The price of change
Nigeria's House of Representatives advances tax reform bills, including VAT exemptions and rate hikes.
Nigeria’s House of Representatives passed for a second reading four tax reform bills proposed by President Tinubu despite regional divisions. Northern governors opposed the VAT-sharing formula, fearing Lagos would benefit disproportionately, while southern lawmakers saw it as restructuring. The bills advanced to the committee stage for further review. The 2024 Tax Bill proposes VAT exemptions for oil exports, baby products, sanitary items, and military hardware, while essentials like food, medicine, and education would have a zero percent VAT rate. However, the general VAT rate will gradually increase from 7.5% to 15% by 2030.
Nigeria's passage of four tax reform bills marks a significant milestone. President Bola Ahmed Tinubu proposed these reforms aim to reshape the tax system through a mix of exemptions and gradual increases, balancing economic growth and revenue generation. While some areas will see relief, concerns remain about potential inflation and the contentious VAT-sharing formula.
The 2024 Tax Bill exempts essential items like oil exports, baby products, sanitary items, and military hardware from VAT. Food, medicine, and education services will also have a zero percent VAT rate. These measures could relieve Nigerians struggling with the rising prices of these essentials. However, the planned gradual VAT increase—from 7.5% to 15% by 2030—has raised concerns. Our recent report, ‘Much Ado About Taxes,’ highlighted fears that the VAT hike could worsen inflation and reduce purchasing power.
Beyond VAT, the reforms could reshape state-level revenue generation, particularly in northern Nigeria. Respondents from formal and informal sectors believe these reforms could push states, especially those reliant on federal allocations, to improve internal revenue mechanisms, potentially driving industrial competitiveness and economic diversification.
Despite regional differences, the reforms are likely to pass substantially as proposed. Tax reform was a key element of Tinubu’s governorship in Lagos, and he is expected to use his influence to ensure federal enactment. Opposition, particularly from northern governors concerned about the VAT-sharing formula, has softened, with negotiations focusing on concessions rather than outright resistance.
The success of these reforms hinges on careful implementation and resolving contentious issues. Equitable resource distribution and incentivizing all states to enhance their economic capacities will be crucial. Thoughtful execution could create a more balanced and sustainable fiscal system for Nigeria. The tax exemption on staples and other essentials could relieve many Nigerians facing financial hardship. However, the report also highlighted concerns about the VAT increase, with respondents fearing it could exacerbate inflationary pressures. The report also noted that the reforms could push states to improve revenue generation and foster industrial competitiveness, especially in the North.
These tax reform bills represent a significant step in Nigeria’s fiscal policy. Their success depends on thoughtful implementation and resolving issues like the VAT-sharing formula. Prioritising measures incentivising all states to enhance economic capacity while ensuring equitable resource distribution is crucial for a more balanced and sustainable fiscal system.