By Michael Chibuzo
As the temperature of the debate around the landmark tax reform bills sent to the national assembly by President Bola Tinubu increases exponentially, so also is the amount of misconception and misinformation around the bills, some of which are quite deliberate, I must add. It is for this reason that I want to chronicle the top 10 misinformation about the bills being peddled around by mostly uninformed and sometimes mischievous commentators.
1. The Tax Reform Bills will increase tax burden on poor people:
This is definitely not true. The Nigeria Tax Bill in section 58 and the Fourth Schedule clearly exempts individuals earning an annual income of N800,000 and below from paying income tax. The current law requires anyone earning above N300,000 to pay income tax. When you realise that the vast majority of poor people in Nigeria do not earn up to N1 million annually, it becomes obvious that the Nigeria Tax Bill is pro-poor and will reduce tax burden on low income earners.
2. Inheritance is taxed:
This is another falsehood or misinformation from those who don’t understand the provisions of the bills especially Section 4(3) and 4(4) of the Nigeria Tax Bill, which they misconstrue to mean inheritance. The entire section 4 of the bill basically lists income, profits or gains chargeable to tax. For clarity purposes, that section 4(3) states: Income of a family recognised under any law or custom in Nigeria as family income in which the several interests of individual members of the family cannot be separately determined.
What this simply refers to is income that is earned from a business or venture which is jointly owned by a family. For example, if a family contributes money to build a three-storey block of flats, the income derived from the apartments is jointly owned by the family. This income (once it’s above the threshold of income tax exemption) is subject to income tax at the relevant rate depending on the income band the total income falls into. What is taxed is the income that flows from the joint partnership and not any Inheritance.
In the same breath, section 4(4) of the Nigeria Tax Bill also included income arising to a trustee of any settlement or trust, or estate or to an executor of any estate of a deceased persons. This is simply talking about the income a trustee earns as payment for administering a property in trust or the income an executor (will executor) earns while administering an estate of a deceased person. It has nothing to do with any inheritance tax.
3. Consultants like Alpha Beta will be used to collect tax revenue
Another misinformation being peddled about the tax reform bills is that revenue consultants will be empowered to collect revenue on behalf of the Nigerian Revenue Service in exchange for a percentage of the revenue they collected. The major consultant the misinformers have in mind of course is Alpha Beta.
However, this notion is absolutely false. As a matter of fact section 19(3) of the Nigeria Revenue Service Establishment Bill clearly prohibits the engagement of consultants for purpose of assessment, collection of tax revenues or tax enforcement activities on behalf of the NRS (currently FIRS). So, Alpha Beta or any other revenue collection consultant will not collect revenues on behalf of the NRS.
4. VAT from the North will be sent to Lagos
Top political figures in the North as part of their opposition to the tax reform bills especially the VAT reforms have propagated an incorrect narrative that under the new tax reform legislations, value added tax generated from the Northern states will be sent to Lagos. This assertion is not supported by any single section in any of the four tax reform bills. On this VAT issue, what the bills (particularly Nigeria Tax Bill and the Nigeria Tax Administration Bill) seek to achieve is to reform the derivation formula so that attribution of VAT revenue to states will no longer be dictated by headquarters remittance, which favoured Łagos but by place of consumption of the goods and services that generated the VAT, which will favour the vast majority of states (about 32), who together currently account for less than 15% of VAT revenue collected in Nigeria.
Section 77 of the Nigeria Tax Administration Bill reduced FG’s share of the VAT revenue from 15% to 10% and increased that of the states from 50% to 55%. It also provided that 60% instead of the previous 20% of the VAT revenue standing to the credit of the states and LGAs shall be distributed on the basis of derivation. This derivation model is hinged on attribution of VAT revenue, which was clearly defined earlier in section 22(12) of the Nigeria Tax Administration Bill to be based on the actual location where the taxable supplies was consumed and no longer the location where the VAT revenue was remitted to the tax authority.
So, even if companies with headquarters in Lagos continue to remit their VAT in Lagos, this time around, they will break the VAT collected down into the actual locations across the country where they came from so that it will be attributed to the state of origin. By this provision, it is therefore incorrect to say that VAT generated in the North or any part of the country will be sent to Lagos rather each state apart from Lagos, will now witness a massive increase in the VAT revenue attributed to them. This is what will be used for calculating 60% derivation. By the way, 20% of the states’ and LGAs’ share of VAT will be shared equally while the other 20% would be shared based on population.
5. Northern states will witness reduction in FAAC allocations
Part of the reasons for the pushback against the tax reform bills by the northern governors and some elites is the fear that the new VAT revenue distribution formula would lead to a reduction in the FAAC allocations to the states in the region. Borno State Governor went further to allege that the new bills will make payments of salaries difficult for northern states. This is definitely not true but a very misleading alarm devoid of any accurate empirical backing.
As a matter of fact, after a simulation of proposed VAT revenue to states under the new consumption based derivation model using MTN VAT remittance in six states (one per geopolitical zone) as a case study, which was carried out by the Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, Taiwo Oyedele, it emerged that every state will experience an increase in their VAT revenue under the proposed model. If there was any state that may witness marginal reduction in their VAT revenue, it will be Lagos even though they will still be the highest earner.
Apart from VAT revenue, the bills proposes that 100% of the revenue generated from the Electronic Money Transfer Levy (EMTL) will now go to the states. With the commencement of N50 EMTL deductions for mobile and digital transfers between bank accounts that are above N10,000, the states would definitely get more revenue from FAAC.
Also the bills provide for tools to ensure high income earners and high networth individuals do not evade income tax anymore. With the expected increase in payment of income tax by the rich, states will have even greater amount of revenue at their disposal since personal income tax is totally meant for the states. All these and more put together means states will definitely see very significant increases in their revenues and should have no problems paying salaries as well as financing their other developmental projects and programmes.
5. Lagos will take 60% of Tax revenues generated from the South East
This claim by some commentators and content creators in the South East is similar to the claims that Northern taxes will go to Lagos. Like I started previously, the new VAT derivation being proposed in Section 77 of the Nigeria Tax Administration Bill is based on a consumption model instead of the place of remittance model. So, Lagos cannot take 60% of VAT that is collected from consumption in Enugu or Anambra simply because the company is headquartered in Lagos and remits the VAT revenue centrally to the tax authority in Lagos. Under this new proposal, section 22(12) of the Nigeria Tax Administration Bill states that attribution of the revenue from the taxable supplies will be based on location of consumption.
This means, MTN for instance while remiting the VAT revenue they collected from their subscribers across the country will state how much was collected from its subscribers in Enugu or Anambra within the period under review. This amount will then be attributed to Enugu or Anambra States for the purpose of calculating 60% derivation due to these states. Enugu and Anambra will also partake in sharing the other 20% equally as well as the remaining 20% based on population size. The same thing is applicable to banks, companies into fast moving consumer goods etc.
6. Companies in Free Trade zones and Export Processing Zones will no longer enjoy tax exemptions/incentives
This claim is misleading and incorrect. Section 60 of the Nigeria Tax Bill and by extension the Second Schedule to the bill stated clearly circumstances under which entities in export processing and free trade zones will cease to enjoy tax exemptions. Paragraph 3 of the second schedule maintained that if an entity operating in a free trade or export processing zone makes 100% of its profit by exporting goods or services produced by such an entity, this profit is fully exempt from tax. This after all, is the essence of establishing the zones, to encourage firms to export goods and services that are competitive in terms of pricing in the international market.
However, due to over time some entities in the free trade zone abuse this provision by producing goods and services for sale in the local market (the customs territory), which places them at a huge advantage over competitors in the customs territory since they don’t pay tax, it became necessary to level the playing field. This is why paragraph 4 of the second schedule provided that if at least 75% of goods or services produced by a licensed entity in the free trade and export processing zone is exported or serve as inputs into goods or services in which at least 75% of it is exported, company income tax shall then be imposed on the portion of the profits of the entity in respect of goods or services sold within the customs territory.
Crucially, paragraph 5 went further to state that if more than 25% of sales of a licensed entity in the export processing or free trade zone occur in the customs territory, the whole profits of the entity shall be taxed in Nigeria and all other reliefs granted under the Nigeria Tax Act as well as the law guiding the free trade zone or export processing zone shall not apply to that entity. This is the true position of the bill.
7. VAT increase(s) will lead to a spike in inflation
Due to the provision in section 146c which proposed a gradual increase in the VAT rate of some taxable supplies from 7.5% to 10% in 2025 to 12.5% in 2026 up till 2029 before nestling at 15% from 2030 and thereafter, some have raised concerns that these rate increases will lead to a spike in inflation. These fears are misplaced and erroneous. This is because paragraph (a) and (b) of the same section 146 of the Nigeria Tax Bill exempted many basic items and other taxable supplies from being charged VAT. These zero rated or exempt items are indicated in sections 187-189 of the Nigeria Tax Bill as well as paragraphs 1 and 2 of the Twelfth Schedule to the bill.
The items exempted from VAT or charged 0% VAT together contributes 82% to the inflation basket represented by the consumer price index. These items include food (51%), housing/rent/water/electricity/gas/other fuel (17%), transportation (7%), education (4%) and health (3%). So, if these major contributors to inflation are not going to witness any VAT charge, it means that instead of increase in inflation, we should actually be expecting a reduction in inflation since the other 18% taxable supplies which will see a progressive increase in their VAT rate over the next five years are not items that the vast majority of vulnerable Nigerians consume and therefore would not I have any significant impact on the consumer price index.
8. Agencies like TETFUND, NITDA and NASENI will be scrapped
This false narrative is being peddled by some persons who misinterpret section 59 especially subsection 4, which states that no part of the proposed consolidated development levy shall be distributed to NITDA and NASENI after 2026 and TETFUND after 2029 to mean that these agencies will be defunded and consequently scrapped while all the development levy collected would go to the Student Education Loan Fund from 2030.
This narrative is false, the Nigeria Tax Bill is not scrapping these agencies, rather it simply removes taxing profits of companies as one of their sources of funding. All these agencies will continue to be funded through budgetary allocations from the federal government and other sources enshrined in their various establishment laws (as will be amended consequently).
9. The Nigeria Tax Bill will lead to increase in tertiary school fees
The President of the Academic Staff Union of Universitiess (ASUU), Prof. Emmanuel Osodeke recently insinuated that the Tax Reform Bills will lead to increase in the school fees charged by tertiary institutions on account of the increased funding of student loans as well as the scrapping of the tertiary education tax levied on companies’ profits to fund TETFUND. This claim or insinuation from the ASUU President has no basis whatsoever.
The student loans are simply meant to assist those students who cannot afford the fees charged by public tertiary institutions. The government is not privatising its tertiary institutions and will continue to increase support to these schools to build infrastructure necessary for quality learning environment while also footing the personnel cost of both academic and non-academic staff in these institutions. Any increase in fees by any university will be their normal regular increment in fees, which has been taking place for ages as these institutions try to adjust to inflationary pressures.
10. The bills are anti-North
This is also another narrative actively being pushed by some persons in the North. This is a very false claim and I must add, very mischievous and divisive. There is no part of the four bills aimed at overhauling our tax system in Nigeria that is targeted at any region, whether in the North or in the South. Some of those who peddle this falsehood usually hinge it on the VAT proposed derivation model, which they incorrectly claim is disadvantageous to the northern states which do not have a lot of company headquarters. This wrong impression has been clarified sufficiently in number 4 of this piece.
However, there are also others who acknowledge that the bills indeed intends to change the attribution of VAT revenue from the current practice which uses place of remittance to the new model which is based on place of consumption. This category of people unfortunately claim that this consumption-based attribution model is also anti-North because of the perceived low consumption figures of the northern populace when it comes to items that are charged VAT based on the new bills. This view is however not supported by data.
For example, the six biggest contributors to VAT revenue, which accounted for N1.78 trillion (or 84.8%) of the N2.1 trillion non-import local VAT collected in 2023 are manufacturing (N578B), information and communication (N412B), mining and quarrying (N260B), finance and insurance (N215B), public administration (N180.9B) and wholesale and retail (N138.1B). All of these areas have consumers in every part of the North. Fast moving consumer goods such as cement, beverages, tobacco products, processed food etc are widely consumed in the north. Telcos have tens of millions of active subscribers across the north, solid minerals mining activities are mostly in the North, while financial institutions equally have large amount of customers across the north.
Therefore, if consumption is used as a basis for calculating VAT derivation, it does not place the North in any disadvantage and will not lead to reduced revenues for the north. There are no provisions or circumstances envisaged in the bills that can be tagged anti-North. Instead, the bills provides opportunities for states in the North, who are endowed to take advantage of their abundant resources and comparative advantage in many areas such as agriculture and solid minerals to significantly improve their revenue base through increased value addition to many of their primary raw materials.