Lagos, Nigeria — The Presidential Committee on Fiscal Policy and Tax Reform (FPTR) has submitted a proposed Personal Income Tax Bill aimed at overhauling the country’s tax system, particularly for high-income earners. This legislative initiative seeks to eliminate the Consolidated Relief Allowance (CRA) and introduce a new 25% tax rate for individuals earning more than N50 million annually.
Key Features of the Proposed Tax Bill
The new bill proposes several key changes designed to simplify the tax structure and ensure a fairer distribution of the tax burden. Notable sections of the bill include:
- Section 28: Defines eligible deductions that taxpayers can use to reduce their taxable income.
- Section 30: Clarifies what constitutes chargeable income and the specific conditions for deductions.
- Section 56: Outlines tax rates for companies, including those applicable to sole proprietorships and individual businesses.
- Section 58: Refers to the Fourth Schedule, which specifies individual income tax rates.
Changes to Tax Calculation
Under the existing system, salary earners could deduct certain allowances before calculating their personal income tax, including the CRA, which allowed for a deduction of 20% of gross income plus an additional N200,000. For example, an individual with an annual salary of N6 million could deduct N1.4 million, reducing their taxable income to N4.6 million.
The current Pay-As-You-Earn (PAYE) system utilizes a graduated tax scale as follows:
- 7% on the first N300,000
- 11% on the next N300,000
- 15% on the next N500,000
- 19% on the next N500,000
- 21% on the next N1.6 million
- 24% on the next N3.2 million
This structure results in an approximate tax payment of N896,000 for someone earning N6 million annually.
Proposed Tax Rates and Deductions
The proposed system seeks to eliminate the CRA formula, streamlining the process while retaining statutory allowances. Additionally, a rent allowance of N200,000 or 20% of rent (whichever is lower) will be included.
Under the new proposal, for an individual earning N6 million annually, the tax payable would be approximately N870,000, slightly lower than the current system. The new graduated tax scale would be as follows:
- 0% on the first N800,000
- 15% on the next N2.2 million
- 18% on the next N9 million
- 21% on the next N13 million
- 23% on the next N25 million
- 25% on the next N50 million
For someone earning N6 million annually, the first N800,000 would be tax-free, leaving N5.2 million to be taxed. The next N2.2 million would incur a 15% tax, followed by 18% on the remaining amount.
Impact on Different Income Levels
The analysis indicates that the proposed tax system would lower tax burdens for Nigerians earning less than N1,450,000 monthly (assuming statutory allowances are not deducted). For instance, individuals earning the national minimum wage of N70,000 monthly would see their tax liability drop to N500 from N3,326 under the current system. Those earning below the minimum wage would be exempt from taxes. Conversely, individuals earning N250,000 monthly would face a slight decrease in tax, from N29,100 to N27,500.
Higher Taxes for High-Income Earners
Taiwo Oyedele, chairman of the FPTR committee, emphasized the implications for high-income earners. Nigerians earning more than N50 million annually (approximately N4.4 million monthly) will see significant increases in their tax liabilities. The analysis shows that individuals earning above N3 million monthly would incur effective tax rates exceeding 20%, a notable increase compared to the current system, where no individual pays more than 20% in effective taxes.
Conclusion
The proposed Personal Income Tax Bill represents a significant shift in Nigeria’s fiscal policy, focusing on equitable taxation and addressing income disparities. By restructuring tax rates and eliminating outdated allowances, the government aims to create a fairer system that ensures those who earn more contribute appropriately to the nation’s revenue, while also providing relief for low- and middle-income earners. The outcome of this proposal will be crucial in shaping Nigeria’s economic landscape and enhancing the effectiveness of its tax system.