Not New, Not Arbitrary: Why Government Says ‘Power Of Substitution’ In Tax Won’t Touch Small Earners

Amid rising public debate around the government’s renewed emphasis on tax enforcement, fiscal authorities have moved to clarify concerns over the “power of substitution,” insisting the provision is neither new nor designed to target low-income earners or small businesses.

The power of substitution is a long-established mechanism in Nigeria’s tax laws that allows a tax authority, as a last resort, to recover an unpaid and legally confirmed tax liability through a third party holding funds belonging to a defaulting taxpayer.

Contrary to fears circulating in public discourse, officials stress that the measure is not discretionary, arbitrary, or routinely applied.

“The power of substitution is not a shortcut to enforcement, nor is it an administrative whim,” the Presidential Fiscal Policy & Tax Reforms Committee said in a statement, stressing that “It is only activated after every legal and administrative process has been exhausted and a tax liability has become final, conclusive, and unpaid.”

Under the law, the power can only be exercised after a taxpayer’s liability has gone through the full statutory process—enquiries, assessment, objection, final notice, and appeals, including recourse to the courts.

Only when a taxpayer has failed or refused to settle the debt within the prescribed period can a notice of substitution be issued to a third party holding funds due to the taxpayer.

Fiscal authorities are also drawing a clear line between large, persistent defaulters and ordinary Nigerians.

Individuals earning the national minimum wage and small businesses operating below applicable taxable thresholds fall outside the scope of the measure, as the power is only practical where there is a substantial tax liability.

Under current tax frameworks, these categories of earners generally do not meet that threshold.

“This is not a tool aimed at small traders, artisans, or workers earning modest incomes,” the Committee explained, deepening understanding with “the design of the law makes it clear that the power of substitution is only relevant where there are significant, confirmed tax liabilities, which low-income earners and small businesses do not ordinarily have under the new tax laws.”

The clarification comes against the backdrop of wider tax reforms aimed at improving compliance, widening the tax net, and reducing pressure on compliant taxpayers.

Officials argue that without credible enforcement tools, the burden of public finance would continue to fall disproportionately on those who already comply with tax laws, while chronic defaulters face little consequence.

The government also points out that the power of substitution is not unique to Nigeria. Similar third-party recovery mechanisms—such as garnishment orders and third-party payment notices—are standard features of tax administration in many jurisdictions globally and are regarded as international best practice for recovering confirmed tax debts.

“Nigeria is aligning its tax administration with globally accepted standards,” the Presidential Fiscal Policy & Tax Reforms Committee noted, emphasising that “third-party recovery mechanisms are widely used across advanced and emerging economies to ensure that confirmed tax debts are paid, not to punish taxpayers, but to protect the integrity and fairness of the system.”

Safeguards, authorities insist, are built into the framework. A third party appointed as a substitute is required by law to comply with the notice or formally object in writing within 30 days, stating clear grounds for refusal.

Both the taxpayer and the substitute retain full rights under Nigeria’s tax dispute resolution framework, including access to appeals and protection through the Office of the Tax Ombud.

Officials maintain that the power’s rarity in past application underscores its nature as a last-resort instrument rather than a routine administrative tool.

Its purpose, they say, is not punishment, but equity—ensuring that lawful and confirmed tax obligations are ultimately met, and that the integrity of the tax system is preserved in the interest of the wider economy.