The Chairman of Nigeria’s Presidential Fiscal Policy and Tax Reform Committee, Taiwo Oyedele, has disclosed that under the proposed tax reforms, Nigerians earning the minimum wage or slightly above it will be exempted from the Pay As You Earn tax.
He revealed this update on Monday through his X account while addressing public inquiries on the recent tax reform bills.
President Bola Tinubu, on September 3, 2024, submitted four significant tax reform bills to the National Assembly for deliberation. These bills aim to establish a more robust, clear, and fair taxation framework in Nigeria.
The first of these is the Nigeria Tax Bill 2024, designed to create a comprehensive fiscal structure to streamline taxation nationwide.
The second, the Tax Administration Bill, is set to clarify the legal foundation for taxes, aiming to reduce tax disputes across the board.
The third bill, the Nigeria Revenue Service Establishment Bill, seeks to dissolve the existing Federal Inland Revenue Service Act, proposing the establishment of the Nigeria Revenue Service in its place. This new entity is expected to handle tax collection and administration duties more effectively.
Lastly, the Joint Revenue Board Establishment Bill aims to create a tax tribunal and appoint a tax ombudsman, offering a more formal structure for dispute resolution and oversight.
These bills are the result of recommendations from Oyedele’s committee and have stirred debate among lawmakers, with contrasting views emerging within the National Assembly.
Addressing common questions on the bills, Oyedele explained, “The current taxable income bands and rates were introduced in 2011. Due to the lack of review, the structure has resulted in a ‘fiscal drag’ where many low-income earners have been pushed to the top bracket over time due to high inflation.”
He added that this outdated tax structure has created disincentives for formalizing businesses, noting, “Also, the system discourages formalisation given that the tax rate on companies is nearly double that of enterprises which also encourages arbitrage in many cases. The proposal seeks to address these issues and simplify the system by eliminating various reliefs and allowances while adjusting the bands and rates to achieve an overall lower effective tax rate for workers.”
One of the objectives of the proposed tax system is simplicity, so that taxpayers can handle their own returns without needing assistance.
For example, a new rent relief allowance will support low-income earners, and PAYE tax rates will decrease for individuals making N1.7 million or less monthly.
“Individuals earning about N1.7m or less per month will pay lower PAYE tax while those earning the new minimum wage and slightly more will be fully exempted,” Oyedele clarified.
He noted that this approach will allow approximately 98 percent of public and private sector workers to pay lower taxes, while high earners will see a moderate tax increase, with top earners potentially paying up to 25 percent.
Furthermore, the new tax proposal would simplify the tax system by abolishing state-level consumption taxes, with the exception of the nationwide Value Added Tax.
Oyedele explained, “Imposition of parallel consumption taxes in some states along with VAT which increases the tax burden on the people and contributes to multiple taxation. The reform seeks the discontinuation of all consumption taxes other than VAT.”
Some National Assembly members have expressed concerns about potential reductions in revenue for certain states under this model.
However, Oyedele explained that a provision to redistribute five percent of federal revenue could be reserved for equalization transfers, mitigating any revenue losses for affected states.
He noted, “The 5 per cent to be ceded by the FG can be set aside for equalisation transfers to cater for any shortfall to a state under the new model.”
A central debate revolves around the proposal for a derivation-based VAT model, which would shift tax revenue allocation to states where goods and services are actually consumed rather than where companies are headquartered.
This proposal aims to better reflect economic activity within each state and foster fairer distribution of tax revenues across the nation.
