Anxiety, mistrust cloud Nigeria’s tax reform promises, benefits

• ‘Exemption for low-income earners to benefit high-income earners’
• How TIN, bank account linking fuels anxiety  

The rising anxiety over Nigeria’s ongoing tax reformbetrays a deeper crisis – failing revenue, a system that creates loopholes for the wealthy to evade taxes, a long history of investment taxation and a structure that increases poverty as well as widens inequality – rather than a fair reading of the recalibrations fact sheets.

The reforms will be implemented at a time when public discourse is masked by emotion, saturated with public mistrust.Barely two weeks to the implementation, many ordinary Nigerians feared the new era would increase tax rates, worsen headline inflation and fuel economic strain, but available data suggest that the reform is less about a fiscal ambush than an overdue attempt to correct one of the country’s most damaging structural weaknesses.

But the government described the reform as the most audacious move to strengthen economic growth, increase revenue generation in the long run and modernise the system.

According to reports, mistrust, poor fiscal exchange, bribery and complexity are among the top reasons Nigerians are unwilling to pay, especially direct taxes, forcing the government to rely more on indirect taxes, which are inherently retrogressive.

Whereas the reform may not automatically bring the problems to an end as it seeks to reset the system, it provides a legal framework that has equipped the authorities, including civil society and media, with tools to demand a gradual shift.

For the first time, the tax authorities are deliberate in evolving a progressive personal income tax (PIT) that has exempted individuals with N800,000 and below from paying. At less than the current national minimum wage, the cut-off point appears extremely low. But the decision, some experts have noted, is a clear signal that the country’s tax system is headed on the path of equity.

In any case, in a country with an extremely high average propensity to consume (MPC), estimated at over 60 per cent by some studies, with the variance among the low income earners as high as 35 per cent, giving opportunity to the poor to increase their disposable incomes means higher consumption and more production, which makes up for the income losses suffered by the wealthy who are meant to pay high tax rates.

A more equitable distribution of income also means stronger incentives to support work and higher national productivity, which some studies suggest are mutually reinforcing.

Besides, Nigeria is in dire need of a new legal framework to unlock its revenue potential in the long run. According to the tax reform policy roadmap, Nigeria’s tax revenue to output level was 10 per cent as of 2023. The figure is miserably lower than Africa’s average, which sits at 17 per cent and miles behind the Organisation of Economic Cooperation and Development (OECD), estimated at 30 per cent.

This chronic underperformance, rather than excessive taxation, lies at the heart of Nigeria’s fiscal fragility, which has increased the debt service to output ratio to over 90 per cent. Even at below 70 per cent, the ratio is still far above the level required to drive development, the government has said.

The consequences of an extremely high debt service to revenue ratio, economists and government officials admitted, are dire and a stark reality of the fragility of the country’s fiscal position.

For several years, weak revenue mobilisation has left government finances dangerously exposed, triggering an increasing reliance on debts to fund even routine expenditure. It has also detracted from the country’s ability to bridge the infrastructure gap, which Moody’s, in a 2020 report, estimated $100 billion yearly.

The government, in the past few years, has adopted overlapping budget implementation in a desperate attempt to increase the performance of the capital budget. For instance, the 2024 budget is scheduled to run till December 2025 as the government battles to bridge the funding gap.

As of August, the government merely promised that the 2025 capital budget would commence before the end of September, three months to the end of the fiscal year. Besides, contractors who have duly completed their jobs are in a queue for payment and forced to protest the government’s slow response to their needs.

These are real red lights on the country’s fiscal dashboard, which require urgent recalibrations to save the government from sovereign default.

But the Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, Taiwo Oyedele, said the consequences are dire. Without reforms, he said, Nigeria risked zero capital expenditure (CapEx), over 100 per cent debt service to gross domestic product (GDP) ratio and over 50 trillion ways and means (W&M).

A higher quantitative easing, as seen in the previous years, means more indirect tax on Nigeria through high inflation. Last year, the high inflation rate, which Dr Chiwuike Uba attributed to the Central Bank of Nigeria’s (CBN) aggressive money creation, peaked at over 34 per cent – a major tax burden on struggling Nigerians, who spent much of their incomes on essential commodities and left with no inflation-hedging assets.

Without fiscal reform, the World Bank had projected the country’s debt service cost to GDP ratio to hit 127 per cent by 2027. The tax reform roadmap scenario mapping said a breakdown of the subsidy programme could trigger hyperinflation similar to the famous Zimbabwe crisis.

Essentially, the reform agenda is not anchored on aggressive rate increases. Official policy direction points instead to broadening the tax base, improving compliance and closing loopholes the wealthy have explored to evade taxes.

Estimates suggest that fewer than 30 million Nigerians are registered taxpayers, a sharp contradiction of over 70 million economically active adults. This underscores the scale of untapped revenue potential without necessarily imposing new burdens on compliant citizens.

Concerns that the reforms will cripple businesses also overestimate the current reality. Multiple taxation, informal levies and arbitrary enforcement have long imposed hidden costs on enterprises. Studies have consistently shown that Nigerian firms face dozens of overlapping taxes across federal, state and local levels.

Streamlining and harmonising these obligations, as contained in the new regime documents, could reduce, rather than increase, the cost of compliance. This ultimately will increase tax revenue and reduce the cost of collection, a major setback for an efficient tax system.

Over the years, the big firms have had to hire tax consultants to work them through the complex system and help them evade payment, while small enterprises, which account for more than 80 per cent of employment, receive the short end of the stick.

Digitalisation of tax administration, a key pillar of the reform, could reduce human discretion, curb harassment and improve efficiency, helping small businesses to gain from the new regime. The reform also exempts small businesses with turnover not exceeding N100 million from company income tax (CIT) and capital gain tax (CGT). Essential commodity companies, such as agro-allied, are equally excluded, a decision that advances the progressive tax pathway.

Still, the low-income earners are the most disenchanted with the reform. Chief Executive of Highcap Securities, David Adonri, attributed the growing anxiety to “several rumours flying around concerning an increase in tax burden”.

“The compulsion to have a tax indent number (TIN) is fuelling people’s anxiety. People are afraid that corrupt public officials may turn taxation into an extortion mechanism. In general, there is a huge trust deficit in the government. Investors are still in shock over the imposition of capital gains tax, and many high-net-worth investors have started running for cover,” he said.

Interestingly, the linking of bank accounts with a Tax ID (TIN) started with the Finance Act of 2019, with targeted individuals randomly invited to comply. Since it was introduced, there has been no report of the government taking money from an individual’s account, as insinuated.

Oyedele said it is practically impossible for the government to go after all tax evaders using their personal account inflows, even though activities in the account could trigger a suspicion that somebody is evading taxes.

Of course, chasing every Nigerian based on their bank account balances or inflows to pay taxes is against the cost of collection principle, which suggests that the government cannot use N2 to collect N1.

The equity dimension of the reform is equally significant. Nigeria’s tax system has historically leaned heavily on indirect taxes, which disproportionately affect low-income households. By strengthening personal and corporate income tax administration and maintaining exemptions for basic consumption, the reform seeks to rebalance the burden toward higher earners and profitable sectors that are currently underrepresented in the tax net.

Beyond revenue, the reform has implications for fiscal federalism. Sub-national governments account for the bulk of public service delivery, yet many depend overwhelmingly on federal allocations. Clearer tax assignments and improved internally generated revenue could enhance accountability at the state and local levels, where citizens most directly experience governance failures.

Public scepticism, however, is not without cause. Past reforms had often failed to translate higher revenues into visible improvements in infrastructure, healthcare or education. The trust deficit explains much of the current anxiety and highlights the need for transparency, credible reporting and a clear link between taxes paid and services delivered, stakeholders have said.

However, in a country near fiscal collapse, conflation of legitimate concerns about governance with outright rejection of tax reform could be a costly mistake. Nigeria’s budgetary arithmetic is no longer sustainable, both the World Bank and the International Monetary Fund (IMF) have warned. Without decisive action to raise non-oil revenue, the options narrow to deeper debt, austerity or economic stagnation.(Guardian)