Some bitter truths about Tinubu’s tax reforms

There are reasons to be wary of the Tax Reform Bill proposed by President Bola Tinubu, as Nigerians have been over the last few days. Most of those reasons have nothing to do with the bill itself but with the person proposing the bill and his antecedents.

In the recent past, President Tinubu had assured Nigerians that he was seeking the office of president to make their lives better, that ending the fuel subsidy would be for the good of the country and Nigerians, and that the financial reforms he implemented would be for the good of the economy. News flash: So far, none of these things has turned out the way he promised. Tinubu’s days in office have become associated with economic hardship occasioned by astronomical rises in fuel costs, a stunning fall in the value of the naira and, of course, hyperinflation.

So, when the same person proposes another reform, this time in the tax sector, it is only natural that the suffering people of the country will scream: “Enough!” even before they grasp the intricacies of the proposed bill.

We must understand the skepticism of Nigerians from this perspective. Just as we should also understand that our tax laws are archaic and are long overdue for review. As most Nigerians know already, what this administration is proposing is a pack of bills, like one of those Indomie packs with different flavoured noodles in them. This pack, though, consists of the Nigeria Tax Bill 2024, the Nigeria Tax Administration Bill, the Nigeria Revenue Service (Establishment) Bill, and the Joint Revenue Board (Establishment) Bill.

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Together, these bills are supposed to consolidate existing tax laws, establish a clear framework for tax administration, and create a Tax Appeal Tribunal and Office of the Tax Ombudsman. Because we all know how things work out in this country. As the naira redesign was supposed to force looters to expose themselves, but in the end, it was the non-looting Nigerians who suffered for it.

Some of the major bricks hurled at the proposed reform are that it could upset the balance of fiscal federalism (Nigerians have an abusive relationship with this word), centralise tax authority, and cut down state revenues.

One of the leading brick hurlers is the Borno State governor, Babagana Zulum, along with the other 18 northern states, whose governors had, at an October meeting, rejected the new derivation-based model for VAT distribution contained in the proposed bill.

In the furore that has followed an attempt to fast-track the bill through the Senate, the objectives of the bill have been lost in the dust.

Ostensibly, the reforms are aimed at consolidating tax laws by unifying them into a single framework, thereby simplifying the tax system for better accessibility. The Tax Administration Bill aims to enhance efficiency by reducing bureaucratic hurdles (good luck with that), making tax processes smoother for both taxpayers and authorities, all in an attempt to streamline tax administration. Further, the Nigeria Revenue Service Establishment Bill proposes creating a centralised tax agency to replace multiple tax collection bodies, improving coordination and effectiveness. God knows Nigeria is famous for duplicity of roles and agencies, and we really need to cut them down.

Significantly, it proposes that small businesses with annual turnovers below ₦50 million will be exempted from corporate income taxes. This is a significant relief, and God knows our businesses need that relief, as it reduces the tax burden on small enterprises, allowing them to reinvest profits into their growth and operations. That is the idea anyway. Completely unrelated, though, the government did propose to reinvest monies saved from subsidy removal into infrastructure development. That is yet to happen.

However, back to tax reforms, and here is where it gets tricky: the phased increase in VAT and the introduction of a telecommunications excise duty could lead to higher costs for goods and services. Small businesses might face increased operational costs, which could affect their pricing strategies and profit margins. Seems like giving with the right hand and taking it back with the left, doesn’t it? But these are points that have been mentioned and discussed already.

Now, here are my two cents on the controversies around the centralisation of tax collection and the potential of VAT increases on the cost of living. The biggest source of contention is that the new tax reform bill shifts from an equal-sharing basis to a derivation-based model. This means that states will receive revenue based on their contribution to the tax pool. States that generate more revenue will receive a larger share, while those with lower contributions may see a decrease in their allocations. This is the major bone of contention for the governors of the northern states and a lot of northerners.

There are, as I have said, many reasons to be sceptical about the reforms and to interrogate them thoroughly, but I don’t think this should be one of them. The northern states’ protests feel like a misplacement of priorities. It is only fair that states that generate more revenue from VAT and contribute more to the pool should earn more allocations. This way, other states should focus on providing more services, promoting local businesses, and creating more income for the people living in those spaces. This will lead to increased spending by their citizens and increased VAT generation from them, which would translate to increased allocation to them. Instead of an increased focus on protesting the reforms on this ground, there should be an increased focus on IGR and the means to enhance the capacity to generate revenue internally. This shift should encourage states to develop their local economies and improve tax collection mechanisms.

While that is easier said than done, after all, some states in the North are far less industrialised compared to Lagos and Rivers and generally have weaker industrial bases, and would therefore struggle to generate sufficient revenues internally. We must, however, stop using this as a crutch to stagnate our development while taking from others. The idea is that states should grow their economies, find their strengths, and lean on them, rather than fighting to maintain the status quo. The states without industrial potential have agrarian ones and should lean into them.

The bitter truth is that the North has got a bit too comfortable with crutches. For example, we have held onto the status of being educationally less developed as a reason for the quota system’s introduction. Decades later, we have not developed our education system enough to allow for advancement to a quota system that is solely meant to ensure balance, not one meant to compensate regions for struggling behind.

One might suspect that the reason the northern governors are opposed to this is that it will challenge them to focus more on improving their IGR. That seems to be hard work when they can kick their feet up and wait for federal allocations.

Granted, there are real challenges beyond economics that are impacting development in the region, most of it tied to security challenges, but the truth here is that the region has been largely sleepwalking through the Nigerian experience. State governors must be more proactive in developing enhanced security and development strategies to be able to position themselves and their people for growth. The reliance on handouts is supposed to be a temporary intervention, not a permanent state of being.

With increased revenue from more efficient tax collection, states could potentially invest more in public services and infrastructure.

I am glad Nigerians kicked up a storm over the reforms. Public scrutiny has become essential to ensure that bills that expose Nigerians to more harm are not rushed through NASS. While we may fault the executive for many of the policies that have backfired on Nigerians, we must also point fingers at NASS for not doing enough to protect Nigerians from them. So, in a way, this furore should be a good thing for the country and the Tax Reform Bill.