With the introduction of a comprehensive Tax reform bill aimed at overhauling the country’s tax system, President Bola Tinubu’s administration has prioritized reforming the country’s Tax Policies and regulations, which have remained lax under successive governments due to the level of evasion. The administration is committed to enforcing more stringent laws and streamlining procedures in order to improve compliance and increase government revenue. Additionally, the administration has proposed the Finance (Amendment) Act, 2024, the Deduction at Source (Withholding) Regulations, the VAT Modification Order 2024, and reforms to the Nigeria Tax Bill 2024, Nigeria Tax Administration Bill 2024, Nigeria Revenue Service Bill 2024, and the Joint Revenue Board Bill 2024.
Nigeria’s tax system has long been characterized by low collections rates, placing the country among the least efficient Tax Collection globally. The tax-to-GDP ratio has remained low, with the National Bureau of Statistics revising the calculation in 2021 and reporting it at 10.86%, a significant increase from the previously estimated 6%. However, the Organization for Economic Co-operation and Development (OECD) noted a decrease to 7.9% in 2022. In 2023, the International Monetary Fund (IMF) reported that it stood at 9.4%, highlighting the country’s struggles with Tax Revenue mobilization.
Tax collection in Nigeria lags behind African averages.
When compared to other countries, Nigeria has a very low tax collection efficiency. Higher tax-to-GDP ratios are frequently seen in developed nations, which is indicative of more efficient tax structures. In 2021, for example, the average tax-to-GDP ratio for OECD nations was 34.2%. In Africa, Nigeria likewise falls behind its peers. As of 2022, the average tax-to-GDP ratio for 36 African nations was 16.0%, which was far greater than Nigeria’s 7.9%. Due to its low revenue-to-GDP ratios globally, Nigeria’s fiscal position is susceptible to shocks.
Among peer African nations, Nigeria has the lowest VAT collection efficiency (C-efficiency ratio), which is calculated by dividing actual income by prospective revenue. The 2021 Tax Expenditure Statement (TES) estimates that tax expenditures cost Nigeria around 4 percent of GDP (₦6.8 trillion) in 2021, making it one of the most expensive tax expenditure countries in Sub-Saharan Africa. Due to its limited bases, Nigeria’s indirect taxes—such as VAT and excise—have the lowest rates among ECOWAS nations, at around half of the average, severely reducing tax revenues.
Strengthening revenue generation through tax reforms.
In recognition of the constrained fiscal space, the government has created and revised a “Strategic Revenue Growth Initiative (SRGI)” with four primary goals, which are increasing the revenue-to-GDP ratio to 15% by 2025; broadening the tax base; combating Tax Evasion and promoting citizen tax payment; and improving tax system transparency. Additionally, the comprehensive tax reform bill’s implementation aims to provide standardized processes for the reliable and effective administration of tax laws. A notable provision within the bill is the proposed rise in the Value Added Tax (VAT) rate. The present 7.5% VAT rate is expected to increase gradually, rising to 10% in 2025 and then to 12.5% in 2026.
Also, the reform also targets corporation taxes by revising the corporate Income Tax rates. Under the new bill, small businesses will be exempt from paying taxes. The tax rate for other businesses is set at 27.5% for the 2025 assessment year and drops to 25% starting in the 2026 assessment year. Additionally, the bill proposes an increase in the capital gains tax rate from the current 10% to align with the corporate income tax rate, reaching 27.5% in the 2025 assessment year and adjusting to 25% from the 2026 assessment year.
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The bill also introduces new withholding tax in an effort to improve compliance and simplify tax administration. The implementation of these measures is expected to greatly impact Nigeria’s fiscal climate. While the SRGI features a number of significant tax and customs administration initiatives, the IMF report pointed out that it lacks a particular plan to raise tax rates. It recommended that more ambitious tax policy measures will need to be implemented, such as reducing several tax advantages and increasing indirect tax rates to levels comparable to those of ECOWAS nations.