euphoria but quickly get over it. They should take a magnifying lens to the signed laws and undertake careful and comprehensive reviews. They should evaluate the individual and combined provisions of the laws against the stated objectives of the reforms. They should assess the implications of the proposals that didn’t scale through. They also need to pore over the wordings of the laws and take a holistic view of the provisions.
Laws, by design or default, sometimes contain ambiguous, contradictory and counter-productive provisions. They should look out for the probability that some vested interests could have sneaked certain things into the small prints of the laws while the major actors were distracted by the contention over the big-ticket items. It will also be necessary to have clarity on how success will be measured, to anticipate different ways in which things could go wrong at the implementation stage, and to emplace robust risk-mitigation strategies.
I have not seen or read the final versions of the laws so I can’t comment on specific details. But with the bits and pieces that I have read from official communication and reports of the conference committee set up to harmonise the bills, I am curious about the likely impact of some of the provisions of the tax laws on the revenues of the three tiers of government. And I am wondering if anyone had modelled the revenue impact. We need to query and test assumptions, especially on key policy decisions. We don’t do that enough.
For example, the PIA transferred the federation equity in joint venture assets to the national oil company in exchange for quarterly dividends. Federation equity in JVs used to yield the bulk of the barrels available to the federation for export and domestic use. The sale of federation crude, especially federation exports,was the biggest revenue source from the oil and gas sector, and the major foreign exchange earner for the country. Someone must have sold the line that the federation would be better served with allowing NNPCL to take ownership of the JV assets, charge management fees, and pay dividends to the federation, possibly by point at ‘best practices’ from other countries. We all know how that has panned out. One of the enduring lessons from that episode should be that claims should not be taken on face value. More rigour and more evidence are needed for key policy decisions.
I am equally curious about the implication of some of the tax laws for Tinubu’s clear and repeatedrationale for the tax reform: to increaseNigeria’s tax-to-GDP ratio to 18% within three years.This is not a frivolous rationale. Nigeria underperforms even its poorest neighbours in terms of tax revenue against the size of its economy. Also, we are not generating enough revenues for our number and needs. Lately, Oyedele has been saying that the main goal of the tax reform is to reduce the burden on taxpayers and improve the ease of doing business, and not revenue maximisation. I will prefer to stick with the president here, because the president is the person that should be telling us his target.
I will admit that the revenue and economic regeneration goals of the reforms need not be at odds. When individuals have more disposable incomes, when businesses do well, and when the economy grows, the government—all things being equal—should earn more tax revenues. But this suggests there will be a time-lag, and which means that though the goals are linked but that higher revenue will be the trade-off in the short term. And there is nothing wrong with government taking immediate revenue cut for future increase in tax revenue, as long as it is a conscious and considered decision, anchored on evidence and not just on vibes or someone’s say-so. I will love to see the workings of how the 18% tax-to-GDP target will be met or whether the timeline needs to be adjusted and by how many years.
My sense is that some of the goodprovisionsof the laws will negatively impact tax revenues and not enough thought and preparation have gone into this probability. For example, exempting certain items from VAT and the first N800,000 from income tax will likely task the finances of certain states. Yes, the laws make our income taxmore progressive. But I can wager that most states across the country would hardly have many people in the high-income bands with the higher rates while significant number of those in formal employment, even with increase in minimum wage, would be covered by the exemptions. Personal income tax is mostly for states and the bulk of their internally generated revenue (IGR). Do we know how many states are likely to be worse off and the extent of the shortfall?
Also, one of the golden rules in tax administration is: have a low rate and a wide base. It is low rate, not a no-rate. I get the pro-poor argument. But everyone should pay taxes, proportionate to their income. It is not clear to me for now how we intend to widen the tax base with some of these exemptions. One of the lines regularly bandied around is that the rich will now pay more taxes. That’s the whole idea of progressive taxation: higher rates on higher income brackets. But how many states can boast of hundreds of people earning N25 million and above? Besides, the rich have the resources to hire experts that can advise them to avoid as much as they can. Expanding the tax base remains our best bet. The expected increase in tax takes from the rich may or may not materialise, and even if it does it may not compensate for the expected revenue loss to most states likely to result from widening the portion of personal income that will not be taxable.
Allowing firms to claim input VAT on fixed assets and services is no doubt a good policy but it will not be revenue-neutral. It will be good to know if the revenue likely foregone had been modelled and discussed,and whether the potential gains of more efficient tax collection can compensate for the probable revenue shortfall, and if not, what that would mean for government finances across the three tiers of government, especially the subnational governments. A back-of-the-envelope calculation suggests 30-40% possible reduction in revenue. If this is right, that is N2b to N2.7b off VAT revenue, if we use last year’s figures. The bulk of VAT goes to states and LGAs (currently 85% and to increase to 90% when the laws kick in).
I am agnostic about the transmutation of the Federal Inland Revenue Service (FIRS) to the Nigeria Revenue Service (NRS). Bigger may be better. It may not. The change of name may be transformational. It may just end up as mere rebranding. We have seen that with a certain entity. Some countries have single revenue agencies. Most do not. Concentration of revenue collection is neither a universal best practice not does it necessarily correlate with effectiveness in revenue collection. But I will give the benefit of the doubt on this.
My concern for now is that the harmonised versions of the bills stipulate that NRS will receive 4% of all revenues except petroleum royalties. FIRS used to get 4% of non-oil revenues as its cost of collection, which some of us have argued against. It is nothing personal but I believe that turning government agencies into commission agents is all shades wrong. I support that critical government agencies should be well resourced, but not over-resourced. I can live with giving bonuses when targets are exceeded or even aligning collection costs to established needs. But allowing certain agencies to keep a constant portion of the money they collect on behalf of the government creates all sorts of perverse incentives and enables graft, waste and misallocation of scarce resources.We have shown this over and over.
Now, NRS will get 4% of all revenues it collects, including oil revenues (except royalties). Based on 2024 figures, allowing FIRS to charge 4% on PPT and oil and gas CIT would have added at least N230 billion to its cost of collection for last year. Now think about the mega NRS receiving 4% of all revenues it collects except royalties. This is a major shift, and worthy of serious interrogation. Oyedele once stated that his committee would seek to slash the cost of collection to 1% or below. But here we are.
As mentioned earlier, I have not seen or read the final versions of the laws. I look forward to reading, digestingand dissecting them. Even if the laws are perfect—there is no perfect law—the real test will be when the rubber meets the road. Changing the laws is an important first step. But that is not all there is to reforms. Implementation is where the real work is. But beyond this, the ultimate test of tax reforms will not be just how fairer and more efficient the system has become or how much more money the government is able to rake in but more importantly it will how the reformed system and extra revenues are able to benefit the generality of citizens. We don’t know enough to make a call on this yet. A few things could have been done differently in the process of passing the law, especially in terms of political management and in not lumping tax reforms with revenue sharing in a federal system. These notwithstanding, Tinubu deserves his flowers for seeing the laws through in record time and with such tenacity.
Credit:This Day