The federal government has announced a plan to implement a 50 percent windfall Tax on banks’ foreign exchange gains in 2023 to stabilise the national economy. During a session with the Senate Committee on Finance, the Federal Inland Revenue Service Chairman, Zacch Adedeji, shared the information alongside Minister of Finance, Wale Edun. He further noted that in 2023, the banking industry saw an increase in FX profits, whereas the Manufacturing industry suffered a loss of ₦1.7 trillion after the Naira was floated on the foreign exchange market.
Moreover, the conversation overlooks that it focuses only on banks, ignoring that Nigerian manufacturers reported about ₦1.7 trillion in losses last year due to foreign exchange fluctuations. He further emphasised that the government is worried about this issue because they can only collect taxes once the losses are fully recovered, which could take about five to ten years. Their primary focus is not on making a profit but rather on recovering the losses incurred in another sector of the economy.
Tinubu proposes a windfall tax on banks’ FX earnings to boost revenue.
He advises a shift in perspective, emphasising that the focus should not solely be on banks. Tax-paying manufacturers faced setbacks due to external activities, not incompetence, but policy decisions. In February, The Central Bank of Nigeria (CBN) released a circular instructing to refrain from using profits for dividends or expenses despite reporting a profit. It was acknowledged that the funds did not belong to them. He explained that the clear instruction was to refrain from incorporating them into the capital for display purposes.
President Bola Ahmed Tinubu proposed legislative changes to the 2023 Finance Act, calling for a windfall tax on banks’ foreign exchange earnings. Under the proposed changes, banks will contribute half their combined FX gains of ₦3.7 trillion to the government’s revenue. This move is part of the 2024 supplementary budget, aiming to increase Government Revenue and reduce the budget deficit. The proposed windfall tax on banks’ FX earnings is seen as a way to generate additional funds for the government and ensure that banks contribute to the country’s economic development.
Tax on banks’ FX earnings may impact lending and profitability.
In addition, banks are expected to face financial pressure as they are required to contribute half of their FX gains to government revenue. This could reduce their capital reserves, potentially affecting their ability to lend and invest. The banking industry has expressed concerns about the potential for reduced profitability and the impact on shareholder returns. Also, there are worries that this levy might discourage banks from engaging in FX transactions, which could affect liquidity in the foreign exchange market.
Moving forward, manufacturers affected by the naira’s fluctuation view the windfall tariff as necessary to address economic imbalances. The losses suffered by manufacturers due to currency depreciation have affected their operations, leading to reduced production and job losses. Industry leaders argue that the revenue generated from the windfall levy should be directed towards supporting the manufacturing sector through subsidies, charge reliefs, and Investment in Infrastructure to help them recover and stabilise. However, economists and analysts have provided a mixed outlook on the proposed windfall tariff. Some believe it is a short-term solution to boost government revenue but caution that it might have unintended consequences.
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While it addresses immediate fiscal needs, it could reduce investor confidence and slow economic activities if not carefully managed. Others suggest that the government pair this tax with broader economic reforms to improve the business environment, enhance regulatory frameworks, and promote sustainable growth. Conversely, some citizens support the move to ensure profitable sectors contribute to the national economy. Others are sceptical, fearing that the additional tax burden on banks could lead to increased costs for banking services, which would ultimately be passed on to consumers.