What are they Advantages of Suspending the PAYE Scheme under the Personal Income Tax in Nigeria Part II
Suspending the PAYE Scheme Under Personal Income Tax in Nigeria: A Critical Analysis
Last time in our earlier page we took a critical look at the advantages of suspending the PAYE Scheme inorder to cushion the effect of the fuel subsidy removal. Today we attempt to take a deep dive into they cons of implementing such a fiscal policy in Nigeria.
POTENTIAL DISADVANTAGES
- Catastrophic Revenue Loss for State Governments
PAYE is the primary revenue stream for Nigeria’s 36 State Governments and the FCT, as it is governed by the Personal Income Tax Act (PITA) and administered by State Internal Revenue Services. Suspension would immediately hollow out state budgets, crippling funding for education, healthcare, and infrastructure at the sub-national level — where the majority of public services are delivered.
- Disproportionate Benefit to High Earners
PAYE relief is most financially significant in absolute terms for high-income earners. Senior executives and professionals would gain far more from a suspension than minimum-wage workers. This makes it a regressive policy measure unless carefully structured with income caps.
- Destruction of Tax Culture and Compliance Architecture
Nigeria has spent decades — and significant technical assistance resources (from the World Bank, IMF, DFID) — building a functional PAYE withholding architecture. Suspension risks dismantling institutional memory, workforce capacity at SIRS, and employer compliance habits that are very difficult to rebuild.
- Weak Enforcement upon Resumption
The historical pattern in Nigeria shows that once a tax obligation is paused or waived, enforcing its reinstatement faces enormous political and social resistance. A “temporary” suspension could de facto become permanent, permanently eroding the PIT base.
- Violation of Intergovernmental Fiscal Framework
Under Nigeria’s fiscal federalism, PAYE revenues belong to the states. The Federal Government does not have the unilateral constitutional authority to suspend PAYE nationally without state-level legislative concurrence. Any attempt to do so creates serious legal and constitutional tensions.
- Signal Risk to International Investors and Credit Rating Agencies
Suspension of a structural tax instrument signals fiscal instability and unpredictability of the tax regime. This could worsen Nigeria’s sovereign credit rating, raise the cost of Eurobond issuances, and deter FDI — particularly from multinational corporations who factor tax certainty into investment decisions.
- No Guaranteed Economic Stimulus Effect
In a country with Nigeria’s level of supply-side constraints (FX volatility, energy costs, insecurity), increased disposable income from PAYE relief may not translate into productive domestic consumption. It could instead fuel import demand or be absorbed by inflation, yielding little macroeconomic benefit.
- Informal Sector Exclusion — Equity Problem
The majority of Nigeria’s working population (~80%+) operates in the informal sector and is already outside the PAYE net. A PAYE suspension benefits only the formal sector minority, deepening inequality between formal and informal workers without addressing the fundamental tax base problem.
- Impact on Contributory Pension and Social Security Integration
PAYE administration is closely integrated with employer-side obligations including pension contributions under the Contributory Pension Scheme (CPS). A suspension could create confusion and disruption in these parallel compliance systems.
What Next
In our next write up we will attempt to look at the pros and cons of suspending PAYE in Nigeria with a view of providing a balanced analysis and then provide actionable solution, till then stay connected.
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