Nigeria’s new tax laws arrive with grand promises of inclusive growth and creating “a new lease of life” for everyone from households to large corporations. The reforms include significant benefits for small businesses, individual taxpayers, and entire economic sectors. However, beneath the surface of these well-intentioned policies lie potential pitfalls that could undermine their effectiveness and create unintended consequences that may haunt Nigeria’s economic future.
The most celebrated aspect of the reforms is the expansion of small business support. The tax exemption threshold has doubled from N25 million to N50 million in annual turnover, potentially freeing thousands of small enterprises from corporate income tax obligations.
While small businesses celebrate these exemptions, early evidence suggests the policy design reveals concerning “double-edged-sword” gaps. The requirement that businesses maintain fixed assets below N250 million while generating up to N50 million in revenue implies a mere 20 percent asset utilisation rate — a troubling efficiency standard that may not reflect Nigeria’s challenging operating environment.
In a country where businesses generate their own power, construct access roads, and maintain extensive infrastructure due to government failures, the revenue-to-assets ratio becomes distorted. A manufacturing company might hold N200 million in generators, transformers, and backup systems just to maintain basic operations, yet struggle to generate N50 million in revenue due to broader economic challenges.
More troubling is the potential for “perpetual small” companies — businesses that intentionally remain below tax thresholds to avoid obligations. Nigeria’s experience with infant industry policies, where companies refused to grow to maintain preferential treatment, should serve as a cautionary tale.
Individual taxpayers: Progress with painful realities
The increase in the personal income tax exemption to N800,000 annually appears generous until examined against Nigeria’s economic realities. With minimum wage at N70,000 monthly (N840,000 annually), even the lowest-paid formal workers exceed the exemption threshold. This hardly represents the pro-poor stance the reforms claim to champion.
The new progressive tax structure introduces rates ranging from 15 percent for income between N800,001 and N3 million, escalating to 25 percent for income above N50 million. While this appears equitable on paper, the reality is that Nigeria’s inflation rate of 22.97 percent significantly erodes purchasing power, making the exemption threshold less meaningful in real terms.
The comparison with Ghana, where the tax-free threshold approximates N65,360, initially seems favourable for Nigeria. However, Ghana’s inflation rate of 13.7 percent means Ghanaian taxpayers face significantly lower living costs, making Nigeria’s higher threshold less advantageous than it appears. The reforms may inadvertently create a situation where low-income earners bear a disproportionate tax burden while struggling with high inflation and limited purchasing power.
Fiscal Federalism: A timid first step with dangerous precedents
The reforms’ approach to fiscal federalism — allowing states to retain 30 percent of VAT generated within their borders — represents progress but has sparked fierce resistance from some state governors and regional leaders. The new distribution formula (50% equality, 20% population, 30% consumption) still heavily favours federal control and may not adequately address the resource control demands that have fuelled Nigeria’s political tensions.
The decision to maintain VAT at 7.5 percent rather than implementing planned increases to 15 percent may seem taxpayer-friendly, but it may also represent a missed opportunity for revenue optimisation. Countries like Ghana successfully operate with higher VAT rates, suggesting Nigeria’s rate could support greater government revenues without necessarily harming economic growth.
Priority sectors: When everyone is a winner, nobody wins
The identification of 51 priority sectors for tax incentives raises fundamental questions about selectivity and effectiveness. When virtually every sector, from agriculture to services — receives preferential treatment, the concept of “priority” loses meaning. This broad-based approach may dilute the impact of incentives and create administrative complexity that undermines the reforms’ simplification goals.
The provision allowing the President to add or remove sectors from the priority list, while flexible, introduces political discretion that could undermine the predictability businesses need for long-term planning. The Economic Development Incentive (EDI) scheme, designed to replace the criticised Pioneer Status Incentive (PSI), offers multi-year tax credits based on actual investments, but the validation process remains unclear and potentially bureaucratic.
After all is said, implementation remains the ultimate test of these laudable intentions. Nigeria’s history is littered with well-intentioned policies that failed during implementation. The tax reforms create frameworks and institutions, but their success depends on the government’s ability to enforce compliance, prevent abuse, and adapt to unintended consequences.
The challenge of monitoring small businesses to ensure they do not artificially split operations to remain below tax thresholds will require sophisticated enforcement mechanisms that Nigeria’s tax administration may lack. Similarly, ensuring that priority sectors benefit translate into genuine economic development rather than mere tax avoidance will demand careful monitoring and evaluation capabilities.
These tax reforms represent genuine progress in addressing systemic fiscal challenges, but they also reveal the complex trade-offs inherent in comprehensive policy change. The reforms’ most significant achievement may be creating a foundation for continuous improvement rather than solving all of Nigeria’s fiscal challenges immediately.
The true test of these reforms will come not in their ambitious promises, but in their practical implementation and the government’s willingness to address unintended consequences as they emerge. The winners and losers of Nigeria’s tax reform will ultimately be determined not by the laws themselves, but by how effectively the government manages the complex transition from policy intention to economic realities.(BusinessDay)
