Nigeria’s proposed tax reform seen curbing inflation
As Nigeria embarks on a new phase of economic reform, President Bola Tinubu’s administration has turned its attention to overhauling the country’s tax system. Having already implemented bold policies, such as ending a costly petrol subsidy and devaluing the currency twice within his first year in office, Tinubu is now focused on reforming tax structures to drive economic stability.
One of the key goals of this reform is to tackle Nigeria’s soaring inflation, which stood at 34.8% in December, with the ambitious target of reducing it to 15% by the end of the year. However, while the administration argues that these changes will ease financial pressure on households, critics fear they could exacerbate economic hardship for many Nigerians.
A Plan to Reshape Taxation in Nigeria
At the heart of the proposed overhaul is a significant change to the value-added tax (VAT) system. The government plans to nearly double the VAT rate to 12.5% by 2026 while simultaneously restructuring how the tax is collected and distributed. A key component of this plan is to exempt essential goods such as food, medicine, and other necessities—items that account for 82% of household spending—from VAT altogether.
Taiwo Oyedele, a presidential adviser on tax reforms, has sought to reassure Nigerians that the policy will not place undue strain on their finances. He insists that the majority of households will actually see a decline in prices for essential goods, as VAT will no longer apply to them. “Only 18% of goods will experience price increases,” Oyedele stated in a recent interview, arguing that the overall impact will be beneficial to most consumers.
Nigeria currently has one of the world’s lowest tax-to-GDP ratios, standing at around 10.8%. This has forced the government to rely heavily on borrowing to fund its budget. By improving tax compliance and aligning Nigeria’s tax system with global standards, Oyedele believes the reform will create a more sustainable revenue model. He also acknowledged that the proposed VAT exemptions could lead to a 30-40% reduction in tax revenue but stressed that this would still be preferable to the estimated 60% decline the government faces if the current VAT system remains unchanged.
Growing Opposition and Economic Concerns
Despite the administration’s assurances, scepticism remains high among economists, business leaders, and state governors. Some analysts argue that increasing VAT could weaken consumer spending and stifle industrial growth. Adewunmi Emoruwa, CEO of public strategy firm Gatefield, has warned that the proposed changes could follow the pattern of a similar VAT increase in 2019, which placed additional strain on businesses and households. “The government is putting pressure on people’s ability to spend,” Emoruwa cautioned.
One of the most contentious aspects of the reform is the proposal to alter the revenue-sharing formula between federal and state governments. Under the current system, only 20% of VAT revenue is allocated to the states where it is generated. The new plan seeks to increase this share to 60%, a move that has sparked strong opposition, particularly from Nigeria’s northern governors, who argue that it could deepen regional inequalities.
In response to these concerns, Oyedele indicated that the federal government would not stand in the way of a counter-proposal from state governors, which suggests capping revenue-generating states’ shares at 30%. This compromise could ease tensions, but disagreements over revenue allocation are likely to persist.
What Lies Ahead?
As Nigeria moves towards implementing these tax reforms, the government faces the challenge of balancing economic stability with the need to ease financial pressures on its citizens. While the administration believes the new VAT system will ultimately reduce inflation and create a more efficient tax framework, critics argue that increasing taxation in an already struggling economy could do more harm than good.
The coming months will be crucial in determining whether these policies can deliver the intended benefits or if they will trigger further economic difficulties for Nigerians. One thing is certain: the debate over taxation and economic reform in Nigeria is far from over.