Editorial Comment:
The National Assembly’s recent amendment to the Finance Act 2023, introducing a 70 percent windfall tax on banks’ foreign exchange profits, represents a significant shift in fiscal policy. According to the Act, this tax will apply to profits realized by commercial banks from 2023 to 2025 and will be collected by the Federal Inland Revenue Service (FIRS).
While the intention behind this policy is to boost government revenue, its potential impact on the banking sector cannot be ignored. The Centre for the Study of the Economies of Africa (CSEA) has warned that this tax could substantially reduce banks’ net earnings, discourage foreign exchange trading, and ultimately harm sector profitability. Such outcomes could have far-reaching consequences for the Nigerian economy, potentially leading to reduced banking activities and financial instability.
The Act grants the FIRS authority to enter into deferred payment agreements with banks, provided these are finalized by December 31, 2024. Banks failing to comply face severe penalties, including fines, interest charges, and imprisonment of principal officers. This stringent enforcement aims to ensure compliance but also highlights the punitive nature of the policy.
To mitigate these adverse effects, the government must ensure transparent implementation of this tax. Transparency is crucial to maintaining investor confidence and ensuring that the tax does not stifle economic activity. Additionally, reallocating the proceeds to sectors like manufacturing could drive economic growth and diversification.
Moreover, it’s essential to recognize that other Policy for revenue-generating measures, such as the 50 percent deduction from government parastatals’ internally generated revenue (IGR), have already hampered their operational effectiveness. These deductions have turned once-functional parastatals into nearly non-existent entities. Thus, careful consideration and a balanced approach are vital to prevent similar outcomes in the banking sector.
Though, the 70 percent windfall tax aims to address fiscal challenges, its implementation requires a nuanced approach to avoid undermining economic stability and external reputation damage in the eyes of investors. The government’s strategy should ensure that this tax supports economic growth without jeopardizing the financial sector’s health.
