Tax reform in Nigeria: Relief for SMEs or revenue risk?

In today’s dynamic world, change is not only inevitable; it is necessary. From healthcare to education, from pension reform to the intricacies of fiscal and monetary policy, societies everywhere are in a constant state of transformation. In this regard, Nigeria’s ongoing tax reform efforts are both timely and essential. But the big question remains: does this reform offer genuine relief to individuals and SMEs, or does it carry hidden risks for government revenue and long-term sustainability?

To answer this, we must trace Nigeria’s tax reform journey, from the colonial era to the modern-day digital economy. Historically, the pre-independence tax system was anchored in native authority structures. The 1917 Native Revenue Ordinance and the 1940 Direct Taxation Ordinance laid the groundwork for formal tax collection. Following independence in 1960, Nigeria has witnessed several reform waves: the harmonisation of income tax in 1978, the introduction of VAT in 1993, the National Tax Policy of 2012, and the 2017 review that prioritised compliance and reduced leakages.

Read also: Tinubu to sign four tax reform bills into law on Thursday

Most recently, the 2023 Presidential Fiscal Policy and Tax Reform Committee under President Bola Ahmed Tinubu proposed a bold suite of reforms aimed at simplifying, harmonising, and modernising the tax landscape. The outcomes include four key bills:

1. Nigerian Tax Bill
2. Nigerian Tax Administration Bill
3. Nigerian Revenue Service Establishment Bill
4. Joint Revenue Board Establishment Bill

Together, these form the backbone of the current reform drive.

The case for relief: Individuals and SMEs

One of the most notable provisions is the tax exemption for individuals earning below ₦800,000 annually: a pragmatic step that puts more disposable income in the hands of low-income earners. For many, this is not just a tax policy; it is the difference between survival and destitution in a high-inflation economy.

Even more significantly, companies with annual turnover below ₦50 million are exempted from corporate income tax. This exemption offers breathing room for Nigeria’s vibrant but often fragile SME sector. These businesses can now redirect capital toward expansion, job creation, and innovation. Over time, this could lead to a broader tax base as these SMEs mature into larger enterprises.

Additionally, a tiered VAT structure places higher taxes on luxury goods and services, sparing essentials and protecting the poor while still boosting government coffers. Large companies will also see a reduction in corporate tax rates, from 30 percent to 27.5 percent, and eventually to 25 percent, which could attract more investment and improve business sentiment.

The revenue risk dilemma

But no reform is without trade-offs. Tax exemptions, however well-intentioned, inevitably reduce short-term government revenue. At a time when Nigeria is grappling with debt, inflation, and fiscal pressure, the loss of revenue from exempt individuals and SMEs may prove challenging.

Moreover, the success of the reform hinges on implementation capacity. Resistance from professionals, inadequate public education on new tax laws, and a general shortage of skilled personnel within the tax ecosystem could hinder the reforms’ intended outcomes. A simplified tax code still requires understanding and compliance and in a country where tax literacy is low, this is no small feat.

Beyond revenue: Wider gains and unintended consequences

Despite its challenges, the reform holds far-reaching potential. If properly implemented, it could boost voluntary compliance, encourage formalisation of the informal sector, and promote fiscal stability. One major win is its linkage to education financing. Under the 2023 reform, 30 percent of TETFUND revenue is earmarked for the newly established Nigerian Education Loan Fund (NELFUND), a game-changing initiative for Nigerian students seeking higher education financing.

Professionals and students alike stand to benefit from improved public infrastructure, better service delivery, and enhanced investment in research and development. Tax reform, when thoughtfully crafted, can serve as a lever for economic transformation—not just a revenue collection exercise.

Read also: National Assembly transmits tax reform bills to Tinubu

Conclusion

In truth, the Nigerian Tax Reform Bill straddles both relief and risk. It provides significant lifelines to struggling individuals and SMEs while asking the federal government to recalibrate its revenue strategies. For the informal sector, it offers much-needed oxygen. For the government, it demands discipline, creativity, and long-term planning to avoid a fiscal crunch.

Rather than resist this reform, Nigerians, especially professionals, students, and business leaders, must rally behind it. With vigilance, policy feedback, and collaborative implementation, the tax reform can become a launchpad for inclusive growth, not just another policy footnote.

Dr. Kingsley Ndubueze Ayozie FCTI, FCA is a Public Affairs Analyst and a Chartered Accountant. He writes from Lagos.