Four far-reaching bills to modernise the tax system, eliminate inefficiencies and drive inclusive growth are currently going through Nigeria’s parliament. They represent a bold move towards building a fairer and more efficient fiscal system.
Proposed late last year by Nigeria’s presidential fiscal policy and tax reforms committee, the reforms have generated robust debate in the country. Sustained dialogue and collaboration are crucial to passing the bills and capturing the far-reaching benefits they will deliver not just for citizens and micro, small and medium-sized enterprises (MSMEs) but also for the broader economy.
Enterprise backbone
It is a big positive that the bills pay significant attention to MSMEs, the backbone of Nigeria’s economy, which account for 96% of the country’s businesses, 84% of its private sector workforce and 48% of its GDP. By tackling the country’s long-standing fiscal challenges, the reforms will create an MSME-friendlier environment.
Over 97% of MSMEs will be shielded from the burden of VAT compliance
Entrepreneurs and the self-employed will benefit from new tax reliefs. The exemption of minimum wage earners from income tax will indirectly support micro-enterprises, many of which employ minimum-wage workers. The exemption of food, education and healthcare from VAT will further benefit low-income workers.
Under the proposed new tax framework, businesses with an annual turnover below 50m naira (about US$32,500 and twice the previous threshold) will be exempt from charging VAT. Shielding over 97% of MSMEs from the administrative and financial burden of VAT compliance, this measure will translate into lower operating costs and improved cashflow, boosting profits and enabling greater reinvestment. Simplified tax filing and the promotion of technology such as electronic invoicing will further reduce the compliance burden for MSMEs.
Corporate income tax rates will also be lowered from 30% to 25%, again allowing MSMEs to channel more resources into expansion, innovation and job creation in a country with a very high level of youth unemployment/underemployment. Exemptions on capital gains up to NGN150m and input VAT credits on assets and services will encourage growth and investment, especially for businesses looking to scale up their operations.
The stage has been set for MSMEs in Nigeria to thrive
Making it happen
By making it easier to do business and bringing about more equitable taxation, greater investment and increased tax revenue for development, this powerful tax reform package will ultimately accelerate the country’s economic growth. The reduction in tax complexity, offer of financial relief and compliance streamlining all set the stage for MSMEs in Nigeria to thrive.
However, challenges loom, the first of which is getting the reform bills through the legislature in the first place. There have been loud voices of dissent as well as support for the reforms, with different groups agitating for changes, and a great deal of horse trading to date.
Another obstacle is Nigeria’s low tax morale – over 80% of individuals and nearly 70% of businesses believe tax evasion is either not wrong or wrong but understandable. Resistance to the reforms can be expected from those used to exploiting the current loopholes.
The new tax regime will involve disruptions, and the cost of adjustment may be another hurdle, especially for MSMEs transitioning to digital compliance tools. Staff training will demand significant resources. Ensuring all regions, including rural areas, can access new tax systems may not be easy either. For the reforms to succeed, all these challenges must be envisaged from the get-go and planned for.
Realising these benefits also requires transparency and inclusivity
Visible gains
The proposed reforms hold immense potential to stimulate economic growth, empower MSMEs and improve public services. But realising these benefits requires a commitment to transparency and inclusivity as well as effective implementation.
Once the reforms are in place and working as they should, citizens need to see tangible benefits if they are to trust the system. A great deal of work is required to make individuals and MSMEs see how the new tax regime benefits them. Targeted awareness programmes can help here, while government accountability in spending tax revenues on public benefits will strengthen confidence. Addressing structural inefficiencies by, for example, streamlining tax administration through the proposed Nigeria Revenue Service and the Joint Revenue Board, will also help.
Nigeria stands at a pivotal moment in its fiscal history. Properly executed, these reforms can transform the tax system into a powerful tool for shared prosperity – one that will enable individuals, MSMEs and the broader economy to flourish.
