Patching a leaking vessel: why Nigeria’s new tax bill needs social contract reform

Nigeria’s new tax bill is promoted as a breakthrough for fiscal stability, providing exemptions and streamlined levies aimed at small businesses and households. Yet without deeper reforms addressing Nigeria’s structural issues, this policy is merely a temporary fix. Nigeria’s underlying economic and governance crises will persist unless the informal sector, which comprises over 60 percent of the economy is genuinely engaged, and the fragmented relationship between citizens and the state is rebuilt.

Background and economic context

Nigeria faces complex economic pressures, exacerbated by volatile oil revenues, spiralling inflation, growing public debt, and limited domestic resource mobilisation. Inflation surged beyond 33% in 2024, with food inflation exceeding 40%, severely eroding household incomes (NBS, 2024). Simultaneously, public debt has soared past ₦97 trillion ($108 billion), consuming significant federal revenue for debt servicing (IMF, 2024). Furthermore, annual losses due to illicit financial flows, estimated between $18 and $25 billion further drains resources needed for infrastructure, health, and social welfare (UNCTAD, 2020), in addition to the informal and artisanal mining sectors whose activities remains largely unregulated, thereby significantly contributing to these illicit flows.

On the other hand, and critically so, Nigeria’s tax to GDP ratio remains among Africa’s lowest at 6-8%, insufficient to fund essential public services or infrastructure (OECD, 2022). This criticality considers the fact that for a diverse country of over 200 million people, equitable and effective tax systems are crucial, not just for economic stability but for social cohesion, government legitimacy, and nation building. As such, a robust domestic revenue system would invariably enable investments that strengthen national resilience and reduce reliance on external debt and unpredictable aid.

The promise and limits of the new tax bill

The 2024 tax bill offers several important changes aimed at simplifying Nigeria’s complex tax regime and providing targeted relief to smaller businesses and households. Small companies with an annual turnover up to ₦100 million are now exempted from corporate income tax, capital gains tax, and the consolidated development levy. Medium-sized enterprises also benefit from a reduced corporate income tax rate, and the exemption threshold for personal income tax has been raised alongside targeted relief in value-added tax (VAT). Additionally, the bill consolidates numerous previously scattered levies into one unified development levy and introduces significant digitalisation efforts through the newly established Nigeria Revenue Service.

Despite these commendable positive measures, substantial structural gaps and limitations remain unaddressed. Citizens and businesses continue to grapple with overlapping federal, state, and informal taxes. Lagos, as a clear example, illustrates these complexities vividly. A typical Lagos transport operator faces multiple layers of levies: federal VAT, state-imposed road taxes, and daily informal levies by transport unions and local touts. These cumulative costs severely undermine business profitability and sustainability, exacerbating precariousness for informal workers and heightening public mistrust toward government institutions (The Guardian Nigeria, 2023; Sahara Reporters, 2021). For many Lagosians, such compounded financial pressures threaten their daily livelihoods and long-term economic stability.

Moreover, the new bill perpetuates an informality bias by primarily benefiting formally registered entities while largely neglecting informal economic actors. With over 60% of Nigeria’s workforce operating in the informal sector, this oversight further entrenches economic exclusion and limits prospects for genuinely inclusive growth. The persistent marginalisation of the informal sector reinforces barriers to formalisation and leaves a significant portion of the population outside government support systems.

Underlying these issues is a fragmented social contract marked by deep trust deficits. Many Nigerians perceive taxes as a mechanism of extraction rather than a reciprocal relationship with their government. Ongoing corruption, inadequate public services, and pronounced elite privileges intensify public disillusionment and undermine willingness to comply voluntarily with tax obligations. As a result, the legitimacy of state governance is weakened, further complicating effective fiscal management and national development efforts.

Recommendations: building a resilient social contract

To ensure meaningful and equitable reform, Nigeria must:

• Harmonise tax regimes: Align federal, state, and local taxes to reduce overlapping burdens and simplify compliance. Harmonisation will ease business operations and enhance overall tax collection efficiency.
• Engage the informal sector: Provide incentives like microcredit, insurance, and infrastructure support to encourage voluntary formalisation. Inclusive policies that reflect informal realities can integrate these critical economic actors into the formal economy.
• Leverage local networks: Partner with market associations and community organisations to deliver tailored tax education and compliance assistance. Utilising trusted local structures increases transparency and voluntary compliance.
• Enhance transparency and accountability: Regularly report on revenue allocation and outcomes, and establish effective grievance mechanisms to rebuild public trust. Transparent governance is essential to enhance legitimacy and foster civic trust and engagement.
• Address illicit financial flows: Tackle economic crimes and enforce transparency, particularly in extractive sectors, to reclaim resources essential for development. Mitigating these losses can significantly boost domestic revenue availability.

Ultimately, true transformation requires more than statutory reforms; it demands rebuilding trust, inclusivity, and mutual accountability. Only by integrating the informal sector, harmonising tax governance, and visibly translating taxes into public goods can Nigeria’s new tax framework truly succeed.

Conclusion

The promise of Nigeria’s new tax bill will remain unfulfilled without confronting deeper governance and structural challenges. Genuine reform demands bridging the divide between formal and informal sectors and rebuilding the fractured social contract. Until citizens clearly see their taxes reflected in public goods, formal reforms will continue to yield limited results. To move from symbolic to substantive change, Nigeria must reimagine taxation not merely as revenue extraction but as the foundation of inclusive, equitable, and sustainable national development.