Nigeria Overhauls Tax System: What It Means for Households and Small Businesses

President Bola Ahmed Tinubu has signed into law a series of tax reforms aimed at modernising Nigeria’s tax system, simplifying compliance, and improving revenue generation without placing an extra burden on vulnerable citizens.

Signed on Thursday at the State House, these reforms consolidate four key pieces of legislation into one cohesive tax code. The new laws include the Nigerian Tax Act, the Nigerian Tax Administration Act, the Nigerian Revenue Service Act, and the Joint Revenue Board Act. Together, they represent a significant shift towards a more people-focused, efficient, and growth-driven tax system.

“We are in transit; we have changed the roads, we have changed some of the misgivings, we have opened the doors to a new economy, business opportunities,” President Tinubu said at the signing ceremony. “Leadership must help people take off, lead the way, and navigate every turn and twist. We must help them reach their destination. That is what we are doing.”

What Has Changed?

Despite earlier proposals to raise the Value Added Tax (VAT) from 7.5 percent to 12.5 percent, the rate remains unchanged. However, its scope has been refined to protect essential goods and services. Items such as food, education, healthcare, public transport, electricity, residential rent, and exports are now zero-rated, helping to ease inflationary pressure and lower the cost of living.

A major highlight of the reform is the shift in how VAT proceeds are distributed. Now, 30 percent will be shared based on consumption, 50 percent equally among states, and 20 percent according to population. The federal government’s share has been reduced from 15 percent to 10 percent, while states will now receive 55 percent, up from 50 percent. Local governments continue to receive 35 percent.

Taiwo Oyedele, chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, said the objective of the reform is not simply to raise revenue. “If you set out to do a reform in an economy like this with the objective of raising more revenue, you are placing the cart before the horse,” he said during an interview on Channels TV. ““If you don’t address how to stimulate economic activities but you want to collect more taxes, you are chasing shadows.”

Oyedele noted that if all goes as planned, Nigeria’s tax-to-GDP ratio could rise from the current 10 percent to as high as 18 to 20 percent by 2026, potentially generating around N50 trillion in today’s terms.

An Overview of the New Laws

• The Nigerian Tax Act: This law simplifies the tax structure by consolidating over 50 smaller, overlapping taxes into one unified code. This change aims to reduce confusion, eliminate duplication, and make tax compliance easier for businesses, especially small and informal ones.
• The Nigerian Tax Administration Act: This sets out uniform rules for tax collection across federal, state, and local governments, reducing conflicts and making the entire system more predictable and consistent.
• The Nigerian Revenue Service Act: Replaces the Federal Inland Revenue Service with an independent Nigeria Revenue Service. The goal is to create a more efficient, autonomous agency to oversee tax administration.
• The Joint Revenue Board Act: Improves coordination between different levels of government. It also introduces new institutions such as a Tax Ombudsman and a Tax Appeal Tribunal to ensure that tax-related disputes are handled fairly and transparently.

Who Benefits?

• Low-Income Households: People earning up to ₦1 million annually (about $650) will now receive a ₦200,000 rent relief, reducing their taxable income to ₦800,000 and effectively exempting them from paying income tax.
  Additionally, individuals earning ₦108,000 or less per month, and households earning ₦250,000 or less, are fully exempt from income tax. For unemployed Nigerians, the tax exemption limit has been raised to ₦50 million from ₦10 million.
  Zero-rated VAT on essential items like food, baby products, healthcare, electricity, education, and rent will help lower the cost of living and ease the financial burden on families.
• Small Businesses: Companies with an annual turnover of less than ₦50 million (around $32,400) are now exempt from company income tax. Small businesses also benefit from simplified filing requirements and no need for audited accounts, reducing both compliance stress and costs.
  A broader category of businesses with a turnover of up to ₦100 million and fixed assets not exceeding ₦250 million are also exempt from various forms of tax.
• Large Corporations: The corporate income tax rate will drop from 30 percent to 27.5 percent in 2025 and to 25 percent thereafter. Businesses will also be able to recover VAT paid on inputs, including services and assets, helping to ease the burden of the 7.5 percent VAT rate.
  Companies will now be subject to a 4 percent development levy on their assessable profits, with the exception of small firms. Additionally, the capital gains tax for companies has been increased from 10 percent to 30 percent.
• Charitable, Educational, and Religious Organisations: Non-commercial earnings of these organisations now enjoy tax incentives, which aim to encourage community-focused and humanitarian work.

Gains for Government and the Public

The new system aims to strike a balance between increasing government revenue and easing the financial pressure on the public. By simplifying the tax regime and broadening the tax base, the government hopes to reduce its reliance on borrowing and fund critical public services like healthcare, education, and infrastructure.

The inclusion of new institutions, such as a Tax Ombudsman and Tribunal, ensures that taxpayers have access to fair treatment and avenues for dispute resolution.

As Oyedele put it, “History will remember [President Tinubu] for good for transforming our country because he went for a fundamental reform.” He praised the president for allowing the committee to work independently, asking only essential questions and providing the support needed to make these far-reaching changes a reality.