By Iroegbu Prisca Okechi
Nigeria is on the brink of its most significant fiscal overhaul in over a decade. Set for implementation in January 2026, the suite of “Tax Reform Acts” promises to reshape the nation’s revenue landscape. While designed to boost government coffers and create a fairer system, these reforms walk a tightrope, risking the exacerbation of the very inflation that has crippled the purchasing power of millions of vulnerable Nigerians.
The reforms are undeniably ambitious. The consolidated Tax Reform Acts are merged into a unified Nigeria Tax Act and establish a new Nigeria Revenue Service (NRS) to replace the FIRS, aiming to streamline administration and improve compliance. At the heart of its progressive agenda lies the restructured Personal Income Tax. The exemption threshold has been raised to N800,000 annually, lifting an estimated 40 percent of formal sector workers from the income tax net entirely. The new system features six tiers, with rates gradually climbing from 15 percent to a top marginal rate of 25 percent for those earning over ₦50 million. “This is a bold and necessary transformation, replacing an outdated system with a unified, progressive framework,” notes a Global Law Experts (2025) analysis.
However, this progressivity is shadowed by significant inflationary risks, primarily through indirect taxation channels. While the standard VAT rate remains at 7.5 percent, the base of taxable goods is altered. Essential items like basic food, medicine, and educational materials are now exempted, a move to protect low income households. However, mandatory e-invoicing rules could increase business compliance costs, potentially passed on to consumers through higher prices for non exempt goods. The most potent inflationary risk comes from a proposed 5 percent levy on petrol and diesel. In a nation heavily dependent on imported fuel and plagued by unstable grid power, this levy could trigger a cascading cost increase. Transport, electricity generation, and production costs would rise across all sectors, disproportionately burdening the masses. Changes to Capital Gains Tax, aligning the corporate rate with income tax at 30 percent, primarily affect investors. While not directly inflationary, they could influence investment behaviour and indirectly impact productive capacity.
The reforms will create clear winners and losers, producing a complex picture for household finances. Low-income earners earning below ₦800,000 stand to gain the most. Complete income tax exemption and VAT relief on essential commodities offer a shield against further erosion of their standard of living. Middle-income earners, those between ₦800,000 and ₦12 million, face a balancing act. Those at the lower end see tax cuts, while those in the uppermiddle brackets face increases. Crucially, the middle class spends a larger share of their income on VAT-able non-essentials and is highly vulnerable to fuel price hikes, potentially neutralizing any income tax benefits. High-income earners, those above ₦12 million, face the largest direct tax increases. However, as they allocate a smaller percentage of income to consumption affected by VAT and fuel taxes, their overall burden may be more manageable, creating a progressivity reversal in the indirect tax system.
These reforms will be implemented in a precarious economic environment. With inflation forecasted to remain high at around 37 percent in 2026 according to the IMF, the introduction of fuel levies could pour gasoline on an already raging fire. The Central Bank of Nigeria faces a complex balancing act, highlighting the risk of fiscal and monetary policies working at cross purposes.
The International Monetary Fund projects Nigeria’s inflation will moderate to 26.5 percent in 2025 before spiking sharply to 37 percent in 2026. This precarious outlook is worsened by new fiscal measures. The 15 percent Fuel Import Levy introduced in November 2025 aims to protect local refineries but is expected to add up to ₦100 per litre to the pump price. Given Nigeria’s continued reliance on imported fuel, accounting for 70 percent of petrol consumed as of October 2025, this policy will directly increase transport and production costs across the economy. The 5 percent Fossil Fuel Tax scheduled for January 2026 will further compound energy costs for households and businesses. Analysts warn these policies will stoke inflation and have ripple effects in the wider economy, acting as a direct channel for fiscal policy to pour gasoline on an already raging fire.
The Central Bank of Nigeria faces a profoundly complex balancing act. While it has held the Monetary Policy Rate at 27.5 percent to curb inflation, its efforts are potentially undermined by fiscal pressures. Furthermore, large debt servicing obligations constrain the government’s ability to act. In the second quarter of 2025 alone, Nigeria’s external debt service hit $932.1 million. For the full year, Fitch Ratings projects the total bill will reach $5.2 billion, a nearly five-fold increase from the $1.07 billion paid in 2024. Domestic debt service reached a staggering ₦1.71 trillion in Q2 2025, with ₦1.69 trillion of that spent on interest payments alone. This diverts crucial public funds away from productive investments that could ease inflationary pressures.
This fiscal environment limits the government’s capacity to offset the inflationary impact of the new levies with social relief measures, thereby increasing the burden on monetary policy. Successfully navigating this tightrope requires exceptional policy coordination. Academic research on Nigeria suggests that while expansionary fiscal policy often aggravates price levels, coordinated monetary and fiscal measures are essential to stimulate growth without imperiling stability. The government’s ability to channel the projected N1 trillion in revenue from the new levies into complementary social relief, agriculture subsidies, and critical infrastructure will be a crucial test of its strategy to mitigate short-term pain for long-term gain.
The 2026 tax reforms are a critical step toward fixing Nigeria’s broken fiscal framework. The pro-poor measures are commendable and offer real protection for the most vulnerable. Yet their success hinges on deft implementation and complementary policies. A phased introduction of the fuel levy, coupled with enhanced social protection programs funded by the new revenues, is essential to mitigate the inflationary shock. Ultimately these tax changes are a necessary but insufficient condition for improved living standards. Their true potential will only be realized alongside complementary investments in productive capacity and governance. Without this comprehensive approach, the reforms risk exacerbating the very inequalities and inflationary pressures they were designed to alleviate.
Iroegbu Prisca Okechi is a Researcher working with the Institute for Peace and Conflict Resolution (IPCR), Abuja. She can be reached via priscaokechi064@gmail.com
