Senate Moves to Reform Nigeria’s Tax System: States to Get 55% in New VAT Sharing Formula

The Nigerian Senate has passed for second reading a set of far-reaching Tax Reform Bills aimed at overhauling the country’s tax structure. Key among the proposals is an increase in the Value-Added Tax (VAT) allocation to states from 15% to 55%, while reducing the Federal Government’s share to 10%. The legislation also includes pro-business measures such as reducing company income tax from 30% to 25% and introducing tax exemptions for essential commodities and small businesses.

The bills, which include the Joint Revenue Board of Nigeria (Establishment) Bill, the Nigeria Revenue Service (Establishment) Bill, and the Nigeria Tax Bill, 2024, have been referred to the Senate Committee on Finance for further review. A public hearing involving stakeholders such as the Nigeria Governors Forum (NGF) and traditional rulers has been scheduled, with a final report expected in six weeks.

Innovative Tax Exemptions and Pro-Business Incentives

The Tax Reform Bills include several provisions designed to reduce the tax burden on Nigerians, particularly low-income earners and small businesses. Senate Leader, Senator Opeyemi Bamidele, highlighted that individuals earning at or below the minimum wage would be exempt from Pay-As-You-Earn (PAYE) deductions. Similarly, small businesses with annual turnover below ₦50 million would be exempt from corporate taxes.

Additionally, the proposed reduction of company income tax from 30% to 25% is expected to last for two years, aiming to stimulate business growth and job creation. Harmonization of multiple levies, such as the 2.5% education tax and 0.25% NASENI tax, into a single 2% development levy, further demonstrates the government’s commitment to simplifying the tax landscape. These funds are earmarked to finance a new student loans scheme, benefiting Nigerian youths.

Addressing Stakeholder Concerns and Constitutional Hurdles

The proposed tax reforms have drawn mixed reactions from lawmakers and stakeholders. While many senators supported the bills’ objectives, former Senate Leader Senator Ali Ndume raised concerns about their timing and constitutional implications. Ndume argued that the 1999 Constitution (as amended) would require further adjustments to accommodate some of the proposed changes. He suggested withdrawing the bills temporarily for broader consultations with the NGF and other stakeholders.

However, Senate Whip Senator Mohammed Monguno disagreed, emphasizing the need to proceed with the legislative process. Monguno noted that public hearings would provide ample opportunities for stakeholder input. Senator Seriake Dickson also called for more consensus-building but expressed confidence in the bills’ potential to improve tax derivation and incentivize state productivity capable to rejig their economic activities .

Path Forward: Stakeholder Engagement and Senate Legislative Refinement

Following an exhaustive debate, the Senate unanimously referred the bills to the Committee on Finance, chaired by Senator Sani Musa, for further legislative action. The committee has been tasked with organizing public hearings to address areas of concern and gathering input from diverse groups, including experts, governors, and traditional leaders.

Senate President Godswill Akpabio assured Nigerians that the final legislation would reflect national interests, promoting fiscal sustainability while protecting vulnerable groups. He stated, “The Senate will deliver reforms that align with Nigeria’s economic realities and aspirations.”

If successfully enacted, these tax reforms could mark a turning point for Nigeria’s revenue-sharing framework, fostering greater fiscal autonomy for states and stimulating economic growth across the federation .

Tax Reforms: Toward a Simpler, Fairer System

The Tax Reform Bills signal a major shift in Nigeria’s approach to taxation, aiming to simplify processes, reduce redundancies, and ensure equity in revenue allocation. By consolidating tax statutes and exempting small businesses from burdensome levies, the reforms are poised to foster economic growth and improve ease of doing business.

Additionally, the emphasis on VAT as a consumption tax ensures that revenues generated in states are equitably allocated, addressing disparities between resource-producing and consuming regions. As the bills progress through public hearings, the Senate remains committed to refining the proposals to reflect the aspirations of all Nigerians. These measures, if passed into law, promise a modernized tax system that works for everyone.

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