Tax Reform Bills: Tinubu Lacks The Will For National Consensus Building

 By Olu Fasan

Hardly anyone will disagree that Nigeria needs a fundamental tax reform. This, after all, is a country with one of the most cumbersome tax regimes in the world, where tax laws and regulations are overlapping and burdensome, where the administration and collection of taxes, and their spending, are ridden with inefficiency and corruption, and where tax avoidance and evasion are prevalent. Nigeria’s tax system is in deep crisis.

*Tinubu

However, while crises are a trigger for fundamental reforms, making the status quo unsustainable, they are not sufficient for reform success. In a democracy, there’s a critical need for an explicit electoral mandate for reform and for a carefully crafted policy design, shaped by a broad consensus for change.

In a recent report, the IMF said: “A strong electoral mandate for policy changes, underpinned by effective communication and far-reaching efforts to convince voters and stakeholders of the need for reform during an electoral campaign, is instrumental in several instances for reform success.”   

Unfortunately, neither a strong electoral mandate nor consensus building, let alone a carefully crafted policy design, informs the radical proposals that President Bola Tinubu put forward in the tax reform bills he recently sent to the National Assembly. Of course, Tinubu would argue that the deep crisis in Nigeria’s tax system justified the far-reaching reform proposals. But he is naïve to think that he can push through fundamental tax reforms without a strong electoral mandate and without building a genuine national consensus for such reforms. Hence, the proposals are deeply controversial and would face serious implementation challenges, even if the National Assembly were to pass them into law. 

Let’s start with the policy design. In October, President Tinubu sent four tax reform bills to the National Assembly. They are the Nigeria Tax Bill, the Joint Revenue Board (Establishment) Bill, the Nigeria Revenue Service (Establishment) Bill and the Nigeria Tax Administration Bill. All the bills emanated from the work of the Presidential Committee on Fiscal Policy and Tax Reforms inaugurated by Tinubu in August 2023 and chaired by Taiwo Oyedele, a renowned tax expert. 

The Presidency said the “bills are simply pro-poor, pro-growth and pro-efficiency”. Well, regarding efficiency, based on the bills’ harmonisation provisions, repealing 11 existing tax laws and bringing them under the omnibus Nigeria Tax Bill must be welcomed, as must making the proposed Nigeria Revenue Service, NRS, which would replace the Federal Inland Revenue Service, FIRS, the sole collector of all federal taxes, including those collected by agencies such as the Nigeria Customs Service. Yet, given the scale of the problem, the proposed reforms may not be a game changer. 

The WTO said in a recent report on Nigeria that “companies make about 60 official tax payments per year and about 200 unofficial tax payments”. Would the proposed reforms radically change that? Utterly doubtful!

Then, take the “pro-poor and pro-growth” claims. In truth, to exempt any person earning N800,000 or less from income tax and to reduce the company income tax from 30 per cent to 25 per cent, while exempting small companies from paying any income tax, as proposed, could be described as pro-poor and pro-growth. However, what the proposed reform gives with one hand – reduced and zero-rated income tax – it takes back with another – a hike in Value Added Tax, VAT, which would rise from the current 7.5 per cent to 15 per cent in 2030. Truth is, any government that says it is helping the poor but hikes up VAT for businesses is lying because companies would either raise the prices of goods and services (inflation) or retrench workers/reduce recruitment (unemployment), both of which will hurt the poor. 

Well, one thing is certain: the tax reform proposals are pro-billionaires. Think about it. The tax rate for anyone earning N50m or more per annum is 25 per cent. Thus, someone earning N50m per annum is lumped together with a billionaire, who would also pay 25 per cent income tax. In a country where several billionaires are state-made or corruptly enriched themselves, and where there is no culture of philanthropy, asking a billionaire to pay the same tax rate as someone earning N50m per annum is perverse. In the UK, the highest tax rate, which captures billionaires, is 45 per cent. But Tinubu’s tax reforms shield the super-rich while penalising the middle-class!

Which brings us to the most controversial aspect of the proposed tax reforms. 

In the Nigeria Tax Administration Bill, Tinubu proposes to introduce a new VAT distribution model, where 60 per cent of the VAT allocation to the states are based on derivation; it would replace the current methodology which attributes VAT to the place of remittance with one that attributes VAT to the place of supply and consumption of goods and services. The proposed change would benefit the South, which contributes the lion’s share to the VAT pool (e.g., N387.06bn out of N444.19bn in August) but receives a disproportionately lower allocation (N149.09bn), and would disadvantage the North, which contributes a minuscule share (N13.69bn in August) but receives a disproportionately higher allocation (N59.17bn). 

You could say the proposed change is fair. But in any situation where there are winners and losers from a policy, the losers will resist it. Thus, it’s hardly surprising that the North is vehemently opposed to the proposed reforms. In their communique after a joint meeting with the Northern Traditional Rulers Council, the Northern States Governors Forum said the proposed change to a derivation-based model was “against the interests of the North”. The Northern Elders Forum said the proposal was “conceived in bad faith”. In truth, given the fundamental nature of proposed change, it should have been canvassed during the election campaign to secure an explicit mandate for it.

One of Tinubu’s media sophists – they are all sophists – said the tax reform bills were part of Tinubu’s campaign manifesto. That’s disingenuous. The only reference to tax reform in Tinubu’s manifesto – “Renewed Hope 2023” – is a short paragraph in page 16, which says: “We shall review the corporate tax system and deploy technology and effective policies to better rationalise the system.” If Tinubu had said during the campaign that, if he won, he would introduce a derivation-based VAT distribution model, would the North have voted for him despite his Muslim-Muslim ticket? Going by their current reaction to the proposal, the answer is no. So, Tinubu won by stealth, and the North is right to accuse him of acting “in bad faith”!

Even worse, in a supposed federal system, Tinubu sidelined the state governments. In October, the National Economic Council, consisting of Nigeria’s 36 state governors, urged Tinubu to withdraw the tax reform bills “for comprehensive consultation and consensus building”. He refused. It affronts democracy that someone who won a minuscule 36.6 per cent of the popular vote, rejected by 63 per cent of the electorate, acts unilaterally and shuns national consensus building. Tinubu misreads his “mandate”!  

*Dr. Fasan is a commentator on public issues