Tax reform in Nigeria is no longer just overdue—it has become an urgent necessity. With persistent fiscal deficits, a narrow tax base, and growing economic pressures, the government’s proposed Tax Reform Bill aims to modernize the tax system, increase revenue, and stimulate economic growth. However, a closer inspection reveals several critical concerns regarding the timing, rationale, and equity implications of these reforms, particularly for ordinary Nigerians who may feel the brunt of these changes.
The Urgency of Reform: Driven by External Pressures?
The urgency surrounding the passage of the tax reform bill can be traced to external financial pressures, particularly Nigeria’s recent loans from the World Bank. In June 2024, Nigeria secured substantial loans under two key programs: the ‘Accelerating Resource Mobilization Reforms’ (AMOR) and the ‘Reforms for Economic Stabilization to Enable Transformation’ (RESET). These loans are contingent on Nigeria increasing its Value Added Tax (VAT) rate to at least 12.5% by 2026, along with other stipulations.
While these loans are intended to strengthen Nigeria’s fiscal capacity, they come at a significant cost. The associated interest rates exceed typical concessional financing, raising concerns about the long-term financial burden on the nation. Moreover, the terms of these loans seem to challenge the principles outlined in the Fiscal Responsibility Act of 2007, which aims to ensure sustainable and affordable financing for development. The government’s push to expedite tax reforms—particularly the VAT increase—appears predominantly influenced by these external commitments, rather than a homegrown strategy to foster national fiscal stability.
While responding to international pressures is understandable, the rapid passage of this tax bill, without comprehensive consultation, risks undermining the transparency, accountability, and long-term effectiveness of these reforms. A hurried approach may leave the country grappling with unintended consequences.
A Step Toward Economic Growth or a Recipe for Discontent?
The proposed reforms include a gradual increase in VAT from 7.5% to 15% over the next five years, designed to generate revenue and attract foreign investment. Corporate income taxes are also set to decrease, and a consumption-based VAT allocation model aims to incentivize economic activity at the state level. These measures ostensibly seek to bolster economic growth by enhancing corporate profitability and improving the government’s fiscal capacity.
However, the timing of these reforms, amid an already inflationary surge, raises significant concerns. Increasing VAT rates will likely drive up the cost of goods and services, which could dampen consumer demand, especially for low-income Nigerians. While the government projects that increased VAT revenue will expand fiscal space, the rapid tax hikes risk exacerbating inflationary pressures, pushing up prices and leading to a reduction in overall consumption. This could adversely affect producers and possibly lead to higher unemployment rates, undermining the intended economic benefits.
Corporate Tax Cuts and Investment Incentives: Who Truly Benefits?
The intention behind corporate tax cuts is clear: to attract foreign investment and stimulate economic activity. However, the lack of safeguards to ensure that these tax cuts will be reinvested in the local economy or passed on to consumers raises alarms. Without robust mechanisms to regulate price reductions or incentivize businesses to expand their workforce, these tax breaks may simply enrich large corporations, leaving ordinary Nigerians to shoulder the burden of higher costs.
Major sectors such as telecommunications, oil, and banking—already benefiting from substantial tax concessions—are poised to gain the most from these reforms. In contrast, small businesses and consumers are likely to bear the brunt of increased VAT and the associated price hikes. With no clear benefits for the everyday Nigerian, the tax cuts risk creating further inequality.
The Removal of TETFUND: A Setback for Education
One of the most concerning aspects of the tax reform is the removal of the Tertiary Education Trust Fund (TETFUND), which has long been a cornerstone of financing for Nigeria’s higher education sector. TETFUND has provided critical funding for infrastructure development, research grants, and faculty development at Nigerian universities. By removing this fund, the proposed reforms could severely undermine the progress made in improving the quality of tertiary education in the country. By the time the removal is fully implemented, tertiary institutions will have no option but to rely on school fees, which will cause an unprecedented hike in the cost of education in Nigeria.
TETFUND has been instrumental in ensuring that Nigerian universities remain competitive, both regionally and globally. Its removal raises serious concerns about how universities will continue to meet the demands for infrastructure improvement and academic innovation, especially when facing increasing student enrollments and global academic competition. The absence of such a dedicated funding stream further compounds the challenges of an already underfunded education sector, potentially worsening the disparity in education quality across Nigeria.
Challenges in VAT Allocation: A Complex System in Need of Refinement
The decentralized VAT allocation model aims to incentivize states to improve their economic performance. However, the complexity of implementing such a system raises significant concerns. Major corporations include taxes in their pricing, complicating the tracking and remittance of VAT at the state level. Businesses operating across multiple states may also face challenges in determining applicable VAT rates, complicating compliance and heightening the risk of tax evasion or misallocation.
The Growing Burden on Ordinary Nigerians
Perhaps the most pressing issue with the proposed reforms is their regressive nature, especially within the broader economic context. Nigeria is already grappling with severe inflation, compounded by the removal of fuel subsidies. The planned VAT increases will disproportionately affect low-income Nigerians, who spend a larger portion of their income on VAT-able goods.
Although the government claims that 82% of consumables will be exempt from VAT, essential items like transportation, car maintenance, and locally consumed beverages remain taxable. This exclusion places additional burdens on households already struggling to make ends meet. The classification of everyday items, such as soft drinks and tea, as luxuries is not only misguided but also disregards the reality that these are staple goods for many Nigerians, including those from low-income backgrounds.
The immediate implementation of VAT hikes will likely accelerate price increases across various sectors. These inflationary pressures will reduce disposable income, pushing more Nigerians further into poverty. As businesses face dwindling sales, cost-cutting measures, including layoffs, may follow, exacerbating the unemployment crisis.
Leveraging Technology and AI for Transparency in Taxation
A critical deficiency in the proposed tax reforms is the lack of transparency regarding the allocation and utilization of tax revenues. To enhance accountability and foster public trust, Nigeria should explore the integration of technology and AI in tax administration. The UK’s successful use of the Government Digital Service (GDS), which allows for real-time tracking of tax revenue, provides an excellent model. Such a system could allow Nigerians to track how tax revenues are spent on critical sectors such as infrastructure, education, and healthcare, thus improving transparency and curbing the discretionary powers of officials over public funds.
Blockchain technology could further secure and streamline public spending, providing an immutable record of every transaction. This would significantly reduce opportunities for corruption, ensuring taxpayers have visibility into how their contributions are used. AI could also be used to optimize resource allocation by identifying underfunded areas and directing resources more effectively.
Recommendations for a Balanced Approach
1. Reconsider the VAT Increases: While gradual, the government should reassess the proposed VAT hikes, ensuring they align with Nigeria’s economic realities and poverty levels. Alternative methods for revenue generation should be explored, reducing reliance on regressive taxes.
2. Strengthen VAT Exemptions: The government should expand VAT exemptions to include essential sectors such as transportation, healthcare, and services that directly impact the livelihoods of Nigerians.
3. Leverage Technology to Ensure Tax Compliance: Instead of focusing on stricter enforcement, Nigeria should introduce technology-driven solutions to eliminate the human element and reduce the risk of collusion between tax authorities and taxpayers. Automated systems using blockchain or AI could streamline tax collection and monitoring, ensuring accurate calculation, transparent tracking, and real-time reporting of transactions. Such technologies would reduce opportunities for corruption, increase compliance, and foster trust in the tax system by making the entire process more efficient and transparent.
4. Ensure Effective and Transparent Use of Tax Revenue: It is crucial to ensure that the tax revenue collected is effectively and efficiently used to achieve national development goals. The government should implement systems for real-time tracking of tax revenue allocation to critical sectors, such as infrastructure, education, and healthcare. Blockchain or AI could provide an immutable record of all public spending, making the entire process more transparent and reducing opportunities for mismanagement and corruption. Citizens should be able to track how their tax contributions are spent, which will foster public trust and accountability.
5. Reevaluate World Bank Loan Terms: Nigeria should renegotiate the terms of its World Bank loans, seeking more concessional rates and extended repayment periods to avoid further economic instability.
6. Ensure Transparency in Loan Agreements: It is crucial to improve transparency in the terms and conditions of international loans. Both the Nigerian public and the National Assembly should be fully informed of the long-term economic implications.
7. Reassess Corporate Tax Cuts: Implement safeguards to ensure corporate tax cuts lead to tangible benefits for consumers and the broader economy. Robust regulations should mandate that businesses reinvest these savings in job creation, price reductions, or local economic development.
8. Engage in Comprehensive Consultation: The government must conduct thorough consultations with a broad range of stakeholders, including economists, civil society organizations, and industry leaders, to ensure that the tax reforms are equitable, sustainable, and beneficial to all Nigerians.
9. Restore TETFUND or Provide Alternative Funding for Education: Given the critical role of TETFUND in financing tertiary education, the government must either restore this fund or create an alternative mechanism to ensure that universities can continue to provide high-quality education and infrastructure. Education is a key driver of national development, and undermining its funding could set back progress in the long term.
10. Remove the Discretionary Power of the President in Tax Revenue Allocation: The section granting the President discretionary power over tax revenue allocation should be removed entirely. Any decisions regarding the allocation of funds should be handled by the Federal Executive Council (FEC), ensuring a more transparent, collective, and accountable process. This would prevent undue influence and ensure that allocation decisions reflect broader national interests and not individual preferences.
In conclusion, Nigeria’s tax reform presents an opportunity to modernize the tax system, but its success hinges on strengthening fiscal transparency and public integrity. Technology-driven solutions, such as blockchain and AI, can reduce human intervention, curbing corruption and ensuring efficient tax collection and allocation. Discretionary powers granted to the president should be removed to ensure fairness. The Federal Executive Council (FEC) should oversee these processes, promoting accountability and eliminating potential misuse of power. To maximize the reforms’ effectiveness, Nigeria must prioritize wide consultancy in collection, transparency in revenue allocation and safeguard against discretionary decision-making. By doing so, the government can foster a trusted, equitable tax system that supports economic growth and instills public confidence.
M.A. iliasu
Strategic Communications
Center for Fiscal Transparency & Public Integrity