Finance Act: Windfall tax explainer

By Arabinrin Aderonke

Why is the Nigerian government introducing a windfall tax, and what does it mean for the economy? As part of economic reforms, President Bola Ahmed Tinubu’s administration has proposed a one-time windfall levy aimed at addressing the substantial gains made by Nigerian banks due to changes in exchange rates.

The Windfall Tax, recently introduced under Nigeria’s Finance Act, promises many benefits for the nation. By redistributing these unexpected gains, the tax will channel funds into important public services, including infrastructure development, healthcare, and education.

This redistribution is expected to improve public amenities, support the quality of education and healthcare, and address economic disparities. Moreover, the funds are likely to stimulate job creation and promote economic growth.

The Federal Government proposal to amend the Finance Act through the windfall tax on the foreign exchange extraordinary gains realised by banks. This measure shows a commitment to ensuring that the financial benefits derived from recent economic reforms are shared with the public. This proposal is framed in such a way as to drive national development while avoiding additional tax burdens on ordinary citizens.

The concept of windfall taxes is not unique to Nigeria. Globally, windfall taxes have been implemented in many ways with different outcomes. The Czech Republic has levied a 60% tax on energy firms and banks, raising $3.4 billion to help those affected by energy price hikes. Hungary has used its tax to promote government bond purchases and introduced a new social tax. Lithuania allocates its windfall revenue to military funding, while Sweden uses it to strengthen public finances. In the United Kingdom, Parliament is considering a windfall tax on banks to address economic inequality and support public services. All these international contexts indicate that windfall taxes are a standard method for managing and redistributing unexpected profits.

In discussions at the National Assembly recently, both Mr. Wale Edun, the Minister of Finance, and Dr. Zacch Adedeji, Chairman of the Federal Inland Revenue Service (FIRS), provided information on the rationale behind this tax. Mr. Edun highlighted that imposing such levies is a common practice worldwide and is designed to ensure that the benefits resulting from government policies are shared with the public.

Dr. Adedeji, in his own comments, emphasized that the windfall tax would help mitigate economic inequalities, particularly in light of recent harmonisation policies in the foreign exchange market. The Federal Inland Revenue Service (FIRS) has worked hand-in-hand with the Central Bank of Nigeria to ensure the levy supports rather than disrupts the banking sector.

Moving forward, banks must work closely with the federal government on the windfall tax. This partnership ensures the efficient allocation of funds to enhance public services, promote economic stability, and maximise benefits for all Nigerians. Together, they pave the way for a prosperous nation.

Arabinrin Aderonke is an Award-Winning investigative journalist, 2016 finalist, CNN African Journalism Award. She currently serves as the Technical Assistant, Broadcast Media at the Federal Inland Revenue Service.