Nigeria: Tax Breaks for Nigeria’s Lowest Earners as Fiscal Reforms Aim for Equity

In a landmark move to alleviate the financial burden on Nigeria’s lowest earners, Taiwo Oyedele, Chair of the Presidential Fiscal Policy and Tax Reform Committee, announced that individuals earning minimum wage or just above it will be exempt from Pay As You Earn (PAYE) tax under proposed fiscal reforms. Oyedele shared this update on Monday via his X (formerly Twitter) handle, clarifying key aspects of the tax reform bills currently before the National Assembly.

This initiative is part of a comprehensive tax reform agenda spearheaded by President Bola Tinubu, comprising four key bills: the Nigeria Tax Bill 2024, the Tax Administration Bill, the Nigeria Revenue Service Establishment Bill, and the Joint Revenue Board Establishment Bill. These bills aim to simplify compliance, boost revenue collection, and address systemic inefficiencies. However, they have sparked heated debate within legislative chambers.

Relief for Workers and a Fairer Tax Structure

Under the proposed reforms, low-income earners, previously pushed into higher tax brackets due to inflation, will benefit from adjustments to income bands and reduced effective tax rates. Oyedele explained that workers earning up to ₦1.7 million monthly will see lower PAYE obligations, while those on minimum wage will be entirely exempt. Approximately 98% of the workforce, spanning both public and private sectors, will benefit, with only the top 2%—high-net-worth individuals—facing a marginal tax increase of up to 25%.

Streamlining Consumption Taxes

A major aspect of the reform is the elimination of most state-level consumption taxes, consolidating them under the Value Added Tax (VAT). Oyedele highlighted that duplicative consumption taxes across states have exacerbated the financial burden on individuals and businesses, creating what he described as “multiple taxation.” By making VAT the sole consumption tax, the reforms aim to simplify compliance and enhance efficiency.

Controversy Over VAT Revenue Distribution

One contentious element of the reform is the proposed derivation-based VAT distribution model. Under this framework, VAT revenue would be allocated based on where goods and services are consumed, rather than where companies are headquartered. While this model is designed to incentivize economic activity across states, critics argue that it may reduce immediate revenue streams for states with high corporate concentrations.

To mitigate potential losses, Oyedele suggested allocating 5% of the Federal Government’s VAT share for equalisation transfers, ensuring states do not experience revenue shortfalls during the transition.

A Pivotal Debate in Nigeria’s Fiscal Future

These reforms promise widespread benefits, including tax relief for the majority of workers, streamlined tax processes, and a more equitable VAT distribution system. However, the National Assembly remains deeply divided, with significant debate over the long-term implications of the derivation model on state-level revenues and Nigeria’s broader fiscal framework.

As discussions continue, the proposed reforms represent a critical step toward modernizing Nigeria’s tax system, fostering economic equity, and promoting fiscal sustainability across the country.