The Bank Directors Association of Nigeria (BDAN) has raised an alarm over the recent decision by the National Assembly to impose a 70% windfall tax on foreign exchange (FX) revaluation gains by Nigerian banks, calling on the lawmakers to revisit the legislation.
BDAN, representing the collective voice of bank directors across Nigeria, expressed its concerns following a meeting where the implications of the newly amended finance act were thoroughly discussed. The association described the 70% windfall tax as “excessively burdensome and ill-timed,” particularly in light of the ongoing recapitalization efforts within the banking sector.
Nigerian banks are currently undergoing a phase of capital augmentation, a critical process aimed at strengthening their financial base to better serve the economy. The introduction of such a steep tax, according to BDAN, could undermine these efforts, stifling the growth and innovation that are essential for the sector’s resilience.
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“Such a high levy has the potential to stifle growth and innovation within the banking sector,” the association said.
The move has sparked widespread debate and concern within the banking sector and among financial experts, who argue that the timing and scale of the tax could have severe repercussions on the industry’s stability and growth
In its statement, BDAN urged the National Assembly to revisit the amendments, calling for constructive dialogue between lawmakers and industry stakeholders. The association emphasized the need for clarity on what exactly constitutes the FX gains to be taxed and raised concerns about how the government plans to address scenarios where banks might incur losses rather than profits from their foreign exchange transactions.
“We respectfully urge the National Assembly to revisit these amendments and engage in constructive discussion,” the statement read.
BDAN’s concerns are not isolated, as many within the financial sector share similar sentiments. The association warned that such a high levy could have long-term negative effects on the industry, potentially deterring investment and innovation, which are crucial for the sector’s development and for maintaining Nigeria’s economic stability.
The Story Background
The windfall tax is rooted in an amendment to the 2023 Finance Act, introduced by the federal government last month. Initially proposed as a 50% tax, the levy was intended to tap into the substantial foreign exchange revaluation gains reported by Nigerian banks.
These gains, which arise from the difference in value when assets and liabilities denominated in foreign currencies are revalued, have become a significant source of income for banks, particularly in the context of Nigeria’s volatile exchange rate environment.
The government justified the tax as a necessary measure to raise funds for critical infrastructure projects and social intervention programs outlined in the 2024 budget. However, in a move that surprised many, the National Assembly not only endorsed the proposal but also increased the tax rate from 50% to 70%, extending its applicability until 2025.
Financial Experts Voice Their Concerns
The imposition of the windfall tax has not only ruffled feathers in the banking sector but has also drawn sharp criticism from financial experts and tax professionals.
KPMG, a global leader in tax and advisory services, has pointed out that Nigeria’s tax laws do not support retroactive taxation, suggesting that the new policy could lead to protracted legal battles. The firm also warned that the tax might create an atmosphere of uncertainty, potentially deterring future investments in the country’s banking sector.
Similarly, PwC, another major player in the consulting industry, highlighted the risks associated with taxing already-reported profits. The firm argued that such a move could send the wrong signal to investors, who might perceive it as a sign of policy unpredictability, thereby increasing the perceived risks of doing business in Nigeria.
Divergent Views Within the Banking Sector
However, some prominent figures within the banking industry have voiced their support for the windfall tax. Femi Otedola, Chairman of FBN Holdings, has publicly endorsed the policy, urging banks to curb their excess spending on luxuries such as private jets and to focus instead on operational efficiency and customer service.
Otedola’s stance suggests that the tax could serve as a wake-up call for banks to streamline their operations and adopt more prudent financial practices.
Tony Elumelu, Chairman of UBA, also supported the tax, stating that the funds generated would be channeled towards the benefit of the masses. Elumelu’s endorsement aligns with the government’s narrative that the windfall tax is a necessary sacrifice to fund critical infrastructure and social programs that will ultimately improve the living conditions of Nigerians.
The Larger Picture
The windfall tax on FX revaluation gains comes at a time when Nigerian banks are reporting substantial profits from these transactions. An analysis by Nairametrics revealed that major banks in the country reported approximately N3.3 trillion in foreign exchange revaluation gains in 2023 and the first quarter of 2024.
These gains have become a crucial component of the banks’ revenue streams, especially in a challenging economic environment marked by currency fluctuations and inflationary pressures.
However, the question remains whether the windfall tax, as currently structured, is the best approach to harnessing these gains for national development.