THE WINDFALL TAX DEBATE

If well implemented the tax will benefit the economy, argues DAVID SAMSON

In July 2024, the federal government signed a new law embedded in the revised 2023 Finance Bill which mandated banks to pay a 50% tax on profits earned through foreign exchange transactions between June 2023 and December 2025.

This has become the subject of debate eliciting opposing reactions from different quarters. Of course, regardless of where one stands on this divide, this law has implications for the economy and the average Nigerian like you, some of which I will try to highlight here.

By definition, a windfall tax is a special tax that governments impose on companies that have made unexpectedly large profits, usually due to favourable economic conditions or unforeseen events. It is most times temporary and is meant to help the government raise revenue quickly from industries or companies that are seen as having benefited disproportionately. Typically, the benefits would have accrued to such entities without any improvement in operations, new innovations or introduction of new products, processes or services, and can be directly tied to external factors which transfer funds from the government or the public to such sectors.

An example of this is the benefits that have accrued to Nigerian banks since June 2023 when the federal government unified all exchange rates leading to an astronomical increase in the value of the US dollar to the naira from around N470 in June 2023 to the approximately N1,620 it is trading for as of September 2024.

Usually, governments impose such windfall taxes for the purpose of redistribution of wealth with the rationale being that the extraordinary profits made by such sectors or companies, especially during economic crises, are shared more broadly with society. It also helps provide additional funds for government which can be spent on public services, infrastructure, or welfare programs.

Imposing such as tax also serves the purpose of providing stability n the market though the prevention of companies from exploiting economic conditions to gain excessive profits at the expense of consumers and the economy.

So basically, for those that argue the tax is a positive legislation, their position is strongly supported by its capacity to make available, funds for covering public services, the balancing of wealth inequalities and the short-term relief for the government during economic hardships or unexpected crises.

In periods of economic downturn such as the present, the government can use windfall tax revenues to boost public spending, stimulate demand, and provide short-term macro-economic stability. This can help mitigate the impact of economic shocks.

Now, while a windfall tax may seem like a good way for the government to raise revenue quickly, it can have significant downsides, particularly if not implemented carefully. It is essential to balance the benefits of increased government revenue with the potential negative impacts on consumers, businesses, and the economy.

So, on the flip side, there are generic arguments that this means higher costs for consumers because such companies (in this case, banks) ‘may’ pass the extra tax costs onto their customers by increasing prices for products or services.

Investors may also be less willing to invest in sectors where windfall taxes are imposed, fearing reduced profitability and some will also argue that such taxes unfairly target successful companies and penalizes them for being profitable.

For you and I, average Nigerians, this will likely play out in forms of higher banking costs. If banks are taxed heavily, they may increase fees for loans, account maintenance, and other services. This could make banking more expensive for Nigerians.

Such increases in costs could inadvertently heighten financial exclusion. Higher costs could discourage small businesses and low-income individuals from accessing banking services and shareholders, including those with small investments or savings in banks, may see lower returns if banks’ profits are heavily taxed.

The perception of a high tax burden, such as a windfall tax, can deter foreign investors, limiting the growth and expansion of the financial sector. Reduced investments and higher costs can lead to slower economic growth, especially if SMEs and consumers reduce spending due to higher banking costs.

There are other dimensions to the introduction of the tax, which though not directly expected, could manifest. The introduction of a windfall tax could, for instance, lead to broader discussions on financial regulations and reforms. It might prompt a review of the regulatory environment to ensure a fair, competitive, and transparent financial system. Some of the conversations that are ongoing are already being steered in these directions.

While there are potential downsides to windfall taxes, the positive implications earlier listed highlight how such a policy could be used strategically to benefit the Nigerian economy and society if implemented thoughtfully and fairly.

 Samson is a public policy expert and writes from Wuse 2, Abuja