Taxation and Development In Nigeria

Nigeria, the largest economy in Africa¹, is at an important point of economic development as the country’s economy hinges on the reform of the tax bills. Taxation is the heartbeat of any modern economy. Nigeria appears to realize this, especially now that economic recession is depleting most countries’ reserved wealth and also the stop of aid from the United States of America to countries in need of aid.

Taxation is a weapon used by any government to share the wealth of individuals, communities, families, and corporate bodies. It is a mandatory imposition and not allowed to be voluntary². Basically, every country in the world uses taxes. A country cannot do without collecting taxes to boost its revenue generation. All taxes in Nigeria are imposed by the federal and state governments, which have constitutional backing. The tax system plays an important role in economic growth, but there’s a wide gap between policy and implementation. 

Research has shown that Nigeria has one of the lowest tax-to-GDP in the world, averaging around 9.4% (IMF 2023)³. This indicates a challenge in revenue mobilization, which is important for funding public services and infrastructure. Nigeria’s tax system has been criticized for its inefficient tax administration, loopholes, corruption, lack of transparency, and distrust of the tax system⁴.

The Nigerian Tax System 

The Nigerian tax system is well structured legally, mandating statutes for tax establishment and administrative bodies. These laws determine tax rates on income, profits, and transactions, adjusting to economic conditions. Nigeria’s governance mirrors this structure, decentralizing tax administration across the federal, state, and local levels. The Federal Inland Revenue Service (FIRS) manages federal taxes such as Companies Income Tax and Value Added Tax. State Boards of Internal Revenue oversee Personal Income Tax, while Local Government Revenue Committees are in charge of local levies. The joint tax board harmonizes tax efforts and advises on amendments. Tax administration includes taxpayer registration, assessment, returns processing, and collection. Authorities assess taxes and can reassess based on tax statutes. Taxpayers are required to file returns periodically. Collection occurs post-assessment through methods set by the authority. Compliance monitoring and enforcement ensure adherence to tax laws. Effective tax administration encompasses these processes, ensuring both efficacy and efficiency⁵.

Critical Challenges in Nigeria’s Tax Eco-System 

Nigeria’s tax system faces a lot of challenges that hinder its effectiveness and potential contribution to the nation’s development. These challenges span from structural to administrative inefficiencies and compliance problems; also, historically, the tax system faced challenges of the lack of readily available tax statistics in the country despite the fact that taxation can be traced back to 1914 as the oldest government activity⁶⁷⁸. Just a few of the states, such as Delta, Lagos, and Kaduna, alongside the custom services, maintain good data management⁹¹⁰. 

A few others exhibit serious data failures, lacking routine collation, analysis, storage, easy retrieval of the limited available data, hindering effective policy process⁹¹¹. Nigeria’s tax system is undermined by a revenue allocation system that neglects tax efforts, poor tax administration due to limited resources, negative attitude of tax collectors, discouraging proactive revenue drives, and increasing dependence on volatile oil revenues. A lax of trusts, digitization concerns, and a flawed revenue allocation system exacerbate Nigeria’s tax challenges, leading to tax evasion, avoidance, noncompliance due to VAT administration issues, mismanagement, obsolete laws, and a significant informal sector.

Foundations of Fiscal Success: Taxation’s Role in Nigeria

Strong tax administration and clear policy objectives are crucial for a country’s financial stability. Nigeria’s tax system evolved through precolonial, colonial, and post-independence eras, with each phase having different structural priorities¹². Effective tax administration ensures prompt and accurate revenue collection and builds trust, which enables businesses to register and expands the tax base¹³¹⁴.

Tax Structures in Nigeria: Direct and Indirect Taxation

The Nigerian tax system contains both direct and indirect taxation, each of which has its unique implications for economic growth¹⁵. Direct taxes, such as company income tax (CIT) and personal income tax (PIT), are placed directly on income and profits made. Indirect taxes, like value-added tax (VAT) and customs duties, are placed on goods and services. Direct taxes can influence investment decisions and income distribution, while indirect taxes have a high influence on consumption patterns and government revenue. Finding the right mix of direct and indirect taxes is essential for promoting sustainable economic growth. 

National Tax Policy and Reforms: An Assessment 

Nigeria has introduced various tax reforms and policies designed to improve revenue generation and promote economic development¹⁶¹⁷. The National Tax Policy (NTP) provides a framework for tax administration and reform. Analyzing the effectiveness of these reforms shows a mix of successes and shortcomings. 

While certain reforms have successfully boosted revenue collection, gaps in implementations and enforcement remain significant obstacles. Factors such as tax evasion, corruption, and insufficient infrastructure continue to weaken the effectiveness of tax policies on economic growth. To bridge gap between policy formulation and execution in Nigeria’s tax system, it is important to address these deficiencies. 

Bridging the Gap between Policy and Implementations: Recommendations. 

To enhance Nigeria’s tax system, improve revenue generation, and ensure better compliance, several important recommendations can be implemented. These reforms are key to creating a more effective tax framework that supports economic development with fairness and efficiency. 

Tax reforms are one of the most important of them all. The Nigeria Tax Bill (NTB) proposes significant changes, part of which includes a reduction in corporate income tax rate from 30% to 25% over two years and exempting small-scale companies with annual revenue below N50,000,000 from CIT. Also, removing the minimum tax for loss-making companies could stimulate growth in surviving sectors, allowing businesses to invest¹⁸.

A phased increase in Nigeria’s Value Added Tax (VAT) rate to 12.5% by 2026 and 15% by 2030 is essential for aligning with ECOWAS standards. This adjustment, coupled with simplified VAT refund processes that ensure refunds are issued within 30 days without audits, will alleviate cash flow pressures on businesses and foster a more favorable trade environment. Additionally, reforming the Personal Income Tax (PIT) system by revising brackets and rates based on income levels will promote equity, ensuring that higher earners contribute a fairer share to the tax system¹⁹.

Embracing technological adoption and digitization in Nigeria’s tax administration is essential for enhancing efficiency and compliance. Implementing electronic remittances and online filing systems will simplify processes for taxpayers while developing robust databases and utilizing software for electronic audits, which will reduce administrative burdens. Building trust between citizens and the government is crucial for improving tax morale, achieved through engaging in discussions about tax policies. Legislative action is necessary to support these reforms, modernize the system, and enhance compliance. Additionally, increasing funding for tax authorities and restructuring them can streamline operations. Addressing specific tax issues, such as zero-rating essential goods, will alleviate financial burdens on low-income families²⁰).

These recommendations aim to create a more effective tax system that fosters economic growth and investment.

Conclusion

The development of taxation in Nigeria spans three eras: precolonial, colonial, and post-colonial. In the precolonial era, taxation was largely informal, with Northern Nigeria employing structured direct taxes under the Fulani rulers. At the same time, the southern part of the country relied on arbitrary impositions by traditional leaders. The colonial era introduced formal tax legislation, beginning with the Community Tax of 1904 and the Native Revenue Ordinance of 1917, which unified tax systems across regions. After independence, Nigeria faced challenges like political instability and corruption, leading to ineffective tax collection despite various reforms and laws aimed at modernizing the system. Understanding this history is important for addressing current tax policy implementation issues.

About Author

David Taiwo Ogunlade is a goal driven budding lawyer and multifaceted individual with a strong passion for law and leadership. He is an associate member of the Institute of Chartered Mediators and Conciliator. As part of his extracurricular, He’s a member of International Law Student Association, OAU; Clinic for Human Rights, OAU and a member of Amnesty International, Osun State, Nigeria.

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9. Ibid⁶ [↩] [↩]
10. Ibid⁸ [↩]
11. Ibid⁷ [↩]
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15. (2025) Central Bank of Nigeria https://dc.cbn.gov.ng/cgi/viewcontent.cgi?article=1058&context=bullion [↩]
16. Ibid [↩]
17. https://core.ac.uk/download/pdf/234631498.pdf [↩]
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