Climbing Nigeria’s Tax Ladder: How It Impacts You and Your State, By Abidemi Adebamiwa

Nigeria’s proposed tax reforms bring significant changes to how income, business profits, and state revenues are taxed. These reforms aim to simplify the tax system while making it fairer for everyone. Let’s break it down together and see what these changes mean for you.

Picture this: your income is like a staircase, and as you climb higher, each step represents a portion of your earnings. Only the money on each step is taxed at its specific rate. For example, if you’re earning ₦2.5 million, the first ₦800,000 is completely tax-free (0%). The next ₦1.4 million is taxed at 15%, and the remaining ₦300,000 is taxed at 18%. This ensures that as you earn more, you pay more—but only for the part that’s on the higher steps. This way, higher earners contribute more to public services, while those with lower incomes are protected.

Now let’s talk about businesses. Imagine you run a small shop making less than ₦50 million a year—good news, you don’t pay any corporate tax! This rule is here to help smaller businesses grow without heavy tax burdens. But if your business is booming and earns more, taxes kick in based on your profits. This ensures fairness and helps fund the schools, roads, and services that support everyone, including your business.

For businesses investing in innovation, there’s a great incentive. Companies can deduct up to 5% of their turnover for research and development (R&D) expenses. This deduction not only helps businesses innovate but also ensures they give back to the economy when commercializing their new products or services.

Now, imagine VAT revenue as a delicious pie. The Federal Government gets the smallest slice—10%, while the States take the largest slice—55% and Local Governments enjoy a 35% share. Let’s put it in numbers. If ₦100 billion in VAT is collected, the Federal Government keeps ₦10 billion, the States share ₦55 billion, and Local Governments get ₦35 billion.

Here’s where derivation kicks in. Imagine Lagos generates ₦30 billion in VAT out of the ₦100 billion total. Under the derivation principle, 60% of the ₦55 billion allocated to states, which is ₦33 billion, is shared based on where the VAT was generated. So, Lagos would get ₦9.9 billion (30% of the ₦33 billion), while a state like Yobe, generating just ₦2 billion, would receive ₦660 million (2% of the ₦33 billion).

To make this clearer, imagine another hypothetical scenario. If Kano generates ₦10 billion in VAT, it would receive 10% of the ₦33 billion derivation pool, amounting to ₦3.3 billion. Similarly, a smaller state like Ebonyi, generating ₦1 billion, would receive ₦330 million from the derivation share. However, the remaining 40% of the state allocation, or ₦22 billion, is distributed equally or based on equity factors like population, ensuring states like Yobe or Ebonyi still get enough to fund schools, hospitals, and infrastructure.

This balance ensures that economically active states like Lagos and Kano are rewarded for driving growth, while less active states like Yobe and Ebonyi still receive enough support to meet essential needs. It’s a system that combines rewards for hard work with a safety net to ensure every state thrives.

For individuals, these tax brackets ensure that people earning less keep more of their income. For businesses, they create room for growth while encouraging compliance. For states, they provide incentives to boost local economies while ensuring fairness in revenue distribution.

Tax systems can seem complicated, but at their heart, they’re about fairness and ensuring everyone contributes their share. Whether you’re a student dreaming of your first job, a shop owner looking to expand, or a state government managing resources, these reforms aim to build a stronger, more inclusive future. What do you think? Let’s discuss how these changes might impact you!