Opeyemi Bamidele: 5 Key Takeaways From The Tax Bills

1. The first takeaway specifically revolves around the review of the sharing formula of the value added tax (VAT) accrued to all the federation. Under Section 77, the Nigeria Tax Administration Bill proposes a reduction of VAT distributable to the federal government from 15% to 10%. The bill also concedes 55% to state governments and 35% to the local government councils.

Under Section 40, the 2004 VAT Act stipulated that a 20% derivation shall be reflected in the distribution of the allocation amongst states and local governments. But the reform bill now tinkered with this provision in favour of the sub-national governments. From 20% under the current regime, Section 22(12) of the Bill recommended that a 60% derivation shall be reflected in the sharing of VAT standing to the credit of states and local governments in the spirit of fairness and justice. Diverse interests nationwide have expressed concerns about this provision on the ground that it may negatively impact on some governments.

I differ with these critical interests on three grounds. First, the provision was introduced to dissuade some state governments from dropping litigation against the federal government with respect to VAT. Because VAT is considered a residual matter, some state governments challenged the power of the federal government to collect and administer VAT, and they won in the courts of first and second instances. But the need to prevent the cases of non-remittances inspired the federal government to step in and collect VAT on behalf of the federation.

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So, increasing the derivation from 20% to 60% will be motivation for the litigants to drop the suit. Also, the provision was introduced to boost the economic competitiveness of the subnational entities. Since VAT is derived from the thriving economic activities, the provision is designed to inspire the state governments to come up with initiatives that boost productive activities from which they generate more taxes within their spaces. Finally, the provision is meant to mainstream equity, equality and justice into the administration and distribution of VAT. That is the centrality of federalism, a system our founding fathers bequeathed on us and we have been operating since independence.

With the new sharing formula, the shares of both the states and local governments now account for 90% of total VAT collected across the federation. This increase literally does not support claims of the state governments that they will not be able to meet their basic obligations if the new tax bills eventually sail through. Rather, as different data have shown, this particular initiative will obviously increase VAT proceeds due to the state governments once its enforcement takes off. As a matter of fact, this is the first time in the last two decades or thereabouts that the federal government is making such a huge concession to guarantee the fiscal stability of the federating units, encouraging them to run efficient and competitive governments and as well reduce their dependence on the statutory allocations.

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2. Another takeaway from the Tax Reform Bills is enshrined in Section 22 (5-9) of the Nigeria Tax Administration Bill, which in detail provides for tax incentives for defined beneficiaries or entities that will either be exempted from the taxable community or be incentivised with a view to spurring economic growth and guaranteeing collective prosperity.

The section, in specific terms, recommends zero VAT on exports and essential consumptions by the masses. If enacted at last, this provision presents two broad benefits, which none of its critics can ever doubt or deny. In the first instance, goods, services, and intellectual property exports will benefit from zero-rated VAT and other incentives, which obviously boost the trade competitiveness of Nigeria on the global stage. The provision also exempts food and other related items from VAT. This obviously will crash the rising food prices and bring a huge relief to 133 million citizens now classified as multidimensionally poor.

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3. The third takeaway is, for me, perhaps the most exciting of all, purely because it focuses on the economically disadvantaged or vulnerable working class. Unlike the extant regime that perpetually places them under tax obligations, Chapter 2 of the Nigeria Tax Bill outrightly takes the burden off their shoulders. But it sets a threshold for the working class that can benefit from the proposal. The threshold covers all employees earning N800, 000 and below annually.

It also captures all minimum wage earners or all low-income households within the threshold. This class of people will definitely enjoy outright exemption from personal income tax with a view to boosting their purchasing powers and de-escalating food inflation. This equally suggests that over 90% of workers across sectors will see a reduced tax burden when the proposed regime becomes effective. At a time of global economic headwinds, this offer means a lot for every household within the threshold. This is in addition to tax exemptions on all essential goods and services from which all citizens will benefit. The core duty of the government remains providing institutionalised and well-structured social support to the vulnerable and not complicating their burdens considering the current global economic realities that spare no country or territory worldwide.

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4. Fourth, aside from the incentive for minimum wage earners, the tax reform bills equally exempt small businesses from the payment of taxes. It first reviews the financial threshold of businesses that can tap into such benefits. Unlike the subsisting regime that grants exemptions to businesses with N25 million annual turnovers, the tax reform bills raise the threshold to N50 million, which unequivocally accounts for a 100% increase.

The bill also exempts small businesses with the total assets of N250 million. Again, this is an audacious, indeed progressive initiative with the intent of providing an environment that can speed up the growth of such businesses rather than suffocating them. With these provisions, thousands of businesses within this threshold will be relieved of tax burden. The idea behind this initiative is not far-fetched. First, micro, small and medium enterprises (MSMEs) constitute about 48% of our GDP. Second, they provide about 87% of total employment nationwide. Third, they have a strong presence across all 774 local government areas. All this data obviously attest to the crux of granting small businesses with N50 million annual turnover tax exemption and its significance in building an army of vibrant entrepreneurs.

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5. The last takeaway largely borders on the long-standing concerns about multiple taxation. Conglomerates, multinationals and organised private sector have been complaining about this syndrome for decades. But the tax proposal now offers relief under Section 56 of the Nigeria Tax Bill. The proposal now opts for a significant reduction in company income tax rather than sticking to the subsisting regime that multiplies their tax obligations. The reduction will be effected in two successions. From 30% currently, the bill proposes 27.5% in 2025 and 25% in 2026, which according to development data, is conservative compared to 27% in South Africa and 30% in Kenya.

The bill also introduces a 4% development levy aimed at harmonising the multiplicity of taxes and levies paid by companies. It also maps out the plan to reduce the development levy to 2% in 2030, which will be devoted solely to funding the Nigerian Education Loan Fund (NEFUND), thereby phasing out 2.5% education tax; 0.25% National Agency for Science and Engineering Infrastructure tax and 1% National Information Technology Development Levy. Instead of all these earmarked taxes, the company will only pay a 4% development levy till 2029 and 2% afterward for the funding of NEFUND, a scheme that has benefitted no fewer than 10,000 students already

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Senator Opeyemi Bamidele, APC Ekiti Central, is the Leader of the Nigerian Senate