Nigeria is set to undergo a significant tax reform, aiming to simplify the system, ease the burden on businesses, and ultimately boost economic growth
The proposals, outlined by the Presidential Committee on Fiscal Policy and Tax Reforms chaired by Mr. Taiwo Oyedele, target specific areas to achieve these ambitious goals.
Bold Reforms
A key focus is on alleviating the tax burden for businesses, particularly smaller players and those in critical sectors. A major change involves withholding tax, a process currently deemed cumbersome by many. The committee proposes exempting manufacturers, farmers, and small businesses with an annual turnover below N50 million from withholding tax altogether. Additionally, rates for other businesses will be significantly reduced, with some sectors like real estate producers seeing rates as low as 2%.
Dr. Adeola Akindele, a tax policy analyst at the Lagos Business School, suggests this reform could be “a game-changer for small and medium-sized enterprises (SMEs). Reduced withholding tax frees up immediate cash flow, which can be critical for reinvestment and growth.” However, Akinyemi cautions that “effective implementation is crucial. Streamlining the process of identifying legitimate small businesses to qualify for the exemption will be essential to avoid abuse.”
Another major reform targets the multiple taxation burden. Businesses in Nigeria have long complained about the overwhelming number of taxes levied by various government agencies. The committee proposes consolidating these numerous taxes into eight core categories, creating a more streamlined and manageable system. These categories include income tax, VAT, customs duties, and excise tax, among others.
Professor Anya Oforo a Financial Advisor based in Abuja believes this consolidation “could significantly improve the ease of doing business in Nigeria. Businesses will spend less time and resources navigating a complex tax landscape, allowing them to focus on core operations.” However, Oforo raises concerns about potential revenue shortfalls in the short term, stating, “the government will need to carefully analyze the impact on tax collection and explore alternative revenue streams if necessary.”
Recognizing the crucial role of the informal sector in the Nigerian economy, the reforms also aim to incentivize its growth and formalization. Businesses earning N25 million or less annually will be exempt from taxes, allowing them to focus on establishing and expanding their operations. In the words of Mr. Oyedele, “we think that 95% of the informal sector should be legally exempted from all taxes… We’re using data to inform our decisions… We think that the informal sector are people who trying to earn a legitimate living, we should allow them to be and support them to grow to a point where they canen have the ability to pay taxes.”
Promoting Equity and Efficiency
The reforms also address the issue of fairness in the tax system. Currently, a flat income tax rate applies to all earners. The committee proposes a more progressive system, with increased tax rates for high earners (above N5 million monthly) and reduced rates for low earners (below N2 million monthly). Mr. Oyedele explains, “We are proposing that personal income tax rate should be reduced for anybody who is earning around N2 million per month or less… our tax rate is not progressive.”
Looking Ahead
The proposed reforms directly address some of the biggest challenges faced by the Nigerian tax system. The complexity of withholding tax, the burden of multiple taxes, and the challenges faced by the informal sector are all being targeted for significant improvement. However, the successful implementation of these reforms is crucial. The government must address potential challenges like identifying legitimate informal businesses and navigating resistance from existing tax agencies.
The overall goal of these reforms is to create a tax system that is fair, efficient, and fosters economic activity. By reducing burdens on businesses, promoting growth in the informal sector, and ensuring everyone contributes their fair share, the Nigerian government hopes to generate sustainable revenue for national development. The potential economic impact of these changes is significant. Analysts like Dr. Akinyemi believe it could stimulate entrepreneurial activity and boost GDP growth. However, close monitoring and adjustments might be necessary to ensure the reforms achieve their intended outcomes.
While the success of these reforms remains to be seen, they represent a bold step by the President Bola Ahmed Tinubu’s admnistration towards a more modern and equitable tax system in Nigeria
