Discussing the potential Long term implications of the New Tax Reform Bill

Introduction

In late 2024, President Bola Ahmed Tinubu introduced a comprehensive Tax Reform Bill aimed at overhauling Nigeria’s tax system to enhance efficiency, equity, and economic growth. This legislation consolidates various tax laws, revises tax rates, and introduces new
levies, all of which have significant implications for businesses operating within the country and individuals as well. It is a comprehensive piece of legislation that seeks to outline all taxes in the country hitherto administered by different laws and compress them into a single simplified law.

Most importantly, the Nigerian Tax Bill vests upon the Nigeria Revenue Service (expected to succeed FIRS) powers to collect all national taxes, including royalties hitherto collected by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) and excise duties, import VAT etc, hitherto collected by the Nigeria Customs Service.

• The Tax Bills are:The Nigeria Tax Bill (NTB) 2024
• The Nigeria Tax Administration Bill (NTAB)
• The Nigeria Revenue Service (Establishment) Bill (NRSEB); and
• The Joint Revenue Board (Establishment) Bill (JRBEB).

The enactment of this Bill will lead to the repeal of 11 laws, while 13 other laws will experience consequential amendments. The Nigerian Tax Bill will also revoke one subsidiary legislation and consequential amendments on two other subsidiary legislations.
The laws that would be revoked once the Tax Bill comes into effect (as currently proposed) include:

• Capital Gains Tax Act
• Companies Income Tax Act
• Casino Act
• Deep Offshore and Inland Basin Act
• Industrial Development (Income Tax Relief) Act
• Income Tax (Authorised Communications) Act
• Personal Income Tax Act
• Petroleum Profits Tax Act
• Stamp Duties Act
• Values Added Tax Act and
• Venture Capital (Incentives) Act

Some Key Provisions of the Tax Reform Bill:

1. Consolidation of Tax Laws: The Nigeria Tax Bill unifies multiple tax statutes—including the Companies Income Tax Act, Personal Income Tax Act, and Value Added Tax Act—into a single framework. This consolidation aims to simplify compliance and reduce administrative burdens for businesses.

2. Reduction in Corporate Tax Rates: The bill proposes a gradual reduction of the Companies Income Tax (CIT) rate from 30% to 25% over the next two years. Additionally, it consolidates various ancillary taxes into a single development levy, set at 4% for the 2025
   and 2026 assessment years, and 3% for the subsequent three years.
3. Value Added Tax (VAT) Revenue Sharing Adjustment: The reform revises the VAT revenue-sharing formula, allocating 60% of VAT revenue to the state where goods and services are consumed, 20% based on population, and the remaining 20% equally among all states. This adjustment is designed to promote fairness.
4. Tax Exemptions for Small Businesses: Small enterprises with turnovers below ₦50 million are exempted from corporate tax, providing relief to small and medium-sized enterprises (SMEs) and encouraging their growth.

This bill has stirred significant debate among economists, policymakers, as well as citizens. As the government attempts to enhance revenue generation and improve economic stability, it is crucial to explore the potential long-term impacts of these changes on various sectors of the economy. One of the primary objectives of the tax reform bill is to increase the government’s revenue base. By broadening the tax net and introducing new levies, the government aims to ease the dependency on oil revenues. In the long run, this could lead to greater fiscal stability as the government diversifies its revenue sources. An improved revenue stream could facilitate increased spending on infrastructure, healthcare, and education, fostering economic growth and development.

Impact on Business
Enhanced Investment Climate: The reduction in corporate tax rates positions Nigeria as a more attractive destination for both domestic and foreign investments. Lower tax burdens can lead to increased profitability and reinvestment opportunities for businesses.

• Compliance Simplification: The consolidation of tax laws into a single framework simplifies the tax compliance process, reducing the administrative workload for businesses and allowing them to focus more on their individual operations.
• Regional Economic Disparities: The new VAT revenue-sharing formula benefits states with higher consumption levels, potentially leading to increased revenue for businesses operating in economically vibrant regions. However, it may also lead to economic disparities between states, influencing business decisions regarding location and market targeting.
• Support for SMEs: Tax exemptions for small businesses alleviate financial pressures, enabling them to allocate resources toward expansion and innovation. This support is crucial for fostering entrepreneurship and job creation within the economy.

The reform is expected to have a mixed impact on businesses. On one hand, the introduction of new tax rates may increase the financial burden on small and medium enterprises (SMEs), which could stifle growth and innovation. On the other hand, by
potentially increasing compliance among larger corporations, the reforms could create a more level playing field, allowing SMEs to compete more fairly. In the long term, businesses adapting to these changes may find opportunities for expansion.
A transparent and fair tax system could also increase potential investor’s confidence, attracting foreign direct investment(FDI) and promoting entrepreneurship in its citizens.

Economic Growth and Inflation
The long-term implications of the tax reform on Nigeria’s economic growth will largely
depend on how effectively the government implements the changes, If implemented right
some economic growth could include:

• Boosting Business Competitiveness

The bill introduces a phased reduction in corporate tax rates, with the Companies Income Tax (CIT) decreasing from 30% to 25% over two years. This competitive tax rate aligns Nigeria with global trends, attracting foreign direct investment (FDI) and encouraging local
enterprises to expand. Lower corporate taxes allow businesses to reinvest profits in operations, infrastructure, and innovation, which in turn leads to job creation and higher productivity

• Support for Small and Medium Enterprises (SMEs)

SMEs, the backbone of Nigeria’s economy, stand to benefit significantly. By exempting businesses with a turnover of less than ₦50 million from corporate tax, the reform ensures that smaller enterprises can allocate more resources to growth and sustainability. This policy encourages entrepreneurship and provides a platform for small businesses to thrive, fostering inclusivity in economic participation.

• Improved Tax Collection and Efficiency

The consolidation of Nigeria’s tax laws into a unified framework simplifies compliance, reduces duplication, and eliminates inefficiencies. By digitizing the tax system and introducing streamlined processes, the government aims to reduce tax evasion and increase revenue collection. Enhanced tax compliance ensures that the government has more resources to fund critical infrastructure, education, and healthcare projects, which are essential for long-term economic growth.

• Regional Development Through VAT Allocation

The new Value Added Tax (VAT) revenue-sharing formula emphasizes consumption patterns, allocating 60% of VAT revenue to the state where goods and services are consumed. This formula incentivizes states to attract businesses and increase economic
activity. States with thriving consumer markets, such as Lagos and Rivers, are likely to see an influx of investments, spurring regional development.

• Encouraging Industrialization

To stimulate industrial growth, the bill includes incentives for manufacturing and export-driven businesses. Tax holidays for industries operating in free trade zones and sectors critical to national development encourage the establishment of factories and
processing plants. This focus on industrialization diversifies the economy, reducing dependence on oil and creating resilient economic structures.

An increase in tax rates without corresponding improvements in public services may lead to public discontent and reduced consumer spending, ultimately hindering economic growth. Moreover, If increased taxation disproportionately affects lower and middle-income
households, it may lead to heightened inflationary pressures. Should businesses pass on their increased tax costs to consumers, this may exacerbate the cost of living, particularly for vulnerable populations.

Social Implications
The tax reform bill also has significant social implications. By potentially reallocating government spending towards social welfare programs funded by the newly generated tax revenues, the government could address inequality and improve living standards. However, this positive outcome relies heavily on the government’s ability to manage and distribute funds efficiently.

The Tax Reform Bill is not only an economic policy but also a transformative measure with social implications. Designed to streamline taxation, promote fairness, and foster development, the reform has the potential to reshape societal dynamics. Here is how this bill
can impact the lives of Nigerians, touching on income inequality, social mobility, and regional disparities.

• Income Equality

The reform introduces progressive elements, such as tax exemptions for small businesses and the reduction of the tax burden on lower-income groups. These measures are expected to help redistribute wealth more equitably across the population. By allowing smaller businesses to reinvest their earnings, the reform could empower small entrepreneurs and small-scale traders, providing opportunities for upward economic standing.

There is an argument however that while small businesses benefit, larger corporations enjoy a significant reduction in corporate tax rates, which may disproportionately favor wealthier business owners. Raising the question whether the reforms will sufficiently address Nigeria’s wide income gap in the long term.

• Regional Disparities and Development

One of the most significant social implications of the tax bill lies in its adjustment to the Value Added Tax (VAT) revenue-sharing formula. By allocating 60% of VAT revenue to the state where goods and services are consumed, the reform rewards economic activity in “commercial regions” . This benefits urban states like Lagos, Rivers, and Abuja, which already host significant business activity. Consequently, these regions may experience faster development, improved infrastructure, and better social services.

However, the formula may expose inequalities between Nigeria’s developed southern states and less industrialized northern regions. States with lower consumption levels could face revenue shortages, potentially limiting their ability to invest in healthcare, education, and other critical sectors.

• Access to Public Services

Increased tax compliance and revenue from the reform are expected to provide the government with more resources to invest in public services. If effectively managed, this could lead to:

Improved Healthcare:
Enhanced funding for hospitals, clinics, and public health initiatives, particularly in underserved communities.

• Quality Education:
  Greater resources for schools, teacher training, and educational infrastructure, which could improve literacy rates and skill acquisition.
• Better Infrastructure:
  Investments in roads, electricity, and water supply systems, improving the quality of life for millions of Nigerians.
  
  However, achieving these outcomes depends on transparent and efficient allocation of tax revenues. Corruption could undermine these benefits, leaving citizens disappointed with the reform.

• Social Mobility and Entrepreneurship

By exempting small businesses with annual turnovers below ₦50 million from corporate taxes, the reform promotes entrepreneurship. Young Nigerians, particularly those entering the labor market, may find it easier to start and sustain businesses. This can contribute to reducing unemployment, especially among youth, and create new opportunities for social mobility.

Also, tax incentives for industries like manufacturing and agriculture can create jobs in sectors critical to Nigeria’s development. As employment opportunities grow, families may experience improved living standards and increased access to education and healthcare.

• Public Perception of Taxation

Generally Nigerians view the tax system as inefficient and plagued with corruption. The reform’s emphasis on simplification, transparency, and fairness could help rebuild trust between citizens and the government.

If citizens see benefits from the taxes they pay like better roads, healthcare, and education they may be more willing to comply with tax regulations. Public trust may also rely on how transparent the implementation of the tax reforms is. If the reforms are perceived as unfair or mismanaged, it could lead to reduced public support for the government

Conclusion:
The long-term effects of the new tax reform bill in Nigeria will depend on various factors, including successful implementation, public acceptance, and the adaptability of businesses. While the potential for increased revenue and improved public services exists, there are significant risks associated with increased taxation and regional disparities, particularly if not managed carefully. As Nigeria navigates these complex changes, it will be essential to monitor the reforms’ impacts on economic stability, growth, and social equity to ensure that the desired outcomes are achieved for the nation as a whole. The road ahead may be challenging, but it is essential for Nigeria’s long-term economic health and prosperity.