Nigeria Tax Reforms – Review Of Value Added Tax Legal Framework: Raising The Bar, Expanding The Leakages

Introduction

Nigeria's public debt profile continues to expand at a geometric rate, while growth in fiscal revenue lags significantly. This widening fiscal imbalance is evident in the 2025 Federal Government budget. The projected revenue barely covers recurrent expenditure and debt service obligations. The entirety of the capital expenditure for 2025 is to be financed through borrowing. It is no longer tenable that the country will continue to rely solely on debt to finance public infrastructure.

The Nigeria's public debt stood at N133.0 trillion¹ by 31 December 2024, almost seven times the total aggregate revenue (N19.6 trillion)² that accrued to the Federal Government in that same year. The gap between debt stock and revenue generation highlights the urgency for a decisive fiscal strategy to restore normalcy.

Possibly in response, President Bola Ahmed Tinubu set up the Presidential Fiscal Reforms and Tax Committee (the Committee)³, under the leadership of Mr. Taiwo Oyedele, to review all tax laws. This was in the expectation that the outcome would accelerate fiscal revenue generation.

This article reviews the amendments proposed by the Committee to the Value Added Tax (VAT) legal framework as approved by the National Assembly. The approved final version contained in the Nigeria Tax Bills, 2024 (the Bill) would soon be signed into law by the President. The main thrust of this article is to evaluate the likely impact of the amendments to the VAT legal framework on revenue generation. The concluding part provides suggestions on how to quickly address any unexpected outcome when the law takes effect.

Reforms in the VAT legislation

Chapter Six and Part IV of the Bill⁴ contain the proposed legal framework for VAT. The three major changes in the Bill which would affect compliance and revenue generation are as follows:

1. Input VAT – The Bill reinstated recovery of all input VAT incurred in generating output VAT:
   1. "A taxable person shall pay VAT to a supplier on the taxable supply made to the person.
   2. The VAT paid by a taxable person under subsection (1) of this section shall be known as input VAT."

2. Reintroduction of zero-rated VATable items – Zero-rated VATable items were expunged from the VAT Act in 2007. Some of the items that are classified as VAT-exempt have now been placed as zero-rated. The key distinction between zero-rated and exempt items is that suppliers of the former are eligible to claim refunds of input VAT incurred to supply of zero-rated VATable items.
3. Withholding VAT at source – The Bill retains the system of withholding VAT at source for governmental bodies and non-resident suppliers. (The inclusion of non-resident companies among those that can act as collection agent is a new development.) The Bill also empowers FIRS to appoint other companies or any other taxable person as agents of collection.

It is important to note that several historical provisions in Nigeria's VAT framework– such as the discrimination in input VAT recoverability, cancellation of zero-rated items and appointment of non-governmental entities to act as collection agent - were some of the deliberate measures put in place to block leakages. They were effective in enhancing growth in revenue generation from VAT. Interestingly, the modified VAT system was one of the reasons that taxpayers cited to oppose earlier attempt to increase VAT rate. It was argued that Nigeria cannot be practicing modified VAT system and still have rate that reflects international standard.

The Committee has, therefore, recommended a phased increase in the VAT rate over five years from 7.5% to 15%, while introducing proper VAT system. This measured approach was intended to balance revenue generation objective with the need for stakeholders' buy-in and gradual economic adjustment.

However, the National Assembly reasoned otherwise. They opposed increase in VAT rate (currently at 7.5%) but accepted a proper non-modified VAT system. They inadvertently approved reintroduction of provisions that were hitherto expunged to block loopholes without permitting increment in VAT rate that would have compensated for the potential leakages. As a result, there is every likelihood that the expected fiscal revenue from VAT may likely reduce, or at best, remain stagnant, as discussed further below.

Raising the bar, expanding leakages

Over time, Nigeria has progressively amended the original VAT legislation to reflect the country's peculiar situation. However, widespread tax evasion⁵ persists among a significant portion of the taxpayers, driven by a range of factors. Compounding this challenge is the consistent failure of the tax authority to enforce compliance through effective penalties and sanctions.

The current tax reforms have introduced significant changes to raise the standard of Nigeria's VAT system. This is a positive development towards aligning it with international best practices. Unfortunately, the law makers, who are saddled with the responsibility of approving the framework, have reversed a major provision that would have at least maintained fiscal revenue generation while permitting the loopholes! The retention of the VAT rate at 7.5% is antithetical to international best practices. Nigeria would continue to have one of the lowest VAT rates in the world. This may exacerbate fiscal deficit. We have provided further explanation to buttress our position as follows:

1. Full deductibility of input VAT – While the exact scale of Nigeria's informal economy remains unknown, there is evidence that it is substantially larger than the formal sector⁶. Many suppliers of goods and services operate outside the tax net. Although most of the taxpayers in the formal sector welcome the ability to recover their full input VAT against output VAT, the bulk of the input VAT paid to players in the informal sector do not get into the coffers of the Federal Inland Revenue Service (FIRS). Consequently, remittances from the formal sector may decline, because the input VAT recovered from the output VAT and paid to the players in the informal sector may not be remitted. This may ultimately reduce VAT revenue generation.
2. Reintroduction of zero-rated VAT – The bulk of zero-rated products are supplied by those in the informal sector. This sector contributes more than half of Nigeria's Gross Domestic Product (GDP). While suppliers of zero-rated items are not required to charge VAT on their sales, they remain eligible to claim refunds on input VAT incurred. The Bill requires applicant for refund to provide details of beneficiaries of the input VAT in the monthly VAT returns. They are however not required to demonstrate that the input VAT has been remitted to the government. The reintroduction of zero-rating, prior to achieving comprehensive tax coverage, may therefore widen revenue leakages.
3. Withholding VAT at source – Withholding VAT at source is a recognized tool in developing economies to improve tax compliance. This mechanism enables compliant taxpayers to assist tax authorities by collecting and remitting VAT on behalf of vendors, especially those in the informal sector. The FIRS has successfully utilized this approach to curb revenue leakages in the oil and gas industry and recently, among major telecommunication companies.
   
   The proposed VAT framework does not mandate non-governmental taxable entities to withhold VAT at source. This omission represents a significant risk to revenue collection efforts. While the Bill empowers FIRS to appoint agents to withhold and remit VAT, the lack of a broad statutory requirement for withholding VAT among non-governmental entities may compromise the effectiveness of this mechanism in revenue generation.

Weak safety valve

We take note of the efforts of the Committee to minimize tax evasion as much as possible. They had provided that "any expense on which Value Added Tax is due under this Act but was not charged..." would not be deductible for tax purpose {Section 21(p) of the Bill}.

However, it is evident that the Committee may have underestimated the number of taxable persons operating outside the tax net, as well as the ingenuity, creativity and determination of tax evaders to maintain status quo. Consequently, while the introduction of this penalty presents a positive measure to deter tax evasion, it may not be sufficient to ensure full remittance of VAT charged and collected on behalf of the government.

Conclusion

The proposed VAT legal framework in the Bill is a paradigm shift. It raises the standard of VAT law and practice in Nigeria and aligns more with international best practices.

There is however no effective middle ground when instituting a robust tax legislation. The retention of the low VAT rate while simultaneously restructuring the VAT compliance framework to reflect international best practices is contradictory. It is more likely than not that the retained loopholes will lead to reduction in fiscal revenue from VAT as a ratio of Gross Domestic Product (GDP). While the nominal value of collection may increase (due to inflation), VAT-to-GDP ratio will most likely fall. The fall may be significant enough for the government to take corrective action: increase VAT rate or revert to the modified VAT system or in the extreme, implement both.

Based on the above and to enable government take quick corrective action, it is imperative that the key Committee members remain engaged beyond the passage of the Bill. Their continued involvement will be essential in monitoring the implementation and assessing whether the reforms are delivering the intended fiscal and economic outcome. By remaining actively involved, they will be well-positioned to recommend timely and practical amendments through the usual Finance Acts.

Footnotes

1 Debt Management Office (DMO): Nigeria's total public debt portfolios as at December 31, 2024 (https://www.dmo.gov.ng/debt-profile/total-public-debt/5215-total-public-debt-as-at-december-31-2024/file)

2 Nigeria Institute of Social and Economic Research (NISER), Ibadan, Oyo State: Analysis of 2025 Federal Government Budget (https://niser.gov.ng/v2/wp-content/uploads/2025/01/2025-FGN-PROPOSED-BUDGET-NISER-BRIEF.pdf )

3 Presidential Fiscal Policy and Tax Reforms Official Website – (https://fiscalreforms.ng/index.php/about-the-committee/ )

4 National Assembly, Abuja, Nigeria: Nigeria Tax Bills (https://fiscalreforms.ng/wp-content/uploads/2024/12/HB.-1759-The-Nigeria-Tax-Bill-2024.pdf )

5 Only 19% of citizens pay tax in Nigeria - FIRS - Tribune Online, 28 May 2025

6 Over Half Of Nigeria's GDP From Informal Sector, Says Report, Oluwatomisin Amokeoja (forbesafrica.com/current-affairs/2024/07/18/over-half-of-nigerias-gdp-from-informal-sector-says-report/ )

The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.