7 key points to note from controversial Tax Reform Bill

By solacebase.com On Dec 3, 2024

Companies, Tax Reform Bill, Controversy, — Seven key points to note from controversial Tax Reform Bill

By Aminu Abubakar

The tax reform bill in Nigeria is currently at the Centre of discussion. The bill has led to controversies among different stakeholders including state governors from the Northern region of the country especially.

In this report, SolaceBase examines key points you should know from the tax bill.

DIssecting VAT Sharing Formular Controversy

VAT, also known as Value Added Tax, is a consumption tax. It is borne by the final consumer because it is added in the final price for goods and services.

Simply put, when you buy a VATable product, the money you pay for such a product or service includes the VAT rate.

Value Added Tax administration is done by the Federal Inland Revenue Service, (FIRS) that is all VAT collected at the state level are taken, summed up and shared at the federal level.

The key controversy raging now centres around sharing formulae for VAT.

Section 77 of the NTAB is on distribution of VAT revenue.

According to the section VAT net revenue “shall be distributed as follows; 10% to the Federal Government; 55% to the State Governments and the Federal Capital Territory; and 35% to the Local Governments.

The bill further notes that this development is provided that 60% of the amount standing to the credit of states and local governments shall be distributed among them on the basis of derivation.

Derivation is simply the portion of VAT revenue made by a particular state. If the federal government records N50 VAT and N5 of this VAT is made from Kano, that would mean that the derivation from Kano stands at N5.

This section on the newly proposed sharing formula if approved will be a deviation from Section 40 of the VAT Act, 2007.

The 2007 act provides that VAT revenue shall be distributed as follows: 15% to the FG, 50% to the State Governments and FCT and 35% to Local Governments.

This is provided that the principle of derivation of not less than 20% shall be reflected in the distribution of the allocation amongst States and Local Governments.

VAT forms a major source of revenue for many states in Nigeria with the Northern states not left out, which may explain the concern on fiscal impacts of the newly proposed VAT revenue sharing formula.

If the arguments of the Northern governors stand, they fear reduced revenue which will affect the already shaky fiscal situation of states. Although not just Northern states are expressing worry, northern states are more vocal.

For instance, Katsina state VAT revenue for Q1-Q3, 2024 stood at N29 billion while its own internally generated revenue stood at N17 billion. This means it got more VAT than IGR.

New Plan for Development Levy

The development levy helps to ensure the development of critical sectors in the country. The emphasis is however usually on the education sector in the country.

According to the document, there shall be harmonization of 2.5% education tax,

1% NITDA tax and 0.25% NASENI tax that many firms pay in addition to their company income tax annually into a single development levy of 2% that will be used exclusively to fund student loans from 2030.

The bill noted that “this further reduces the total tax burden of some companies from around 33.75% of their earnings (when you add these three deductions to their income tax rate of 30%) to just 27% of their earnings.”

The money from the development levy is expected to be distributed as a Tertiary education trust fund (50% in 2025 and 2026 years of assessment), 66% in 2027, 2028, and 2029 years of assessment, 0% in 2030 year of assessment, and thereafter, student education loan fund 25% in 2025 and 2026 years of assessment, 33% in 2027, 2028 and 2029 years of assessment, 100% on 2030 years of assessment.

VAT Rate Schedule

The document also noted that there will be an increase in VAT rate from the current 7.5% to 10% in 2025; 12.5% between 2026-2029 and 15% from 2030.

Incentive on Wage Awards, Increase

According to the bill, a company shall be entitled to an additional deduction of 50% in the relevant years of assessment in respect of costs incurred in 2023 and 2024 calendar years on the following; wage awards, salary increases, transportation allowance or 12% transport subsidy granted to a low-income worker, which bring the gross 13% monthly remuneration of the worker up to an amount not exceeding 14% N100,000.00.

It was noted that this would be so, provided that any additional award or salary increase to an employee earning above N100,000.00 as monthly salary shall not qualify for the additional deduction under this subsection.

Tax Rate for Companies

Companies also pay value-added tax in the country except those who offer services that are tax exempted.

Value Added Tax of Companies are also pegged at zero percent for a small company, any other company at the rate of 27.5% in 2025 year of assessment and 25% in the 2026 year of assessment.

A small company in Nigeria is a private company with an annual turnover of no more than N120 million and a net asset value of no more than N60 million. The company must also meet the following criteria:

Tax Rate for Individual Incomes

Individual income tax rate is pegged at 0% for the first N800,000, next N2.2 million at 15%, next N9 million at 18%, next N13 million at 21%, next N25 million at 23% and next N50 million at 25%.

Simply put, if you earn N800,000 annually, you will be exempt from individual income VAT.

VAT-Exempted Products/Organizations

The following are also expected to have Value Added Tax at zero percent.

“Basic food items, all medical and pharmaceutical products, educational books and materials, fertilizers, locally produced agricultural chemicals, locally produced veterinary medicine, locally produced animal feeds, agricultural seeds and seedlings, electricity transmitted by transmission company of Nigeria, tuition relating to tertiary institutions, exported goods excluding oil and gas, locally produced animal feeds”

Below are organizations also exempted from tax.

“A statutory or registered friendly society, where the profits or gains are not derived from a trade or business carried on by such society”

“A co-operative society registered under any enactment or law relating to co-operative societies, not being profits or gains from any trade or business carried on by that society”

‘’engaged in educational, ecclesiastical or charitable activities of a public character wherethe profits or gains are not derived from a trade or business carried on by such person”

“A trade union registered under the Trade Unions Act where the profits or gains are not derived from a trade or business carried on by such trade union”

“Federal, State or Local Government in Nigeria, their Ministries, Departments and Agencies and other public institutions, other than profits or gains derived from trade or business or any instrumentality established for the purpose of trade or business”

“A government purchasing authority established by an enactment and empowered to acquire any commodity for export or redistribution;dividend distributed by authorised collective investment scheme”

As the controversy continues to rage on, SolaceBase will bring key insights on the bill further.