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Efforts to ram the new tax bills through the National Assembly have suffered weeks of political setback. Northern governors and other interest groups from the region are opposed to the derivation formular proposed for sharing the proceeds of the Value Added Tax (VAT). Many other stakeholder groups, who have specified no cogent objections to the tax bills, nonetheless have shied away from backing the proposals, asking instead for time for more consultation.

But President Bola Tinubu may still have his way by pushing through the most far-reaching tax reform by the federal government in decades. However, the lack of consensus so far for passing the bills reflects not just the president’s tenuous political support base but also general wariness about his reform. For a president that was elected by only 9.46% of the registered voters and a plurality of 37% of the total vote cast, the political mandate he wields to implement systemic reforms is inherently limited. The two major reforms that he has implemented since coming into office in May 2023 – the removal of petrol subsidy and floatation of the naira – have generated serious negative outcomes, including macroeconomic instability, business distress, and rising poverty.

Nevertheless, the tax reform proposals can be evaluated using objective, non-partisan criteria, and regardless of the President’s reform antecedents. The necessity of the legal reform can be questioned, as much as its chances of significant success. On the first criteria, the reform agenda would easily be dismissed. Current trends in Nigeria’s governance do not assure that, if the bills become laws, they would be competently and evenly implemented. This is because the country has continued to drift away from the rule of law. Lawless exemptions in the implementation of the tax laws would likely rival the considerable legal exemptions in the bills, based on the worsening reign of impunity in the country.

For decades, a new legal and regulatory regime was thought to be a necessity for driving transformation in the performance of the Nigerian petroleum industry. At last, the Petroleum Industry Act (PIA) was signed in 2021. More than three years later, however, the legislation has not shifted the pre-existing operating and regulatory paradigms of the Nigerian oil & gas industry. Only cosmetic changes, including changing the name of the national oil company and restructuring of the regulatory institutions, are evident. Thus, resistance to change in Nigeria could happen by stalling legal reform or ignoring the law.

More pertinent to this article is whether there is the likelihood of the proposed tax reform achieving momentous success for the economy and tax administration in Nigeria. The more discernible joint objectives of the four tax bills (Nigeria Tax Bill, Nigeria Tax Administration Bill, Nigeria Revenue Service (Establishment) Bill, and Joint Revenue Board (Establishment) Bill) are to boost Nigeria’s economic growth, raise the tax-to-GDP ratio, improve tax administration, and achieve tax equity.

From this outset, it is important to note that metrics such as GDP growth rate and the percentage of the economic output that is taxed have very limited value. Empirical data has shown that high GDP growth rate can disproportionately benefit a small number of the population in an economy – especially the economic/financial elite. And as the data shows, a low or high tax-to-GDP ratio does not mean an economy is doing well or badly. But the pursuit of a high tax-to-GDP ratio in Nigeria, under the current economic circumstances, can cause what may be unforeseen repercussions for policymakers and public commentators alike – much like the lack of anticipation of the extent of the economic damage that subsidy removal and floatation of the naira has caused.

We shall now examine the prospects of achieving the core aims of the proposed tax reform.

Boosting GDP Growth

With Nigeria’s GDP growth rate in 2024 projected to be 2.9%, the country’s annual GDP growth would average below 2% between 2015 and 2024. A constellation of factors drove the poor economic performance. First was lower oil receipt, caused by external demand shocks and domestic supply shortfalls – chiefly due to an industrial-scale theft of crude oil in the Niger Delta. Second, insecurity stifled key economic sectors, including agriculture, logistics, and infrastructure. Third, systemic corruption thwarted fiscal and monetary policy goals, causing significant macroeconomic and financial instability and loss of investor confidence. Fourth, the high wave of emigration of skilled and semi-skilled workers and entrepreneurs constrained productivity and consumption. And fifth, the high and rising poverty level caused by all of the above generally weakened effective demand.

But the efforts of the current administration to contain oil theft have driven recent increases in government’s oil revenue. Also, in Q2 2024, the oil sector grew at an annual rate of 10.15%, after making adjustment for inflation. The sector's growth of 5.17% in Q3 2024 represents a decline from the previous quarter's growth but an improvement from the -0.85% growth rate a year earlier. As the prices of crude oil remained relatively stable during this period, the positive oil-sector growth indicates that the previous weakness – and weak fiscal performance – were effects while oil theft was the cause. Therefore, efforts to sustainably improve Nigeria’s GDP growth rate must similarly address the causes of weak economic performance and not its effects. Weak tax revenue was arguably an effect and not the cause of the underwhelming economic growth of the past decade.

One important realisation that Nigerian policymakers have yet to grasp is that the economy has become increasingly less resilient to its mismanagement. Addressing the need for a comprehensive economic overhaul with isolated reform conduces to economic mismanagement. In the past, this issue was masked by favourable external factors, including sustained uptrend in oil prices, the “emerging Africa” narrative – which drove the interest of foreign investors to the continent – and interest rate at zero lower bound in the advanced economies, which encouraged capital outflows to emerging markets and Africa. None of these factors still hold sway for a gratuitous, Nigerian economic growth.

The attempt to sidestep the current high inflation in the country and engineer growth through taxation is a nonstarter. Certain provisions of the reform proposals, if implemented, could further stoke inflation. This risk is inherent in the proposed increase in the VAT rate from the current 7.5% to 12.5% between January 2025-January 2026 – and to 15% in 2030. For emphasis, a 66.7% increase in the VAT rate within just 13 months represents a continued dalliance with macroeconomic instability by the Tinubu administration. This will accelerate the ongoing demand destruction in the country, perpetuating the cycle of poverty, emigration, and anaemic growth. According to the Manufacturers’ Association of Nigeria, its members were unable to sell N100 billion worth of their total inventory in 2016. However, this figure had grown to N1.24 trillion by the first half of 2024, driven by the weakening purchasing power in the country.

Another proposition of the tax reform is driving economic growth by offering tax incentive to spur inward Foreign Direct Investment (FDI). Accordingly, the Nigeria Tax Bill proposes to reduce the Company Income Tax (CIT) from 30% to 25%. This strategy has significant limitation as corporate tax rate is only one of several factors that make an economy competitive or attractive for FDI. Infrastructure, competent workforce, security, power supply, bureaucratic efficiency, rule of law, and anti-corruption are some of the other factors for foreign investment attraction. Suffice to say that Nigeria’s unattractiveness for FDI can be more meaningfully addressed with civil service reform that curtails red-tapism and corruption than offering a competitive CIT rate. Anecdotal evidence suggests that it takes far longer time to secure regulatory approvals for major infrastructure projects in the country, like ports, than it would take to start and finish building them. The advantage of a competitive tax regime does not apply where investment projects are discouraged by excessively lengthy and corrupt project approval processes.

How then can the country drive private (foreign and domestic) investments needed for its economic growth? One of the ways is to encourage co-investment between the public and private sectors. Unfortunately, the controversial manner in which NNPC Limited pulled back from its agreement to acquire 20% equity stake in Dangote Refinery, only paying for 7.2% in the end, is a bad example that the government must ensure is not repeated by any of its agencies.

Raising the tax-to-GDP ratio

According to the Chairman, Presidential Committee on Fiscal Policy and Tax Reforms, Taiwo Oyedele, the tax reform aims to deliver a radical improvement in the country’s tax-to-GDP ratio, from the current threshold of 10% to 18% within two years. As I have written in a previous article, increasing the proportion of the GDP that is taxed is not an important objective, as argued by data. In 2022, the tax-to-GDP ratio of China, the global and emerging market giant, was 7.7%. Ethiopia, which is one of the fastest-growing economies in Africa, had the ratio at 4.51%, while Saudi Arabia – a leading oil producer – taxed only 7.8% of its GDP. Many high-income countries, including the United States, Canada, and Germany, had tax-to-GDP ratios of 12% or lower.

But, of course, many low- and high-income countries tax their economies more. However, the metric can hardly be used to segment countries in terms of how well their economies are performing.

Aiming to increase Nigeria’s tax revenue as a proportion of the GDP by up to 80% within two years is rather ambitious. Very often, the government or its agencies would set ambitious targets and seemingly forget about them afterwards. This is evident in the gap between the benchmarks set in the yearly budgets and their actual performance. As another example, the Central Bank of Nigeria (CBN) set 21.4% inflation rate target for 2024 year-end. But at its final Monetary Policy Committee meeting for the year in November, the CBN raised interest rate to 27.50% due to “renewed inflationary pressures”. Data by the National Bureau of Statistics later showed that inflation rose to 34.6% in November 2024; there is now a possibility of up to a whopping 13 percentage points difference between the CBN projection and the actual inflation rate at the end of 2024! One of the reasons for this type of issues is the short-term orientation of policymakers as policymaking is politically charged.

After the VAT rate was increased by 50% in 2020, from 5% to 7.5%, VAT’s contribution to non-oil revenue increased by 8 percentage points, from 32% in Q4 2019 to 40% in Q2 2022. But in the same period, total corporate tax as a proportion of non-oil revenue dwindled by 12 percentage points, from 45% to 33%. The gain from the VAT rate increase was eroded by the decline in corporate tax. If the new VAT rate increase of 66.7% within 13 months is passed, it’s impact on the total non-oil revenue is unlikely to be as strong as the increase in 2020, as more people would respond by consuming less or shifting more to food items that are VAT exempt. In this scenario, many restaurants and other businesses will struggle.

Improving tax administration

Improving tax administration in the country, at both federal and subnational levels, is both desirable and necessary. But like many reforms that the country needs, the political will to implement them is absent. Oftentimes, impactful changes are avoided in new legislations or loopholes to be exploited are deliberately created in them. Nowhere is this phenomenon more evident than in electoral and fiscal reform in the country. This is as the political establishment put their personal/career interest above the collective, national interest.

With regard to taxation, one familiar example is the use of touts in the transport sector to collect taxes. An important point to note is the use of these unprofessional tax collectors serves a broader purpose of using them to foment electoral malpractices during elections and attacking civil liberties of citizens during protests. Over time, these individuals operating a system that leaks public revenue into private pockets have become politically powerful and in Lagos they have limited the application of road traffic laws.

This is one of the reasons for scepticism over the possible implementation of the proposed tax reform. Concerns have also been expressed over how the reform can serve the private interests (including those of public officials) through the use of tax consultancy services. Also, by expanding the remit of the Federal Inland Revenue Service (FIRS), which is to be replaced by Nigeria Revenue Service (NRS), a single point for institutional capture of Nigeria’s tax administration is a major risk. Driving efficiency in such a mega institution can also be challenging, not because of the lack of tools to achieve it but due to the prevailing culture.

These issues, which border on serving entrenched political interests, can undermine the excellent provisions of the tax administration bill.

Equity in taxation

The issue of tax equity has generated the hottest debate of the reform proposals yet. But the subject has been discussed in a very limited or distorted manner. Equity has been debated with regard to the ‘derivation’ formular for sharing VAT proceeds among the states. However, equity in taxation has a very specific meaning. It refers to the fair distribution of tax burdens among taxpayers based on their financial ability to pay. The distortion in the ongoing conversation is based more on practice than ignorance. Government officials at various levels treat tax revenues more as their personal resources than a means for delivering public good as required by the social contract.

The governance of public finance in Nigeria amply entails the tyranny of “taxation without representation.” Nigerians have no say in how state affairs are being managed despite financing government through their taxes. They have scant access to public goods and are not allowed to demand accountability or policy changes. The breadth of the exemptions granted for VAT, Personal Income Tax, and taxation of small businesses can completely erode the need for representation of the people. No taxation would amplify no representation.

The tax exemptions, well-intentioned as they may be, can be counterproductive. Productive individual and corporate entities should pay their fair share of taxes as a bases for their representation in government and for a progressive taxation. But despite the exemptions, the proposed reform aims to drive increases in tax revenue by hiking the rate for VAT, a regressive tax, which takes a large percentage of the income of poor people relative to the rich. This bares the anti-poor face of the reform agenda, despite Mr. Oyedele’s christening of the four bills as “The People’s Tax Bills.”

As for equitable distribution of VAT proceeds among the states, there is no solution under the existing constitutional or fiscal framework of the country that can deliver a generally acceptable solution. The principle of fiscal federalism has been resisted in Nigeria for years, only to create distrust and grievances between the federal and state governments and among the federating units. Lagos and Rivers states are already at the Supreme Court to challenge the current arrangement for VAT collection and distribution.

The argument that states should be able to collect VAT, a consumption tax, is not without merit. It would make the states’ VAT laws reflect more local realities, and they can have varying rates – as opposed to a uniform rate across the country. The argument that the states lack the capacity to collect VAT is not a sound argument for perpetually denying them the opportunity to collect consumption taxes in their jurisdictions. They can develop the capacity if they so wish, and it would be in their best interest to do so.

In a number of the states, agriculture constitutes more than 30 percent of their GDP. The exemptions on agricultural produce in the proposed federal law would cut off a big proportion of the GDP of such states from taxation. This may deter public investment in agriculture in many of the states. The blanket exemptions are one of the problems with the federal government legislating for the local economy. Agriculture in the north is more commercialised than in the south. Were we to have fiscal federalism, where the states can make their own VAT laws, for instance, the northern states can decide to charge VAT on primary food products and plough back the proceeds into developing the food sector, funding broader industrial development, and implementing social safety nets.

The federal government recognises the need for Nigeria to become a competitive tax jurisdiction in relation to other countries. But it is stifling the states by denying them some opportunities to use taxation as a tool for inter-state competition for investment, economic growth, and development. But in the US, for instance, variable rates for state income, property, and sales taxes are factors of attraction for people and businesses in deciding where they want to live, work, and invest. Nigeria must move fiscal federalism from how revenues generated in different parts of the country are first pooled and then shared between the federating units, to the subnational units having more control over revenue generation in their jurisdictions and pooling a percentage of the proceeds to fund the federal government and for redistributive purposes. In this regard, the states should be able to enact their own (competitive) VAT laws and retain about 70% of the revenue. The federal government would receive 30%, from which it would retain 10% and share the remaining 20% according to the development needs of each state.

Conclusion

The major legacy of the governorship of Tinubu in Lagos between 1999 – 2007 was the tax reform he introduced. The reform increased the internally generated revenue of Lagos State by multiple folds. But the reform generated limited developmental benefits and enabled the political capture of the state.

It is not surprising that President Tinubu would like to try his hands in an area that he had generated significant impact in fiscal reform. But according to Abraham Maslow’s law of instrument, there is a risk of an over-reliance on a familiar or favourite tool.

I would like to conclude with the following advice or recommendations. Nigerians should not be overburdened by tax at a time of an acute economic weakness. The government needs to first improve the rule of law before introducing new laws like the ones for taxation. Private investment, utilising local and foreign capital, offers better prospects for the country’s economic turnaround than squeezing more taxes from the people and businesses. Reform that fosters macroeconomic stability is far more important than one that would swell government’s tax revenue while further stoking inflationary pressure. And priority reform of the government should include measures that drive efficiency in government spending, boost productivity, improve efficiency in the civil service, fight corruption, and foster innovation.

The key issue with the proposed tax reform is that whereas the prospects of achieving significant success with its key objectives are very slender, its risk of causing further macroeconomic instability, offering non-substantial relief for businesses, and worsening poverty is considerable.

Jide Akintunde is Managing Editor, Financial Nigeria publications, and Director, Nigeria Development and Finance Forum.