Understanding the Tax Reform Bills

On 3 October 2024, President Bola Ahmed Tinubu transmitted the following Tax Bills to the National Assembly:

1. Nigerian Tax Bill;
2. Nigeria Tax Administration Bill;
3. Joint Revenue Board Bill; and
4. Nigeria Revenue Service Bill.

According to Mr. Taiwo Mr Taiwo Oyedele, Chairman, Fiscal Policy and Tax Reforms Committee the reform is aimed at addressing the challenges of multi-layered taxation and the complexities of the current tax system, consolidating various legal frameworks relating to taxation, expanding the country’s tax base, enhancing tax-compliance and generating sustainable revenue streams for national development.

A summary of the implications of the Tax reform bills on individuals and small businesses are stated below:

1. Small businesses with an annual turnover of ₦50 million or less are exempt from income tax.
2. There is no withholding tax deduction on business income of small businesses. This also includes an exemption from the requirement to deduct and account for tax on payments to vendors.
3. There is a reduction in companies income tax from the current rate of 30% to 27.5% for 2025 and 25% for subsequent years.
4. Workers earning ₦800,000 annually and below will be exempted from taxes. According to the Nigerian Financial Services Market Report, only 10% of Nigerians earn above ₦100,000, This would mean most Nigerians will experience a reduction in their income tax upon the passage of the bills.
5. Essential items such as food, education, healthcare will enjoy 0% Value Added Tax while rent, public transportation, and renewable energy will be exempted, providing relief for low-income households that spend nearly 100% of their income on these necessities.
6. Businesses will be granted tax credits for VAT paid on their assets and all expenses incurred to produce Vatable goods and services. This means up to 7.5% reduction in the cost of production. This proposed measure will eliminate the VAT cost currently borne by businesses and should therefore lead to lower prices. Going forward, this measure will ensure that businesses in Nigeria no longer bear VAT cost regardless of the rate.
7. Economic development incentives on profits or gains of friendly societies, co-operative societies, educational, ecclesiastical, or charitable organisations, trade unions, and government entities, provided such profits or gains are not derived from trade or business activities.
8. There is tax exemption on compensation for loss of employment not exceeding ₦50,000,000.

The obligations of NGOs under the bills include the following:

1. All Non-Governmental Organisations are expected to register for tax purposes and obtain Tax Identification ID. NGOs are required to file annual Company Income Tax returns with the Nigeria Revenue Service in line with clause 11 of the Nigeria Tax Administration Bill.  The administrative penalty for failing to file tax returns or for filing incomplete or inaccurate returns has increased significantly. Previously set at N25,000 for the first month and N5,000 for each subsequent month, the penalties are now N100,000 for the first month of non-compliance and N50,000 for each subsequent month of continued default.
2. NGOs must deduct Withholding Tax (WHT) on payments made to suppliers and contractors and remit the tax to the relevant tax authorities in the currency of the transactions. 
3. Clause 168 of the Nigeria Tax Bill exempts NGOs from capital gains tax on gains from the disposal of chargeable assets, provided that the gains are not derived from assets acquired for non-approved activities and are applied exclusively to the organisation’s approved activities.   
4. Goods purchased by NGOs for use in humanitarian donor-funded projects are zero-rated. However, VAT applies to goods purchased for non-humanitarian purposes. NGOs are also required to pay VAT on services they procure or consume unless these services are exempt under the Nigeria Tax Bill. Furthermore, NGOs must self-account for VAT on taxable goods and services supplied by non-resident vendors or entities not liable to charge VAT. They are also required to charge VAT on all taxable goods and services they supply and remit the tax to the Nigeria Revenue Service. NGOs must file VAT returns monthly, on or before the 21st day of the following month.

It is also important to note that the Tax reform bills are not without any implications and burdens. Some of which include:

1. There is a restrictive definition of small business. This excludes companies that are offering professional services. For these companies, the incentives applicable to small businesses under the Tax reform bills are not applicable to them. 
2. There is the potential of an increased compliance burden due to mandatory Tax IDs for personal accounts and stricter filing requirements. There are also potential barriers for low-income earners due to stringent penalties for non-compliance.

The provisions outlined in the Tax Reform Bills offer considerable opportunities for revenue optimisation. These measures primarily aim to ensure the appropriate taxation of income, profits, and transactions that are rightfully taxable. Aside from the proposed increase in the VAT rate, the provisions do not introduce substantial additional tax burdens on businesses or individuals, and they are unlikely to lead to adverse economic distortions.     

To ensure the effective implementation of these provisions, the government must adopt approaches that balance efficiency with minimal taxpayer burden. Specifically, the enforcement of minimum tax provisions should be carefully structured to avoid negatively impacting investment and profitability.