02/12/2024
*ANALYSIS OF THE TAX REFORM BILLS*
*Copied and shared for public enlightenment- P-BAT ACADEMICS AND PROFESSIONALS GROUP)
President Bola Tinubu on October 3, 2024 transmitted four tax reform bills to the national assembly. The bills are:
1. Nigeria Tax Bill 2024
2. Nigeria Tax Administration Bill
3. Nigeria Revenue Service Establishment Bill
4. Joint Revenue Board Establishment Bill
A SUMMARY OF THE NIGERIA TAX BILL, 2024
The Nigeria Tax Bill (hereinafter referred to as the NTB), is a comprehensive piece of legislation that seeks to outline all taxes in the country hitherto administered by virtue of different laws and compress them into a single simplified law. Most importantly, the NTB vests upon the Nigeria Revenue Service (expected to succeed FIRS) powers to collect all national taxes including royalties hitherto collected by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) and excise duties, import VAT etc hitherto collected by the Nigeria Customs Service.
The coming into force of the Nigeria tax bill will lead to the repeal of 11 laws/enactments while 13 other laws shall experience consequential amendments.
The NTB will also lead to the revocation of one subsidiary legislation and consequential amendments on two other subsidiary legislations. The laws that would be revoked once the NTB comes into effect (as currently proposed) include:
1. Capital Gains Tax Act
2. Casino Act
3. Companies Income Tax Act
4. Deep offshore and Inland Basin Act
5. Industrial Development (Income Tax Relief) Act
6. Income Tax (Authorised Communications) Act
7. Personal Income Tax Act
8. Petroleum Profits Tax Act
9. Stamp Duties Act
10. Value Added Tax Act and
11. Venture Capital (Incentives) Act.
The existing legislation that will witness consequential amendments include:
1. The Petroleum Industry Act, No 6. 2021 (the areas to be deleted in the PIA include: part I – X of chapter four; the Fifth and Sixth Schedule; paragraphs 6, 9, 10, 11 and 12 of the Seventh Schedule; and subparagraph 6 of paragraph 14 of the Seventh Schedule.
2. The Nigerian Export Processing Zones Act (sections 8 and 18(1)(a) deleted).
3. The Oil and Gas Free Trade Zone Act (sections 8 and 18(1)(a) deleted).
4. The National Information Technology Development Agency Act (sections 1, 2, and 3(3) deleted).
5. The Tertiary Education Trust Fund (Establishment, Etc.) Act (sections 1, 2, and 3(3) deleted).
6. The National Agency for Science and Engineering Infrastructure (Establishment) Act (section 20(2), paragraph b(i) and b(ii) deleted).
7. The Customs, Excise Tariffs, Etc. (Consolidation) Act (section 21(2) deleted).
8. The National Lottery Act (sections 35A, 35B and 35C deleted).
9. The Nigerian Minerals and Mining Act (sections 28 and 33 deleted).
10. The Nigeria Start-up Act (sections 25(2), (3), (4) and 29(3) deleted).
11. The Export (Incentives and Miscellaneous Provisions) Act (section 11(1) deleted).
12. The Federal Roads Maintenance Agency (Establishment, Etc.) Act (section 14(1)(h) deleted).
13. The Cybercrime (Prohibition, Prevention, Etc.) Act (subsections (2)(a) and (4) of section 44 and the Second Schedule are deleted).
For the subsidiary legislations, the Value Added Tax Act (Modification) Order 2021 will be revoked while the Company Income Tax (Significant Economic Presence) Order 2020 would be amended by deleting paragraph 2 even though the parent legislation, the Company Income Tax, would be repealed. Finally, the Petroleum (Drilling and Production) Regulations 1969 would be amended by deleting regulations 60B, 60C, 61(1),(2),(4) and 62.
Crucially, the Nigeria Tax Bill included a supremacy clause in section 202, part of which stated that, ”this Act shall take precedence over any other law with regards to the imposition of tax, royalty, levy, excise duty on services or any other tax, where the provisions of any other law is inconsistent with the provisions of this Act, the provisions of this Act shall prevail and the provisions of that other law shall, to the extent of the inconsistency, be void.” This clause effectively elevates the NTB to be the supreme legislation on taxes in Nigeria.
Significance of the Nigeria Tax Bill for individuals and businesses
Apart from trying to simplify tax laws in Nigeria, the Nigeria tax bill also reduced the burden of tax in most cases for individual tax payers and businesses contrary to the narrative in some quarters, amplified that the bills are all about tax increase. I will highlight some provisions in the bill to buttress this point.
1.Reduction in Personal Income Tax: With the new provisions in the NTB, personal income tax would see a progressive reduction in rates with more lower income earners being exempt from paying PIT or paying reduced rates compared to the current rates. The annual tax rate as outlined in the fourth schedule of the bill is as follows:
a. First N800k – 0%
b. Next N2.2m – 15%
c. Next N9m – 18%
d. Next N13m – 21%
e. Next N25m – 23% and
f. Above N50m – 25%
Before now, the personal income tax rates for different bands of annual income are as follows:
a. First N300k – 7%
b. Next N300k – 11%
c. Next N500k – 15%
d. Next N500k – 19%
e. Next N1.6m – 21%
f. Above N3.2m 24%
So, a glance at the two set of rates shows that while currently a low income earner that earns N25,000 monthly, which translates to N300,000 annually is required to pay 7% income tax, the new rates proposed in the Nigeria Tax Bill exempts individuals who earn N800,000 or less annually from paying any income tax. When you consider the fact that more than 70% of Nigerians today do not earn up to N800,000 annually, you realise that the bill is actually pro-poor.
So, in effect, every minimum wage earner in Nigeria would be exempted from personal income tax. Also the bill in section 13(2a) exempts all employees of start-ups and technology-driven service providers from income tax. This is a massive incentive for youths in ICT!
The progressive personal income tax rate in the NTB means that before you get to pay the top income tax rate of 25%, your annual income must be above N50 million. In other words this new income tax regime seeks to make sure that richer people pay their fair share of tax. Before now, it is the low income earners who are employees that get to pay income tax through deduction at source carried out by their employers.
However, with the new provisions in Section 28 of the second bill called the Nigeria Tax Administration Bill, financial institutions are now mandated to furnish tax authorities details of individuals whose cumulative transactions in a month amount to N25 million or more. With this, more high income earners would be brought into the tax net.
2.Reduction in Company Profit Tax and harmonisation of four special deductions into one levy:
The Nigeria Tax Bill is business friendly as it exempted every small business whose annual turnover is below N25 million from paying profit tax and progressively reduced the top rate profit tax paid by larger companies from 30% to 25%. According section 56 of the Nigeria Tax Bill, a small company will be taxed 0 percent (i.e. zero rated) while other companies (medium to large) will be charged 27.5% in 2025 and 25% from 2026. This is against the present 30% CIT rate for large companies with over N100 million turnover and 20% for medium companies with over N25 million to N100 million turnover.
The Nigeria Tax Bill is friendly to small businesses. As much as 90% of businesses in Nigeria fall under the small business category. This means, around 90% of businesses in Nigeria won’t be paying profit tax under the NTB. The bill equally reduces the tax burden on big businesses and frees more resources for them to expand, which will lead to more job creation.
The bill in section 20(1)(a)-(l) also indirectly reduces the taxable income of company by increasing the deductions allowed from company’s gross earnings before ascertaining the company’s profit, that is eventually taxed. The bill also eliminated minimum income tax of around 1% of gross earnings hitherto imposed on companies who did not declare .
The bill went further in section 59 to harmonise all the special deductions on companies profit (different from the profit tax) into a single development levy that is expected to progressively decline from a rate of 4% in 2025 and 2026 assessment years to just 2% from 2030! The three direct annual deductions on companies’ profit consolidated into a one-off development levy by the bill include:
a.Tertiary education tax – as of today, companies are required by TETFUND act to pay 2% of their annual assessable profit as tertiary education tax into TETFUND;
b.NASENI Levy – apart from deduction of 3% of the total revenue accruing to the Federation Account, the Act also mandates FIRS to collect 0.25% of the turnover of companies and firms with income or turnover of N4,000,000 (Four Million Naira) and above; and
c.Information Technology Tax – companies with an annual turnover of N100 million or more who are engaged in banking and other financial activities; insurance activities; pension fund administration; GSM service providers and telcos as well as cyber and internet service providers are required by the NITDA Act to pay 1% of their profit before company income tax (CIT) as information technology tax annually to the Fund (NITDF).
’s primary source of funding is through deduction of 1% of all taxes, levies and duties collected by FIRS and not necessarily extra direct deductions from companies’ profits. However in the Nigeria Tax bill, the NELFUND is the greatest beneficiary of the development levy. According to section 59(2), the development levy to be collected by NRS (i.e. FIRS) at progressively declining rates from 2025 shall be distributed as follows:
a. will receive 50% of total development levy in 2025 and 2026 (rate of 4%). In 2027, 2028 and 2029, TETFUND will receive 66% of the total development levy collected (the levy rate declines to 3%). From 2030 and above, TETFUND will cease to receive any share of the development levy.
b.The Student Education Loan Fund will receive 25% of the development levy in 2025 and 2026; 33% in 2027, 2028 and 2029; and from 2030 onwards, it will receive 100% of the development levy, which would now be 2% of assessable profits of all companies (except small companies and non-resident companies).
c.The National Information Technology Development Fund will receive 20% of the development levy in 2025 and 2026 and 0% from 2027 onwards.
d.For the National Agency for Science and Engineering Infrastructure (NASENI), it will receive 5% of the development levy in 2025 and 2026 and 0% from 2027 onwards.
So, for most companies, the Nigeria Tax Bill is coming to harmonise their taxes into a maximum of two (income tax and development levy) with a maximum total rate of 27% (25% profit tax and 2% development levy) for the biggest companies from 2030 instead of a top rate of 33.25% they currently pay. This is a relief for businesses. There is no other way to say it.
3.Progressive Value Added Tax: The VAT is what many including some governors and Sen. Ali Ndume are focusing their attention on. Provisions about value added tax are contained in Chapter Six of the Nigeria Tax Bill. It is true that the bill in section 146 provides for a gradual increase in VAT rate from the current 7.5% to 10% in 2025; 12.5% in 2026, 2027, 2028 and 2029; and pegged at 15% from 2030.
However, it did not end there, a lot of basic goods and services that are consumed by the poor are either totally exempt from paying VAT or zero rated.
The items exempt from VAT are listed in part IV of chapter 8 of the Nigeria Tax Bill, which include things like food items, medical items, baby products, transportation, electricity, LPG, CNG, petrol products, etc. So, in essence, the progressive VAT rates will not affect the poor or VATable things they normally purchase.
The second part of the VAT controversy is on derivation formula. However, it is important to point out that the Nigeria Tax Bill does not make any provisions for sharing formula or derivation rather it is another bill, the Nigeria Tax Administration Bill that made such provisions but I will briefly touch on it here.
Section 77 of the Nigeria Tax Administration Bill provides for the distribution of VAT in the following manner:
1. 10% to the federal government
2. 55% to the state governments and FCT and
3. 35% to the local governments
The same section provided for distribution of 60% of the VAT revenue standing to the credit of the states and local governments on the basis of derivation. The proposed derivation model is specified under Section 22(12) of the Bill and states as follows: “For the purpose of attribution, any return under this section shall provide details of derivation of taxable supplies by location in a manner prescribed by the service.”
Many opposing the new VAT model, obviously did not read this part. They thought that the 60% of VAT revenue provided for sharing based on derivation in section 77 would follow the current model where derivation is attributed by headquarter remittance. That’s not the case. With the proposal in the new Nigeria Tax Administration Bill, VAT will be attributed to the place of supply and consumption and not necessarily the place of remittance which currently favour places with many company headquarters.
4.Redesign of the Capital Gains Tax: The bill also progressively redesigned the capital gains tax regime by exempting some forms of capital gains from taxation and in other cases raising the threshold of gain before imposing a capital gains tax. For example, section 51 of the bill exempts an individual from paying tax on proceeds of the sale of his residential property or land adjoining his residential property up to a distance of 1 acre. Section.
In section 50, the bill exempts compensation paid to individuals for personal injury such as loss of employment, defamation, libel, slander etc from capital gains tax once the amount is N50 million or below. Above N50 million, only the excess constitutes chargeable gains. The current provision of the subsisting Capital Gains Tax Act is that compensation for loss of office etc are subject to capital gains tax on the portion of the income above N10 million at the rate of 10%.
5.Streamlining of taxation of income from Mining and Petroleum Operations including hydrocarbon tax:
The Nigeria Tax Bill, effectively handed over the revenue collection duty of Nigeria Upstream Petroleum Regulatory Commission (NUPRC) to the NRS (FIRS) and using the same stone carried out some amendments of certain sections of the Petroleum Industry Act 2021.
The Seventh Schedule of the Nigeria Tax Bill prescribed the royalties all production of petroleum (from inland basin, onshore, offshore and deep water) would be subjected to, which are to be collected on behalf of the Federation by the NRS (FIRS) with the royalties so collected by the NRS administered in accordance with provisions of the Nigeria Tax Administration Bill (Act).
Crucially, the Nigeria tax bill outlined provisions that gave tax exemptions to encourage investment in both associated natural gas and non-associated gas (which yields CNG). By virtue of the NTB, NUPRC will squarely face its regulatory role in the upstream petroleum sector and will work closely with NRS where necessary to sanction defaulting companies who fail to remit the assessed taxes and royalties. This is aimed to indirectly increase revenue collection efficiency and reduce cost of collection that NUPRC usually deducts from the royalties it collects before now.
For the mining sector, the Nigeria Tax Bill in the Eight Schedule also laid out rates of royalty to be paid companies or licensees mining 71 solid minerals in Nigeria. The rates are either 3% or 5% of the selling value of these minerals. With this and other supporting provisions on mining, the Nigeria Tax bill would effectively lead to the amendment of the Nigerian Minerals and Mining Act.
6.Harmonisation of taxation of dutiable instruments/transactions: Chapter five of the Nigeria Tax Bill made clear provisions for taxation of all dutiable instruments or transactions. Section 123 of the bill imposed stamp duties on a total of 47 instruments at rates specified in the ninth schedule of the tax bill. A look at that ninth schedule shows that 34 instruments were levied duties ad Valorem (as a percentage of the value of these instruments) while 13 other instruments had a fixed duty of either N50 or N500 with only one instrument commanding a fixed stamp duty of N1000. The bill also harmonised instruments and transactions that are to be exempted from stamp duty and specified them in part III of chapter eight of the bill.
As I conclude this first part, it is important to point out that the summaries contained here did not include few other major innovations that the Nigeria Tax Bill is bringing on board such as provisions on tax incentives contained in Chapter 8 of the bill, which provided for economic development tax incentives targeted at economic sectors classified in the eleventh schedule as priority sectors. There is also the provisions that removed ambiguities on taxation/tax exemptions within export processing zones and free trade zones.
