Apart from revenue generation, another important function of taxation is wealth redistribution, which is basically making the richer segments of the economy to pay higher taxes than the poorer segments. This is done to ensure social security, equality and stability.
The philosophy behind the idea of windfall taxation is not separate from the general idea of progressive taxation as mentioned above. When a section of the economy makes a windfall income, that section has to pay windfall taxes. Short and simple.
Progressive economies around the world have at one time or the other introduced windfall taxes. For examples, in 2022, the United Kingdom introduced a windfall tax on energy companies’ profits due to soaring energy prices exacerbated by geopolitical events, including the war in Ukraine. Also in 2022, Italy imposed a windfall tax on energy companies’ profits, similar to the UK’s approach, to address the impact of high energy prices on consumers and to generate additional revenue for the government. Australia, in the same year, imposed a windfall tax on mining companies benefiting from high commodity prices, though the exact details and implementation varied. Spain, in 2022, also introduced a windfall tax on energy companies and banks to address high inflation and support low-income households.
These taxes are often introduced during periods of significant economic stress or when certain sectors experience unexpected and substantial profits. The aim is usually to mitigate the negative effects of economic volatility on the broader population and to fund public services.
A windfall tax is a tax levied on profits that are deemed to be excessively high or unexpected, often due to external factors rather than business performance. This type of tax is typically imposed on companies or sectors that have experienced a sudden surge in profits due to favourable conditions, such as a rise in commodity prices or economic changes.
The banking sector in Nigeria has had windfall income fall of the laps of its operators since the unification of the exchange rate late last year by the Central Bank of Nigeria (CBN). The manufacturing sector has suffered the consequences of these gains made by the banks. Hence, the moves by the Federal Government to introduce windfall tax on the sector through amendment to the 2023 Finance Act.
Some individuals have expressed genuine concerns about the proposal. Some of these concerns are a result of misunderstanding of some aspects of the Federal Government’s intention. It therefore behoves experts to do a bit of a clarification.
No serious person would expect such amendment to the 2023 Finance Act, which mandates banks to pay a one-off windfall tax of 70 percent on the forex gains of last year would happen without opposition. In fact, more reactions will still come. And since the passage by the Senate, there have been reactions and counter-reactions. After carefully reading and listening to the major stakeholders, I have come to the conclusion that the bankers would later praise the Federal Government for coming up with the initiative. It is actually a remarkable opportunity for bankers to help in stabilising the economy. And history will be kind to them.
The fact that this kind of tax is novel in the country doesn’t mean it shouldn’t be introduced. And there is no better time than now to introduce it. Currently, Nigeria battles a lot of issues— economic and infrastructural. The anger that led to the recent nationwide protest tells a lot. Yes, the citizens have the right to complain, but we forget too soon that the wrongs of the many years of democratic rule, especially in this Fourth Republic cannot be righted in just a year. But all of us know that we are a country of people who are hasty; people who want instant change.
The introduction of the windfall tax did not just happen. It is a necessity; a sacrifice the banking sector should see as its contribution to stabilising the economy. A stabilised economy will be better positioned to deliver more goods for the banks now and in the future. We are aware of the losses declared by major manufacturers. Since 2023, players in the sector counting their losses and the Federal Government has been deploying palliatives to mitigate the effect on the payers in the sector. It what could be described as its largest half-year loss ever, MTN Nigeria in a recent report, revealed a six-fold surge in loss of N519 billion in the first half of the year.
The critical need for adjustment to achieve balance necessitated the windfall tax which will apply only to the N3.37trillion gained by the banks through foreign exchange revaluation in 2023 financial year and first quarter of this year.
I read Kolade Ojo, a financial and tax expert, on the windfall tax. According to him, the policy, though “perceived as a financial burden aims to redistribute unexpected gains in a way that can stabilise the economy and support social programmes, thereby fostering a more equitable financial landscape. To boot, rising inflation and the devaluation of the Naira do pose significant challenges, yet they also highlight the need for a resilient banking sector capable of withstanding economic volatility.”
He went further to say that “The perception of the windfall levy as a punitive measure overlooks the broader economic benefits it is designed to achieve. Rather than unduly penalising banks, the levy aims to redistribute extraordinary profits in a manner that supports the overall economy. By harnessing windfall gains, the government can invest in critical areas that spur economic growth, thereby creating a more favourable operating environment for all businesses, including the banking sector players.” He supported his argument using the Norway’s petroleum tax system model which involves “taxing the super profits from oil and gas exploration at a high rate, which has allowed the country to amass a substantial sovereign wealth fund.
While speaking on the development, the chairman of the Federal Inland Revenue Service, FIRS, Zacch Adedeji Ph.D, explained that the windfall tax is not a new tax imposed on banks, but rather taking from the already made profit. Adedeji, a public sector finance expert, had explained that the windfall tax “are the gains that you have without any contribution from you, without any value addition, which has had an adverse effect on others. And who are these others? If you look at the report of all manufacturing entities and the last one and a half years, you will discover that a lot of them recorded huge losses coming from exchange transactions.
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“The flip of these losses is recorded in banks. Anywhere in the world, the duty of government is to redistribute the wealth to sustain the progress and prosperity of the Nation. So, the loss suffered by manufacturing, as a result of the forex gains recorded by the banks is what the government seeks to redistribute. And that is why we have this levy, which is done everywhere.
Sikiru Akinola, Technical Assistant on Print Media to the Executive Chairman of the FIRS, writes from Abuja.
