Proposed Tax Reforms as Elixir for Nigerian Capital Market
The proposed tax reforms promise a significant boost to the Nigerian capital market, serving as a catalyst for economic growth and market development. The capital market in Nigeria has historically played a crucial role in the country’s economic progress, funding government deficits, enabling company expansions, and creating opportunities for long-term savings and wealth creation.
Despite these contributions, the Nigerian capital market remains relatively small, comprising less than 20% of the nation’s GDP, limiting its impact on economic development. In comparison to other emerging markets like South Africa, with a more extensive issuer base and a robust equity market, the Nigerian market’s concentration poses risks. Major companies like Dangote Cement, Airtel, and MTNN dominate with significant market capitalizations.
Poor savings mobilization, often due to low disposable income, also constrains capital market growth. With fewer than five million retail investors in a large population, the market participation is low, highlighting high exclusion rates and a large informal economy sector.
Government intervention, particularly through enabling policies, could spur capital market development. Evidence from other countries like Malaysia and Singapore shows that strategic tax policies can deepen asset classes and attract private sector participation. These policies can include tax exemptions and incentives aimed at various market segments.
The proposed tax reforms by the Nigerian federal government are a positive step towards revitalizing the capital market. Key provisions like Section 56 of the Nigerian Tax Bill 2024 suggest a gradual reduction in corporate income tax rates. From the current 30%, the tax is set to decrease to 27.5% in 2025 and 25% by 2026. This reduction will enhance shareholder wealth and company valuations on the Exchanges.
For small companies, the income tax exemption threshold will increase from a turnover of N20 million to N50 million, with fixed assets not exceeding N250 million. These measures are expected to stimulate business activities and create jobs, which are vital for capital market growth.
Another significant proposal is the adjustment of individual income tax rates. Individuals earning below N800,000 per annum will be exempt from income tax. Current taxation brackets subject income above N3.2 million to a 24% tax rate, but the new bill proposes a 25% tax for income over N50 million. This progressive tax system can potentially increase the retail investor base and bolster the mutual fund industry.
The Bill also aims to simplify tax administration and reduce the number of taxes from over sixty to a single-digit figure, enhancing the ease of doing business and benefiting listed companies’ bottom lines.
Section 164 of the NTB 2024 offers various tax incentives that can uplift the Nigerian capital market. These include tax exemptions on dividends from authorized collective investment schemes, and rental income distributed by real estate investment companies, provided certain conditions are met. Other exemptions cover pension funds and assets under the Pension Reform Act, gains from asset disposal by specific investors, and income from bonds issued by the government.
Such incentives will likely invigorate sectors like securities lending, alternate investments, and encourage more listings on the Nigerian Exchange. Tax incentives are also proposed for priority sectors like agriculture, textiles, manufacturing, and energy which are expected to stimulate more activity and listings in these areas.
However, the proposed VAT increase from 7.5% to 10% in 2025, eventually reaching 15% by 2030, might increase transaction costs in the capital market. Fortunately, items such as basic food, medical products, educational materials, fertilizers, and agricultural seedlings are now classified as zero-rated, allowing recoverable VAT on inputs.
The President has assured that VAT rate proposals will be subject to negotiation, providing some relief to potential concerns.
In conclusion, the Nigerian capital market stands to benefit significantly from fiscal incentives, and the proposed tax reforms could provide the necessary impetus for growth. The implementation of these reforms will serve as an essential elixir, driving the capital market towards a more robust and contributory role in national economic development.
