By Dolapo Temitayo Lawal
For decades, Nigeria’s fiscal debate has been dominated by a paradox: a country with vast economic potential but persistently weak domestic revenue mobilisation, alongside deep and widening inequality. At the heart of this contradiction lies a tax system that has historically been narrow, regressive, and poorly aligned with the principles of equity and efficiency that underpin sustainable development. The recently enacted Nigeria Tax Act (NTA) 2025, effective from January 2026, represents a significant attempt to correct these structural flaws.
While no tax reform is without risk, the Act gets several fundamental things right from an equity and public finance perspective.
First, from a macro-fiscal standpoint, Nigeria’s starting point is troubling. According to International Monetary Fund (IMF) estimates, the country’s tax-to-GDP ratio stood at approximately 9–10 per cent in recent years, placing it among the lowest globally and well below the 15 per cent threshold widely regarded as the minimum for effective state capacity. World Development Indicators (WDI) data further show that this weak revenue performance has coexisted with a Gini coefficient persistently above 35 and multidimensional poverty affecting over 60 per cent of the population. As Nobel laureate Joseph Stiglitz has argued,
“The true test of a tax system is not how much it raises, but how fairly it distributes the burden and what it enables society to provide.”
Judged against this benchmark, Nigeria’s system has historically struggled to deliver fair outcomes, reinforcing inequality and constraining redistributive spending. Since independence in 1960, public revenue has been overwhelmingly shaped by oil rents rather than broad-based taxation. During the oil boom years of the 1970s, petroleum revenues accounted for over 80 percent of government revenue, while non-oil taxes remained marginal. Even in the post-2000 democratic era, when oil prices recovered, Nigeria’s tax effort lagged behind peers.
Between 2000 and 2014, Nigeria’s average tax-to-GDP ratio remained below 7 per cent, compared with over 15 percent in countries such as South Africa and Kenya. During this period, indirect taxes and levies expanded faster than personal income taxation, disproportionately burdening lower-income households. This dependence weakened incentives to build an equitable tax system and entrenched a fiscal structure in which redistribution relied on volatile commodity earnings rather than progressive taxation.
Against this backdrop, the most commendable feature of the new tax law is its explicit embrace of progressive taxation. The restructuring of personal income tax bands, particularly the exemption of individuals earning N800,000 or less annually marks a decisive shift away from a system in which low-income earners were disproportionately exposed to formal and informal tax burdens. By increasing marginal tax rates for higher-income brackets, the Act aligns more closely with the ability-to-pay principle, a cornerstone of optimal tax theory and vertical equity. In practical terms, this reform reduces the tax wedge on low-income labour while enhancing the re-distributive capacity of the state.
Equally important is the law’s treatment of small and medium-sized enterprises (SMEs). In doing so, raising the corporate income tax exemption threshold from N25 million to N50 million in annual turnover, the Act recognises the central role of SMEs in employment generation and income distribution. From a development economics perspective, this provision helps lower entry barriers to formalisation, reduces compliance costs, and mitigates the asymmetry between large, capital-intensive firms and smaller, labour-intensive enterprises. In an economy where informality dominates and unemployment remains structurally high, such measures are essential for inclusive, job-rich growth.
The rationalisation of Value Added Tax (VAT) under the new regime is another area where equity considerations are evident. VAT is widely recognised in public finance literature as a regressive tax instrument, particularly in low-income economies where consumption constitutes a higher share of household income. By exempting or zero-rating essential goods and services such as basic food items, education, healthcare, and public transportation, the Act introduces deliberate distributional safeguards. While VAT rates may increase gradually, the protection of essentials ensures that the real incidence of the tax does not fall disproportionately on poor households. This design choice reflects an understanding of tax incidence rather than a blunt revenue-maximisation approach.
Beyond rates and thresholds, the Act’s consolidation of multiple tax statutes into a unified framework addresses long-standing inefficiencies in tax administration. Fragmentation has historically increased compliance costs, encouraged arbitrage, and weakened enforcement. The new framework strengthens the capacity of tax authorities to broaden the tax base, reduce avoidance, and improve horizontal equity—the principle that individuals and firms with similar economic capacity should face similar tax obligations. The introduction of minimum effective taxation for large corporations and clearer definitions of taxable income directly targets base erosion and profit shifting, issues repeatedly flagged in IMF country reports on Nigeria.
However, taxation is only one side of the redistribution equation. The inequality-reducing impact of any tax system depends critically on how revenues are spent. Data indicates that Nigeria’s public expenditure on education and health, as a share of GDP, remains below regional averages, limiting the redistributive effect of fiscal policy. Economic theory and empirical evidence are unequivocal: progressive taxation must be complemented by pro-poor public expenditure to meaningfully reduce inequality. Without disciplined expenditure prioritisation, the gains from improved revenue mobilisation risk being dissipated.
Similarly, there is also a political economy dimension that deserves emphasis. Tax compliance is endogenous to trust in public institutions. Studies by the World Bank and IMF consistently show that citizens are more willing to comply when taxation is perceived as fair and when public services are visibly improved. In this regard, the establishment of a Tax Ombudsman and strengthened dispute resolution mechanisms under the new law are not peripheral reforms; they are central to rebuilding the fiscal social contract.
In sum, Nigeria’s new tax law gets the fundamentals right. It moves the system in a more progressive direction, reduces the burden on low-income earners and small businesses, embeds equity safeguards within consumption taxation, and strengthens enforcement against high-income and corporate tax avoidance. These features align with best practices in fiscal policy design and offer a credible pathway toward a more inclusive growth model. Yet, laws do not implement themselves.
The real test of the Nigeria Tax Act will lie in administrative capacity, political will, and the transparent use of revenues to finance social investment. If these conditions are met, taxation can evolve from a narrow revenue-raising exercise into a strategic instrument for equity and development. If not, the reform risks joining a long list of well-designed policies whose promise was undermined by weak execution. The choice, as always, lies not in the text of the law, but in how seriously we choose to implement it.
Lawal is a post-graduate student of the Department of Economics, University of Ibadan.
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