Detailed: What is the proposed Tax Reform Bill? and why is the bill so controversial this time?

The proposed tax reform bill which has been a cause for debate has been prepared for reading and its now before the senate committee for a wide range of opinion by stakeholders. But this proposed bill aims to increase productivity, simplify tax laws and foster business growth.

The tax reform bills include the Nigeria Tax Bill, Nigeria Tax Administration Bill, Nigeria Revenue Service (Establishment) Bill, and Joint Revenue Board (Establishment) Bill. The importance of the reform tax bill will create a new environment competitive enough to guarantee the interest of all.

What is Tax Reform?

Tax reform is generally undertaken to improve the efficiency of tax administration and to maximise the economic and social benefits that can be achieved through the tax system.

In this blog post we will dicuss the aspects of the proposed tax reform bill, and what it would mean for Nigerians.

A REVIEW OF VAT REVENUE SHARING

A value added tax(VAT) is a consumption tax on goods and services, levied at each stage of a product's production and distribution. In the current tax system in Nigeria, the VAT rate is 7.5% which was increased from 5% in 2020. The government claims all the VAT and shares it into 3 slots. The Federal Government takes 15%, 50% is shared among the 36 states, and 35% is shared among the 774 local goverments.

Within the state government, the revenue is shared based on three factors: Equity(i.e. the revenue is shared equally amonng the states neglecting how economically feasible they are.). Population(i.e. The state with highest population gets the bigger share while the popilation with the least population get the least share), and Derivation (i.e. the state that generates the highest amount of VAT gets the bigger share of the money or the state who sourced the money gets the bigger percantage).

But in the proposed tax law, there will be a new sharing formula aimed at revolutionizing the distribution of VAT revenue between the Federal, state, and local governments, but this proposal has brought a serious debate accross various sectors, with major stakeholders voicing their opinions on its potential impacts. The most imperative change is how state government get their shares.

The proposed formula increases the derivation component to 60%, while reducing the equality and population components to 20% each. This shift aims to ensure that states that generate more VAT revenue receive a larger share of the proceeds. This has a potential of increasing revenue for producing states and bring Fiscal Federalism and Equity.

REFORM ON PERSONAL INCOME TAX

Under the present tax system in Nigeria, people earning udner N300k annually do not need to pay tax. But those earning exactly N300k are been taxed 7% of their annual income which amounts to N21K. Then for individuals earning between N300k-600k, their first pay of N300k is taxed at 7%, while their next pay of N300k is taxed at 11%.

But in the proposed bill, individuals with the income of N800k and below annuallly do not need to pay tax which is visible in chapter 2 of the proposed Nigeria Tax Bill. This will give individuals of working class the purchasing powers they need and help in de-escalating food inflation.

REFORM ON CORPORATE INCOME TAXES

A corporate tax, also called corporation tax or company tax, is a type of direct tax levied on the income or capital of corporations and other similar legal entities. The tax is usually imposed at the national level, but it may also be imposed at state or local levels in some countries. Corporate taxes may be referred to as income tax or capital tax, depending on the nature of the tax.

Under the current tax regulations, companies in Nigeria pay different rates of Corporate Income Tax(CIT), which is based on their size. For large companies (i.e companies with turn over of N100million plus), the CIT rate is 30% and its assessed on a preceding year basis (i.e. tax is charged on profits for the accounting year ending in the year preceding assessment).

For small companies the CIT rate is 0% (i.e. companies with a gross turnover of N25 million or less). The CIT rate is 20% for companies with gross turnover greater than NGN 25 million and less than NGN 100 million.

But the proposed tax bill aims at reducing tax rates for many companies. Small companies are exempted from paying taxes, but medium and large companies will pay the same rate and will reduce in subsequent years.There is also a proposal in the bill to ensure that big companies do not pay too little tax, that is if a company tax rate is less than 15% after deduction, it will have to pay extra to meet that minimum.

A PROPOSED CREATION OF A NEW BODY NRS

The proposed body Nigeria Revenue Service(NRS), brought by the Presidential Tax Reform Committee, plans to replace the current body Federal Inland Revenue Service(FIRS). Under the current tax system, different levels of government are responsible for collecting taxes within their jurisdiction.

But the proposed Tax Bill, NRS will have a lot of responsibilities by centralizing tax collection and assist state and local goverment agencies handle tax collection. It will also ensure funds are properly sent to them and reduce administrative complications because all staff are employed by the central government under one organizational structure.

The proposed bill also aims to simplify Nigeria’s complex tax laws, making the tax system fairer and more efficient.

A PROPOSED TAX BILL TO EXEMPT TAXES ON BASIC NEEDS

The provision of this bill exempts foods, rent, transportation, renewable energy and other necessities from Value Added Tax. This will forcefully bring down the price of food prices and help millions of Nigerians affected by high inflation rate. The proposed bill also seeks that zero Value Added Tax is added on exports and goods consumable by the masses. This will provide consolation for low-income earners that spend most of their income on basic necessities.

Some analyst and stakeholders believe that the proposed tax bill will represent a significant opportunity to modernise Nigeria’s fiscal framework, promote economic equity, and foster sustainable growth.As the debate continues, it is crucial to carefully consider the potential consequences of this reform and to ensure that it serves the best interests of all Nigerians.