Senate passes harmonised report on tax reform bills

On May 8, 2025, the Nigerian Senate passed the final two of four major tax reform bills proposed by President Bola Tinubu, completing a comprehensive overhaul of the country’s tax system. The bills aim to modernize tax administration, improve revenue generation, and enhance compliance across all levels of government.

Key Provisions of the Passed Bills

1. Nigeria Revenue Service (NRS) Establishment Bill: This bill replaces the Federal Inland Revenue Service (FIRS) with the Nigeria Revenue Service, headed by an Executive Vice Chairman. The NRS will be governed by a board chaired by a non-executive Chairman and will have six Executive Directors representing each geopolitical zone. The cost of collection for the agency has been reduced from 4% to 2% . 
2. Nigeria Tax Administration Bill: This legislation provides a modernized framework for tax collection and compliance, aiming to streamline processes and reduce conflicts within the tax system . 
3. Nigeria Tax Bill 2024: The bill consolidates existing tax laws and introduces reforms, including the retention of the Value Added Tax (VAT) rate at 7.5%. It also allows VAT input claims on fixed assets, overhead costs, and administrative services, which is expected to lower operational expenses for businesses.
4. Joint Revenue Board (JRB) Establishment Bill: This bill creates a formal framework for coordination between federal and state tax authorities, aiming to harmonize tax policies, reduce instances of multiple taxation, and improve taxpayer compliance . 

VAT Sharing Formula

A significant aspect of the reforms is the new VAT sharing formula:

1. Federal Government: 10%
2. States: 55%
3. Local Governments: 35% 

Within the states, the distribution is based on:

1. Equality: 50%
2. Population: 20%
3. Place of Consumption: 30% 

For local governments, the allocation is:

1. Equality: 30%
2. Population: 70% 

This formula replaces the previous “derivation” principle with a “place of consumption” approach, aiming for a more equitable distribution of VAT revenue .

Next Steps

The Senate has established a 15-member harmonization committee, chaired by Senator Yahaya Abdullahi, to reconcile the Senate’s version of the bills with that of the House of Representatives. Once harmonized, the final bills will be forwarded to President Bola Tinubu for assent to become law . These reforms are expected to enhance Nigeria’s tax-to-GDP ratio, which currently stands at 10.8%, and reduce the country’s reliance on borrowing to finance the national budget .