Nigeria’s lower house of parliament has passed four tax reform bills aimed at overhauling the tax system, focusing on increasing efficiency and revenue. The bills propose raising VAT to 12.5% by 2026 but maintain the current rate of 7.5%. Income tax exemptions were made for minimum wage earners, while corporate taxation in the oil sector is adjusted to a flat rate. The reforms aim to address low tax-to-GDP ratios and improve fiscal responsibility.
On Thursday, Nigeria’s lower house of parliament approved four tax reform bills proposed by President Bola Tinubu, aimed at revamping the national tax system. Although these reforms are a significant step forward, several key measures were modified, particularly concerning value-added tax (VAT) adjustments and income tax exemptions for minimum wage earners.
Currently, Nigeria has a low tax-to-GDP ratio of 10.8%, compelling the government to finance its budget through borrowing. Tinubu’s administration has prioritized tax reforms after eliminating costly subsidies and devaluing the naira, aiming to enhance revenue generation and improve collection efficiency.
The proposed reforms include raising VAT to 12.5% by 2026 and modifying revenue-sharing between federal and state governments. However, lawmakers decided to retain VAT at the current rate of 7.5% and removed income tax for minimum wage earners to alleviate the financial burden on lower-income groups.
To address concerns regarding inequality among states, the lawmakers adjusted the VAT revenue allocation from an initially proposed 60% for high-revenue states to a capped rate of 30%. The remaining 70% will be divided, distributing 50% equally among all states and assigning 20% based on state population.
Additionally, the bills replace the existing 85% petroleum profit tax with a new corporate tax rate set at 30% on oil industry gains. A global minimum tax is also included for multinational companies with revenues exceeding approximately $970.8 million, while the threshold for domestic businesses is raised to 50 billion naira ($32.66 million). Businesses in free zones that export at least 75% of their output will be exempt from this minimum tax.
The reform bills are anticipated to be passed by the upper house of parliament next week and will come into effect upon presidential assent from President Tinubu.
The recent passage of tax reform bills by Nigeria’s lower house marks a notable move towards improving the nation’s tax framework. Key changes, such as maintaining the VAT rate at 7.5% and excluding minimum wage earners from income tax, reflect a compromise in the reform process. The introduction of a corporate tax rate on petroleum profits and a global minimum tax for large corporations aims to enhance revenue collection while addressing regional inequalities in revenue distribution.
Original Source: www.marketscreener.com
