The Nigerian Senate has on Tuesday, passed the amendment bill to the 2023 Finance Act, significantly raising the windfall tax on banks’ foreign exchange revaluation gains from 50% to 70%.
This adjustment, originally proposed by President Bola Tinubu, has sparked considerable debate among economic experts and stakeholders, with many noting that it can potentially undermine investors’ confidence.
The Chairman of the Senate Committee on Finance, Sen. Sani Musa, presented the committee’s report, which included the revised windfall tax rate and other key changes. One notable amendment involved the commencement date of the revised act.
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Originally set retroactively to January 1, 2023, the date was changed to coincide with the implementation of the Central Bank of Nigeria’s (CBN) new foreign exchange policy, which began on June 14, 2023. This change was prompted by objections from Sen. Aminu Waziri Tambuwal, who argued against the retroactive nature of the amendment.
In addition to these changes, the Senate extended the timeline for the windfall levy. Initially intended to cover only the 2023 financial year, the levy will now apply to all profits from foreign exchange transactions from the start of the new forex policy until the end of the 2025 financial year, as specified in clause 2 of the amendment. This extended period aims to capture more of the foreign exchange revaluation gains banks may accrue.
The Senate also addressed fiscal matters by passing an amendment to the 2024 Appropriation Act. This amendment adds N6.2 trillion to the 2024 budget for recurrent expenditures, including payments for the new N70,000 minimum wage and infrastructure projects under the “Renewed Hope” initiative.
Background of The Windfall Tax
Tinubu’s administration initially proposed the windfall tax as part of a broader strategy to increase government revenue. The tax targets the foreign exchange revaluation gains banks reported in the 2023 financial year, aiming to redistribute these profits through a one-time levy.
The amendment stipulates that banks failing to remit the required amount will face a 10% penalty on the withheld tax and interest at the CBN’s minimum discount rate, with key officials potentially facing imprisonment.
The Move Has Sparked Concerns
The proposal has stirred significant debate among economic and legal experts, as well as major tax advisory bodies. Critics argue that the unpredictability and retroactive application of the windfall tax could deter future investments in Nigeria, both domestic and foreign. They contend that such a policy could undermine investor confidence, which is crucial for economic stability and growth.
KPMG Nigeria has been particularly vocal, criticizing the initial 50% rate and suggesting that the tax could lead to legal disputes. The firm pointed out that Nigeria’s tax policy does not traditionally support retroactive taxes, raising concerns about the legal standing of the amendment.
PwC Nigeria echoed these concerns, emphasizing that the tax’s unpredictability, applied to already reported profits, could discourage future investment. The firm highlighted the potential negative implications for the financial sector and the broader economy, especially given Nigeria’s current economic challenges.
Prominent lawyer Dr. Olisa Agbakoba also voiced his concern about the amendment, describing it as an ill-thought-out policy. He argued that the proposal was beyond the scope of the National Assembly and warned that the burden of the tax would ultimately be passed on to banks’ customers, potentially increasing the cost of banking services and financial products.
The debate over the windfall tax occurs against a backdrop of significant economic challenges in Nigeria. The country’s economy has been battered by declining oil revenues, high inflation, and rising unemployment rates. As an oil-dependent nation, Nigeria has struggled with the volatility of global oil prices, which has reduced foreign exchange earnings and strained public finances.
Given these challenges, economic experts have cautioned the government against implementing policies that could further erode investor confidence. They argue that the economy, already weakened, cannot afford additional shocks from policies perceived as punitive or unpredictable.
The consensus among experts is that maintaining a stable and predictable policy environment is crucial for attracting the investment needed to spur economic growth and development.
Thus, the increased windfall levy on banks’ foreign exchange revaluation gains, while intended to bolster government revenue, may have unintended consequences. If not carefully managed, the policy could exacerbate the country’s economic woes, further deterring investment and slowing economic recovery.
The Senate’s passage of the Finance Act amendment bill marks a significant policy shift, raising critical questions about the viability of Nigeria’s economic policies.
The government faces the dual challenge of addressing fiscal shortfalls while ensuring that its policies do not undermine the broader economic stability. However, the windfall tax has tested the government’s ability to balance raising revenue and fostering a conducive environment for economic growth. To many, it has failed on the latter.