TAX POLICY REFORMS IN NIGERIA: ISSUES, CHALLENGES AND PROSPECTS
Introduction
The Centre for Economic Policy Analysis and Research (CEPAR) of the University of Lagos held its 4th Quarterly Policy Discourse virtually on Friday, 20th December 2024, to critically examine ‘’ tax policy reforms in Nigeria: issues, challenges and prospects”. The session, which started at 3:00 pm, is open to the general public, including both local and international stakeholders such as staff, students of the host University of Lagos, and scholars from outside the country The event was moderated by Professor Ndubisi Nwokoma, FNES, Chairman of the Centre’s Advisory Board and featured erudite discussants from different fields of economic, legal, and accounting expertise.
The central focus of the discourse was the examination of the newly proposed tax policy reforms in Nigeria presently under scrutiny by the nation’s National Assembly. The discourse evaluated the issues, challenges, and prospects surrounding the new tax reforms and the tax system in general.
Opening Remarks by the Moderator
Professor Ndubisi Nwokoma welcomed participants and introduced the theme of the quarterly discourse, “Tax Policy Reforms in Nigeria: Issues, Challenges, and Prospects.” He emphasized on the relevance of the topic, noting the lengthy discussions surrounding tax reforms, particularly in the light of recent activities by the Presidential Committee on Tax Reforms. The focus of the webinar was to address pressing tax-related issues, touching the economic, legal, and practical implications of the reform. The moderator acknowledged the importance of the collective expertise brought together to discuss these reforms, as well as the urgent need for comprehensive reform in the Nigerian tax ecosystem.
“A good tax reform should not only focus on generating revenue but also prioritize accelerating economic development and improving the well- being of the people. This can be achieved through the government’s vital role of providing public goods and services."
Introduction of Discussants
The session featured a panel of expert discussants namely:
- Professor Olu Ajakaiye, FNES, FHAMN, Chairman of the African Centre for Shared Development Capacity Building (ACSDCB)
- Professor Abiola Sanni, SAN, Dean of the Faculty of Law, University of Lagos
- Mr. Soji Akinleye, Lead Partner at Soji Akinleye & Co. (Chartered Accountants and Tax Practitioner)
The discussants shared their views on various aspects of Nigeria’s tax system, ranging from fiscal policy implications to the legal framework governing taxation and the role of technology in improving tax administration.
“A sound tax reform must recognize that a 1% increase in taxes can lead to a greater than 1% increase in the prices of goods and services. Therefore, any reform should carefully consider the cost benefit analysis, weighing the economic impact of tax changes against the potential benefits to revenue generation."
Historical Background on Nigeria’s Tax Reforms
The panel provided a historical overview of Nigeria’s fiscal and tax policies, tracing significant reforms from the early 1990s through to the 2016 review that led to the establishment of the Federal Inland Revenue Service (FIRS). It was emphasized that the current round of reforms was long overdue, with significant delays since the last major review in 2002. Further elaboration was made on the ongoing efforts of the Presidential Fiscal Policy and Tax Reform Committee, led by Taiwo Oyedele, which aims to restructure Nigeria’s fiscal and tax policies for improved revenue generation and more efficient government spending.
Issues
Clarification of Fiscal Policy vs. Tax Policy Reforms
The discussants emphasized the distinction between fiscal and tax policy reforms. They clarified that fiscal policy reform goes beyond taxation and involves broader aspects of government spending and revenue management, including borrowing. An emphasis was made that the current reform process involves not just tax policy but also adjustments to other aspects of fiscal policy.
The Role of Technology in Tax Reforms
There was a focus on how technology can help in enhancing tax collection, reducing inefficiency, and ensuring transparency. The discussants pointed out the need for the Federal Inland Revenue Service (FIRS) to judiciously utilize technology in its operations, especially as it moves toward the creation of National Revenue Service (NRS), a new entity that will replace the FIRS to manage revenue collection for all the tiers of government.
Value Added Tax (VAT) and Regional Disparities
The issue of VAT allocation sparked a lively discussion. It was noted that the debate surrounding VAT allocation among regions has been contentious, with some states, like Lagos, claiming that they contribute disproportionately to the federal revenue but receive a smaller share. It was explained that the Taiwo Oyedele Committee proposed adjustments to the VAT allocation formula to address these imbalances and strengthen regional revenue generation capabilities. Meanwhile, the Nigerian Federal Government is reviewing a report from the Presidential Committee on Fiscal Policy and Tax Reforms, which recommends an immediate increase in VAT from the current 7.5% to 10% at the start of 2025, with a further rise to 15% by 2027 or 2030. This report is currently with President Bola Tinubu, and it is anticipated that a Bill to implement these changes will soon be presented to the National Assembly.
Legal and Institutional Frameworks
The reform bills under discussion include the establishment of new institutions like the Tax Ombudsman to resolve disputes between taxpayers and tax authorities, and the re-establishment of the Tax Appeal Tribunal. These measures aim to improve fairness and accountability within the tax system. It was highlighted that 4 different bills were presented by the executive arm of government to the National Assembly, namely:
The Nigerian Tax Law Bill to encompass all taxes in the country to the extent that any tax not listed here is an illegal tax. Hence all taxes in Nigeria will now be contained in one statute. It is a case of a compilation of the merger of the administration of taxes under one bill. It also focused on withholding tax regulations.
The Nigerian Tax Administration Bill aims to improve the administration of taxes in Nigeria by defining the roles, obligations and timelines for tax administration.
The National Revenue Service Bill. It was noted that the current FIRS which was formerly under the Ministry of Finance became independent since 2007. The bill is to empower the FIRS to leverage on technology among others to enhance the country’s revenue profile.
The Joint Revenue Board Establishment Bill aims to provide a mechanism for efficient dispute resolution, and promote the rights of the taxpayers.
“A sound tax reform should not feel punitive to citizens. It must be responsive to the state of the economy, during a recession, the tax system should be designed to ease the burden, while in times of economic boom, the system can be more robust, as businesses are likely to thrive."
Challenges
The discourse identified several challenges in the current tax system:
Despite ongoing reforms, inefficiencies still exist in tax collection, primarily due to overlaps among independent tax agencies and absence of coordination at both the state and national levels. This incompetency is worsened by poor public awareness, as many Nigerians are not fully aware of their tax obligations, resulting to low compliance rates and increased tax evasion.
The joint impact of economic volatility, political instability and inconsistency in government policies and programs create an unfriendly environment for tax reform. These forces disturb the implementation of long-term tax reforms by creating unpredictable outcomes, reducing public trust, and making it complex for taxpayers and businesses to adapt.
In addition, the unequal distribution of tax revenue across states, especially VAT, continues to cause friction and disputes. Certain states in Nigeria, particularly Lagos, generate a large portion of the country’s VAT revenue due to their economic activities. Lagos, being the country’s commercial hub, has a high concentration of businesses, retail activities, and services that are subject to VAT. As a result, Lagos being the country’s commercial hub, has a high concentration of businesses, retail activities, and services that are subject to VAT. As a result, Lagos contributes a disproportionately large share of VAT to the federal government’s revenue compared to other states. Meanwhile, when the VAT is distributed, it is often done according to a formula that does not fully reflect the level of contribution from these high-revenue states.
Although efforts to digitize tax collection have been made, the use of technology in Nigeria’s tax system is still limited. The lack of advanced digital infrastructure and data analytics tools reduces the efficiency of tax administration and collection.
“Tax policy reforms in Nigeria face significant issues and challenges, including inefficiency, corruption, low compliance, and overdependence on oil revenue."
Prospects
The prospects of these tax reforms are expected to go far beyond just improving tax collection. They have the capacity to drive comprehensive economic and social progress by promoting equity, enhancing economic growth, providing social amenities, attracting foreign investment and reinforcing sustainable development. When implemented carefully and comprehensively tax reforms can produce a more robust, efficient, and equitable tax system that will enhance the well-being of the people in the country.
Policy suggestions
Strengthening institutional capacity and increasing public awareness are both critical for improving tax administration and compliance. Enhancing the capacity of tax administration agencies, such as through the creation of the National Revenue Service (NRS), will enable more efficient tax management and collection. At the same time, a comprehensive public education campaign is essential to ensure that citizens understand their tax obligations and recognize the value of taxes in supporting national development. Together, these efforts will create a more effective and sustainable tax system.
Tax should be an instrument for economic development, and the bill should not be rushed through the National Assembly. It is crucial to allow adequate time for thorough review and scrutiny during the bill’s processing. The National Assembly should engage relevant stakeholders to conduct a cost-benefit analysis of the bill before proceeding. The focus should shift from an excessive emphasis on revenue generation to prioritizing a more holistic approach to economic development for the country.
Addressing regional inequalities in tax revenue distribution and investing in technological solutions are both essential components of an effective tax reform process. The reform should focus on ensuring a fairer allocation of revenue, particularly with regard to Value Added Tax (VAT), to ensure all regions benefit equitably from the country’s economic growth. In parallel, the government should invest in technological solutions to streamline tax collection, shun corruption and track the shadow economic activities and improve transparency. Together, these measures will foster a more comprehensive and efficient tax system that supports balanced regional development and regional development and reduces systemic inefficiencies.
“Tax policy reforms are critical for Nigeria’s economic growth and development, as they directly influence the nation’s revenue generation, wealth distribution, and investment climate."
Conclusion
The policy discourse successfully shed light on the complex landscape of tax reforms in Nigeria. It was clear from the discussions that the country’s tax system faces numerous challenges, including inefficiency, regional disparities, and a lack of public awareness. However, the reforms currently underway, while not without their challenges, represent a step in the right direction toward creating a more efficient, equitable, and transparent tax system. The implementation of these reforms, with the proposed adjustments, could significantly improve Nigeria’s fiscal health and promote long-term economic stability. The session concluded with a commitment to continued dialogue on tax reforms, recognizing that it is a pathway for the nation’s economic growth and sustainability.
About CEPAR
The Centre for Economic Policy Analysis and Research (CEPAR) is a research centre of the University of Lagos, in economic and business policy engagement with both the public and private sectors of the economy. Its goal is to engage in high quality, policy-relevant economic and business research on both national and global issues and disseminating its findings widely to decision-makers and other end-users across the economy. It is structured to be a reference point in economic policy analysis in Nigeria and Sub-Saharan Africa, with effort made to collaborate extensively on policy issues with national and international institutions. It offers meaningful economic policy engagement with the governments of the federation, at the federal, state and local levels. The Centre is also structured to engage the business community in capacity building and corporate issues resolution and advice. It is governed by a Board of Directors, comprised of highly qualified and experienced scholars in business and economic policy issues.
The Centre has three specific objectives, namely:
- Conducting evidenced-based policy analysis and engaging the various governments and public on topical economic issues, thus making useful inputs to government economic policy formulation. This will also involve periodic public engagement on these issues
- The conduct of relevant empirical and other economic and business research, at the micro and macroeconomic levels, cutting across the states, the nation and beyond.
- Embarking on appropriate capacity building on economic and business issues, in close collaboration with the private sector and the governments at the various levels.
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