Nigeria’s Lower House Passes Tax Reform Bills with Adjustments

Nigeria’s lower house of parliament approved four tax reform bills proposed by President Bola Tinubu, aiming to enhance the tax system. The reforms include raising VAT, modifying revenue-sharing between federal and state governments, and implementing a corporate tax rate. Some measures were altered, including retention of the current VAT rate at 7.5% and exemptions for low-income earners. The bills await upper house approval and presidential assent to take effect.

On Thursday, Nigeria’s lower house of parliament approved four tax reform bills initiated by President Bola Tinubu, advancing the government’s strategy to reform the country’s tax framework. However, certain proposed provisions experienced modifications during the legislative process. Nigeria, characterized as Africa’s most populous nation, grapples with a notably low tax-to-GDP ratio of 10.8%, compelling the government to depend on borrowing for budgetary support.

President Tinubu’s administration had previously concentrated on high-profile financial adjustments, such as eliminating expensive subsidies and devaluing the naira currency. The new tax reforms aim to enhance revenue collection and system efficiency while increasing the value-added tax (VAT) to 12.5% by 2026. The initiative also intends to reorganize revenue-sharing arrangements between federal and state governments.

Despite these efforts, lawmakers decided to maintain the VAT at the current rate of 7.5%, deviating from the initial proposal. Furthermore, minimum wage earners will be exempt from income tax to alleviate the financial burden on lower-income groups. The allocation of VAT revenue was also revised from a proposed 60% for high-revenue states to a revised cap of 30%. The remaining 70% will be shared with 50% distributed equally among all states and 20% apportioned based on demographic factors.

In addition, the new provisions will supplant the previous 85% petroleum profit tax with a 30% corporate tax rate on profits generated from the oil sector. Lawmakers further introduced a global minimum tax for multinational companies with turnover exceeding $970.8 million and raised the minimum taxable threshold for domestic businesses to 50 billion naira ($32.66 million). Companies operating in free zones and exporting a significant portion of their goods and services (75% or more) will qualify for a minimum tax exemption. The reforms are anticipated to secure passage in the upper house of parliament next week and will be enacted following President Tinubu’s endorsement.

In summary, Nigeria’s lower house has made significant strides in reforming its tax system through the recent passage of proposed bills, although various amendments have moderated the original intentions. The adjusted framework maintains the existing VAT rate, provides exemptions for low-income earners, reshapes revenue-sharing among states, and introduces new tax measures for corporate entities. As these reforms move to the upper house for approval, they signal a pivotal moment for Nigeria’s fiscal policy and efforts to rectify its financial challenges.

Original Source: www.marketscreener.com