Learn about Nigeria’s new tax reform bill, designed to create a fairer tax structure by easing burdens on low-income earners and increasing contributions from high-income brackets.

Earlier this year, President Ruto of Kenya faced strong opposition from the youth over controversial taxation measures included in a newly passed bill. In contrast, Nigeria’s proposed tax reform bill has sparked resistance primarily from the northern political class rather than from young people.

The government intends to create a more equitable system where the tax burden is distributed according to income levels, with higher earners contributing more relative to their earnings, while low-income earners experience reduced tax pressure.

In this post, we’ll cover everything you need to know about the tax reform bill and examine the reasons behind the opposition from northern governors.

Key Components of the Tax Reform Bill

The Tax Reform Bill introduces a series of executive bills designed to revitalize and streamline Nigeria's tax structure. The primary executive bills within the reform package include:

1. Nigeria Tax Bill

The Nigeria Tax Bill proposes a new, comprehensive tax code to replace outdated frameworks, reflecting contemporary economic conditions and incorporating international best practices. 

2. Nigeria Tax Administration Act Amendment Bill

The Nigeria Tax Administration Act amendment strengthens the Federal Inland Revenue Service’s (FIRS) enforcement capabilities, empowering it to execute more effective compliance measures. This bill is intended to enhance the FIRS’s authority to combat tax evasion, enforce penalties for non-compliance, and introduce innovative audit procedures. 

3. Nigeria Revenue Service Bill

This bill establishes an independent Nigeria Revenue Service tasked with overseeing national revenue collection activities. The Nigeria Revenue Service (NRS) would function as an autonomous agency, insulated from political influence, with the mandate to implement tax policies, improve compliance rates, and ensure accountability in revenue generation. 

4. Joint Revenue Board Establishment Bill

The Joint Revenue Board Establishment Bill aims to foster seamless collaboration between federal, state, and local revenue agencies. This bill seeks to reduce redundancies, unify tax enforcement standards, and create a holistic approach to tax administration across Nigeria’s multiple jurisdictions by creating a central body to coordinate efforts. 

Primary Provisions of the Tax Reform Bill

The Tax Reform Bill introduces a range of provisions to create a more equitable tax landscape while encouraging growth across various sectors. Below is a summary of the primary components:

Corporate Income Tax (CIT)

The Corporate Income Tax policy distinguishes between small companies and larger entities, providing an exemption for smaller businesses to encourage growth while setting progressive rates for others.

• Small Companies (annual turnover < ₦50 million): Exempt from CIT.
• Other Companies:
  • 2025: 27.5% on taxable profits.
  • 2026 onwards: 25% on taxable profits.

Personal Income Tax (PIT)

Personal Income Tax is structured progressively, ensuring lower tax rates on lower income brackets, with increased rates as income rises.

• First ₦800,000: 0%
• Next ₦2.2 million: 15%
• Next ₦9 million: 18%
• Next ₦13 million: 21%
• Next ₦25 million: 23%
• Above ₦50 million: 25%

Value Added Tax (VAT)

The VAT rates are set to increase gradually over several years, allowing for a phased approach to reach a final rate, making it easier for businesses and consumers to adjust.

• 2025: 10%
• 2026 to 2029: 12.5%
• 2030 onwards: 15%

Excise Tax

Excise duties apply specifically to the lottery and gaming industries and telecommunications services, targeting sectors with significant consumer demand.

• Lottery and Gaming Revenue: 5% excise duty.
• Telecommunications Services: 5% excise duty.

Development Levy (for qualifying companies)

The Development Levy aims to support economic growth by charging qualifying companies on assessable profits, with rates decreasing over time to reduce long-term financial burdens.

• 2025 and 2026: 4% on assessable profits.
• 2027 to 2029: 3% on assessable profits.
• 2030 onwards: 2% on assessable profits.
  • Note: Excludes small and non-resident companies.

Capital Gains Tax (CGT)

This tax applies a 10% rate on gains from the sale or disposal of chargeable assets, promoting fairness in asset-based income taxation.

• Gains from chargeable asset disposals: 10%

Withholding Tax (WHT)

The Withholding Tax policy maintains specific rates as outlined in the 2024 tax regulations, ensuring consistency in tax deductions at the source.

• Rates: As specified in the 2024 regulations.

Digital Assets and Transactions

In recognition of the digital economy's growth, gains from digital assets and transactions are taxed at a 10% Capital Gains Tax rate.

• Digital Transaction Gains: 10% Capital Gains Tax.

VAT Exemptions

Specific items, such as oil and gas exports and essential goods, are exempt from VAT to keep prices accessible and support key sectors. This applies to specific items, including:

• Oil and gas exports
• Baby products
• Military hardware
• Certain electricity services

Northern Governors' Rejection of the Proposed Derivation Model in the Tax Reform Bill

A key point of contention in President Tinubu's tax reform bill is the proposed change to the Value-Added Tax (VAT) distribution model. 

The Northern Governors have resisted this shift, expressing concerns that the proposed derivation model could unfairly impact less industrialized states, particularly in the North.

Current VAT Distribution System

Under the current system, VAT revenue is remitted primarily based on where a company is headquartered rather than where its goods and services are consumed. 

This approach centralizes VAT remittance locations, often favoring states with a higher concentration of corporate headquarters—typically urban and economically developed areas.

Proposed Derivation Model

The proposed derivation model seeks to alter the basis for VAT revenue distribution, suggesting that VAT should be allocated according to where economic activities actually occur. This includes the point of consumption or supply of goods and services, rather than solely focusing on corporate headquarters or tax remittance locations. 

Under this model, VAT revenue would be distributed based on the origin of consumption, creating a direct link between a state’s consumption or production levels and the VAT revenue it receives.

Concerns of the Northern Governors

The Northern Governors argue that this derivation model could disadvantage northern states and other less economically industrialized regions for several reasons:

Economic Activity Disparities

Northern states often have fewer large companies and, in many cases, lower consumption levels of VAT-applicable goods and services compared to more industrialized regions, especially in the South. 

The derivation model, which is consumption-based, may result in a reduction of VAT revenue for regions where economic activities are less intense. This uneven economic landscape could lead to lower tax revenues in the North, impacting their capacity for infrastructure and social development.

Revenue Distribution and Urban-Industrial Advantage

Under the new model, states with higher concentrations of consumption—predominantly urban or more industrialized areas—would likely receive larger shares of VAT revenue. 

This change could disproportionately benefit states with a strong industrial or commercial presence while potentially reducing revenue allocations to northern states, where consumption patterns and VAT-relevant economic activities might be comparatively lower.

Equity and Development Concerns

The Northern Governors emphasize that a consumption-based VAT distribution model could exacerbate existing regional economic imbalances. 

They argue that this approach might hinder development efforts in economically disadvantaged regions, which depend heavily on VAT allocations to fund essential services and initiatives aimed at bridging the development gap. 

For the North, reduced VAT revenue could limit resources available for investments in infrastructure, education, healthcare, and other critical sectors, undermining national efforts to promote balanced growth across all states.