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Navigating Nigeria Tax Reforms: Implications for SMEs

The Federal Government assent on four new tax legislations represents a deliberate attempt towards resolving a plethora of incessant issues grappling the Nigerian Tax System. Contrary to popular believe that the driving force of the ongoing tax reforms is merely for the expansion of tax revenues, more in-depth research suggest that other motives intended by the FG includes the unification of the Inland Revenue Service in exercise of fiscal discipline, providing clarifications against ambiguities generated by the repealed acts (such as jurisdiction dispute for Withholding taxes between FIRS and SIRS), availing a single reference for all tax laws and making room for provisions that address the complexities of the emerging economy amongst other reasons.  

The impact of these reforms spans multiple stakeholders, cutting across sectors, businesses, investors, and individuals. It affects both local and foreign businesses—large corporations as well as small and medium enterprises—and individuals ranging from high-net-worth to minimum-wage earners. 

Pre-existing tax structure  

Nigeria adopts a multi-tiered and decentralized tax system where each level of government comprising federal, state and local is independently responsible for the administration of taxes within its jurisdiction. At the federal level, the Federal Inland Revenue Service (FIRS) administers key taxes such as Company Income Tax (CIT), Petroleum Profit Tax (PPT), Value Added Tax (VAT), Education Tax, Stamp Duties, Custom Duties and Withholding Tax.  

In parallel, State Internal Revenue Services (SIRS) are responsible for Personal Income Tax (PIT) and Withholding Tax. The local governments on the other hand majorly oversee levies.  Over time, this layered system has become increasingly burdened with inefficiencies, compliance gaps, and informal sector exclusions, prompting urgent calls for reform. 

Catalyst for the 2025 Reform Agenda  

• To increase government revenue: Nigeria Tax-to-GDP ratio happens to be under 10%, indicating ineffectiveness in the existing tax structure.  

• Reduce over-reliance on Oil revenue: With the recent geopolitical instability and renewable energy wave concerns, the government seeks to widen the tax base, penetrate other sectors and diversify the initial concentration on PPT. 

• Expand the Tax Net: The Reform Agenda targets informal and ungoverned aspect of the economy. Coupled with the Finance Act of 2023, the FG eyes untaxed income earned from digital assets etc.  

• Combat Capital Flight and Foreign capital Deterrence: Due to ambiguities arising from the availability of numerous tax legislation, the reform agenda was issued as a panacea against bias, lack of transparency, inequality and ineffectiveness. This is in line to Improve Ease Of Doing Business.  

• Improve Tax compliance and Curb Evasion: By introducing technological capacities such as e-invoicing, e-reporting and other digital tools, to aid tax collection, there is further prevention of leakages from government’s potential revenue stream. 

• Unification of Tax Administration: The Reforms aim to abolish the multiplicity of agencies collecting revenue on behalf of the FG (e.g. Nigeria Custom Service, Nigeria Port Authority, NITDA etc.) and streamline the collection under the NRS. 

• Imposition of taxes on the Digital and Global Economy: By introducing Significant Economic Presence (SEP) rules, the FG hopes to tax expatriate digital services companies who earn from Nigerian customer base. 

• Implementation of a more progressive taxation system: The tax reform targets zero-to-low tax charges on incubatory stage businesses. 

• Reduction of Fiscal Deficit: The FG aims to improve the Debt-to-GDP ratio. Hence, improving the revenue from taxes act as a means to finance its fiscal expenditures without recourse to international borrowing.  

Key milestones of the reform agenda 

• VAT adjustments and CIT exemptions for small businesses.   

• Reclassification of Tax-exempt income threshold.  

• Introduction of Significant Economic Presence (SEP) rules for digital taxation.  

• Issuance of Mandatory Tax Identification Number (TIN) for businesses transactions. 

• Rationalization of tax incentives and deductions 

Strategic objectives of the reform  

The Nigerian tax reforms hopes to achieve the following: 

• Increase Nigeria’s tax-to-GDP ratio from 10% towards the African average (16% –18%) 

• Formalize the informal sector, especially through SME inclusion.  

• Simplify tax compliance and reduce ambiguities in interpretation 

• Promote a fairer, more progressive taxation regime. 

New Statutes the reform introduces  

• Nigerian Tax Act, 2025: This Act consolidates Nigeria’s fragmented tax regime into a single, harmonized statute. It eliminates overlapping taxes, clarifies definitions, reduces compliance duplication, and streamlines provisions relating to income, transactions, and instruments. This act repeals the Company Income Tax Act (CITA), Personal Income Tax Act, VAT Act and Capital Gains Tax Act.  

• Nigerian Tax Administration Act, 2025: This establishes a concise and uniform legal and operational framework for tax administration across the federal, state and local governments. This ensures different tax payment follow common procedures. This system is supported by initiatives such as the National Taxpayer Identification Number (TIN), Electronic Fiscal Systems such as E-invoicing model etc.  

• Nigerian Revenue Service (Establishment) Act, 2025: This establishes the Nigerian Revenue Service as a successor of the Federal Inland revenue Service and also expands power and scope to include both tax and non-tax revenue collection functions. This Act repeals the Federal Inland Revenue Service Act.  

• Joint Revenue Board (Establishment) Act, 2025: This creates the Joint Revenue Board (JRB) to coordinate tax policy and administration across federal, state, and local governments. Key responsibilities include harmonizing tax rates, managing a national TIN database, advising on double taxation matters, and setting up dispute-resolution bodies. JRB replaces the erstwhile Joint Tax Board responsible for administering issues pertaining to Personal Income Tax.  

Key changes in the Nigerian tax landscape  

• Increased exemption threshold for small companies: Formerly, small companies were distinguished from medium and large companies. CITA, later amended by the Finance Act 2019, defined “small companies” as those with Annual Gross Turnover not more than ₦25 million, “medium companies” as those above ₦25 million but not exceeding ₦100 million and “large companies” as those with annual revenue exceeding ₦100 million. Subject to this Act, small companies as defined by the Act, were exempted from company income tax charges, medium companies were taxed 20% and Large, 30%. However, the ongoing tax reforms eliminate the definition of “medium” company and increased the exemption threshold for small companies. Now, Small companies are defined as those with Annual Gross Turnover not exceeding ₦100 million, and are exempt from Company Income tax (CIT), Capital Gain Tax (CGT) and the recently introduced Development Levy.  

• Alignment of the Capital Gain Tax (CGT) with Company Income Tax, by a 20% hike: The Capital Gain Tax (CGT) was increased from 10% to 30% with the introduction of the Tax reforms. This is a deliberate move by the Government to prevent businesses from taking undue advantages of arbitrage arising from the lower CGT than CIT, in attempt to evade tax obligations, through fraudulent misclassifications.  

• Introduction of development Levy: In place of the Tertiary education Tax, there will be a “Development Levy” encompassing Tertiary Education Tax (TET), Information Technology Levy (IT), the National Agency for Science and Engineering Infrastructure (NASENI) levy and the Police Trust Fund (PTF) levy. This development levy is estimated at 4% of the assessable profit. Assessable profit being Tax profits before deducting Tax depreciation and losses. SMEs/Small companies as defined by this act, are also exempted from the Development Levy.  

• Amendment of tax brackets and applicable rates on tax brackets to foster progressive taxation: Individuals earning ₦800,000 or less per annum (Minimum wage earners) will be exempt from Personal income Taxes (PIT) while individuals earning above ₦800,000 will be subject to tax rate of 15% to 25% progressive of their taxable income.  

• Resident vs. non-resident individual: A distinction is struck between the NTA and its predecessor. The definition of “residence” now extends to individuals with substantial economic and immediate family ties in a year of assessment thereby expanding the tax net. Employment income will be taxed in Nigeria only if the individual is resident in Nigeria or performs duties in Nigeria without paying tax in their country of residence. 

• Other transactions liable to income taxes: The NTA classifies transactions such as prizes, winnings, honoraria, grants, awards, profits or gains from transactions in digital or virtual assets as chargeable for personal income tax unlike its predecessor.  

• Introduction of the Tax Ombuds office: The NTA sets up a new office of the Tax Ombuds to be an independent and impartial arbiter in tax disputes. The Tax Ombuds will collaborate with the tax authorities on behalf of taxpayers, and serve as an independent arbiter to review and resolve complaints relating to taxes, levies, duties or similar regulatory charges.  

• Introducing the Economic Development Incentive (EDI): With the passing of NTA, the Pioneer Status Incentive is phased out by the introduction of the Economic Development Incentive. The PSI and the EDI both entail providing specific incentives in terms of tax exemptions to Qualifying Capital Expenditures in certain target sectors. The list of the EDI includes the Renewable Energy Sector, in addition to the PSI lists, but also excludes the telecommunication and e-commerce sector. Other major changes from the PSI scheme to the EDI include that companies under the EDI, unlike the PSI where companies are fully exempted from CIT, are subject to the full obligation of 30% CIT. Likewise the Development Levy and Withholding tax.  

• Research and Development: Research and Development Expenditures can only be regarded as deductible for tax purposes if they are not more than 5% of the turnover. This represents a major deviation from the pre-reform statutes mandating the limitation at 10% of total profits.    

• VAT sharing formula update: The Federal government allocation of Value Added Taxes (VAT) has been reduced to 10% from 15%, while the state and local have been increased to 55% and 35% respectively.  

• The VAT rate of 7.5% remains unchanged. 

• Input VAT recovery: Taxable persons are able to recover fully the Input VAT paid upon purchase of input, by deducting from the Output VAT due to the government, before remitting the balance to the NRS. This is however on condition that the Input is directly related to the output from which the VAT is deducted.  

• Zero-rated Items:  The NTA adds Essential goods such as Basic Food Items, Medical and Pharmaceutical Products, Educational books and Materials, Electricity generation and transmission etc.  

• Adoption of the concept of Minimum Effective Tax Rate (ETR): Section 57 of the NTA provides that when the ETR of a company falls below 15%, such company will be subject to additional tax charges to recoup the ETR up till 15%.  

• Recouping ETR from the Parent company: The Nigerian parent company of a multinational group will have to pay a top up tax where its subsidiaries have paid taxes below the minimum 15% ETR in cases where tax laws are unfavorable to the Nigerian Government (When the Tax rates are externally lower than Nigeria’s, or the tax exemptions are considerably more).  

• Restriction on the tax exemption status of free zone entities: The companies in the Free-Trade Zone will only enjoy tax-exemption on the portion of their exports if the export is: 

• Directly abroad.  

• Selling to a product that will eventually be exported. 

• Selling to an Oil and gas company for Upstream use.  

• Intensified penalties for Non-Compliance: The penalty for failure to file return has been magnified to ₦100,000 in the first month and ₦50,000 every time the failure continues.  

• New penalties: The penalty for awarding contracts to an individual or company yet to register for tax is ₦5,000,000 etc.  

Preserving the SME Ecosystem for later harvest: The FG Agenda  

The SME Ecosystem, although burdened with crucial economic significance, mirrored by constituting 96% of businesses in Nigeria and contributing 48% of the GDP, up until now had their survivability questioned due to the harsh economic realities of the Nigerian business landscape. At the heart of this tax system recalibration is an understated, yet crucial objective: to protect, refine, and eventually harvest the latent power of the Nigerian SME ecosystem. 

This report explores how the 2025 reforms, albeit revenue-driven, subtly embed policy tools that, if well harnessed, will strengthen the SME space — not for immediate taxation, but for future economic resilience, innovation and eventual recourse by the FG.  

Impact of the 2025 Tax reforms on SMEs 

• The tax exemption from Companies Income Tax (CIT) relieves small businesses from early-stage tax pressure, allowing them to channel resources toward operational scaling, market development, and the strategic goal of achieving large company status. 

• SMEs also benefit from the full recoverability of input VAT, improving cash flow and minimizing indirect tax burdens. 

• Furthermore, exemption from the new Development Levies enables SMEs to reallocate funds toward structural growth and formalization.  

• The increased revenue threshold before CIT applies gives SMEs more runway to develop sustainable systems before entering the tax net. 

• SMEs also stand to benefit from a harmonized tax administration system via the NRS and NTAP, reducing the administrative complexities that previously discouraged tax compliance.  

• The streamlined Withholding Tax refund process improves cash efficiency for contract-based businesses. 

• However, SMEs must adapt to new compliance requirements such as PAYE reporting of net emoluments, and should be aware of the higher Capital Gains Tax rate (30%) applicable to asset disposals. SMEs operating in free zones must also assess their exposure to customs territory sales, as tax exemptions will no longer apply if such sales exceed permitted thresholds by 2028. 

Impact of 2025 Tax Reforms on Eligible Businesses  

• The deductibility limit for research and development has been shifted from 10% of total profit to 5% of turnover. This potentially allows more tax deduction and less tax liabilities for eligible businesses. 

• The 20% increase in capital gain tax (CGT) towards unification will potentially result in higher tax liabilities.  

• Just like SMEs, eligible businesses also benefit from the full recoverability of input VAT, improving cash flow and minimizing indirect tax burdens. 

• Telecommunication companies (telcos) and businesses in the e-commerce sector will suffer higher tax obligation due to the elimination of pioneer status. Also, companies who qualify for the EDI will still suffer high tax obligations due to CIT reinstatement for qualified companies.  

• The minimum effective tax rate of 15% implies that businesses whose tax liabilities fall below 15% will now be subject to additional liabilities till total liabilities reach 15% of their profit before taxation.  

Conclusion 

The 2025 tax reform represents a strategic shift from fragmented, revenue-centric tax administration to a coordinated, growth-aligned fiscal framework. While its implementation introduces higher expectations for compliance and reporting, it also offers a simplified system designed to improve transparency, reduce administrative burden, and unlock new sources of revenue without overburdening vulnerable sectors. 

The emphasis on consolidating tax laws, closing compliance gaps, taxing digital and cross-border transactions, and eliminating overlapping collection agencies reflects Nigeria’s intent to align its tax system with global standards. More importantly, by shielding SMEs from immediate tax burdens and integrating them gradually into the formal economy, the reforms lay the groundwork for sustainable fiscal expansion.