Tax Reforms: Bank Statements Define Liability

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The New Era of Taxation in Nigeria: The Power of Bank Transfer Narrations

Nigeria is preparing for a significant shift in its taxation system, set to take effect in January 2026. This transformation will place greater emphasis on bank transaction histories as a primary tool for determining taxable income, particularly for individuals and businesses outside the Pay-As-You-Earn (PAYE) system. As this new regime unfolds, the importance of clear and accurate bank transfer narrations cannot be overstated.

Real-Life Scenarios Highlight the Risks

Adeola Folarin, a trader in Kubwa, Abuja, has never been concerned about the details of her bank transfers. Her business operates seamlessly, with customers making payments through quick transfers. However, these transactions often lack descriptions, leading to a situation where her account may appear to receive unexplained income from the perspective of tax authorities.

Similarly, Ibrahim Musa, an administrative officer by day and a small electronics seller by night, uses the same personal account for both his salary and business transactions. Without clear narration, his account could be flagged for irregularities, potentially leading to scrutiny from tax authorities.

The Shift in Tax Policy

The new tax regime is designed to capture income from the informal and semi-formal sectors, which contribute significantly to Nigeria’s GDP. With over N600tn in electronic transactions processed annually, the banking system has become a powerful tool for revenue collection. Tax authorities are now focusing on financial data and digital records to assess income, marking a departure from traditional methods.

Why Descriptions Matter

Under the evolving framework, every credit alert matters. Unexplained or poorly described inflows may be treated as taxable income unless proven otherwise. This means that even small, seemingly innocuous transactions can have significant tax implications. For instance, a transfer labeled “Thanks” might be interpreted as income, while a more detailed description like “Refund for goods returned” provides clarity and context.

The Burden of Proof

Tax experts warn that the burden of proof lies with the taxpayer. If money enters an account without explanation, it may be assumed to be taxable until proven otherwise. This places a critical responsibility on individuals to maintain accurate records and provide clear transaction descriptions.

Challenges and Concerns

While the new tax regime aims to increase transparency and accountability, it also raises concerns among informal sector workers. Many Nigerians struggle with inflation, weak purchasing power, and rising living costs, making compliance with new regulations challenging. Additionally, the law does not consider intent or hardship, which can lead to unfair assessments.

Dr. Muda Yusuf, Director of the Centre for the Promotion of Private Enterprise, has cautioned against relying solely on bank transactions to determine tax liability. He argues that such an approach could be unfair, especially for informal sector operators who often lack proper record-keeping systems.

The Path Forward

Despite the challenges, many Nigerians are beginning to adapt. Social media platforms are filled with warnings and guides on how to navigate the new tax regime. Financial coaches and tax commentators emphasize the importance of clear transaction descriptions and better record-keeping.

Separating personal and business finances is also crucial. Mixing accounts can lead to double taxation, and business owners are advised to route major transactions through business accounts and pay themselves structured salaries.

Conclusion

The push for transaction narration reflects a broader shift towards financial transparency and formalization of economic activity. As Nigeria tightens its tax net, bank narrations may become the simplest and cheapest form of tax protection available to individuals and small businesses. For millions of Nigerians, the message is clear: what you write, or fail to write, in your transfer description may determine what you pay in tax tomorrow.