The 5% fuel tax is unarguably one of the most popular topics of discussion among Nigerians in the past few days, with many unsure of how it came about and its ramifications.
The 5% fuel tax, officially tagged a “surcharge on fossil fuel products,” is a key component of comprehensive tax reforms introduced through the Nigeria Tax Act 2025 and related bills.
Signed into law by President Bola Tinubu on June 26, 2025, the policy aims to reduce reliance on fossil fuels, promote cleaner energy alternatives, and generate additional government revenue.
It takes effect on January 1, 2026, amid ongoing economic challenges following the 2023 fuel subsidy removal, which has already driven up petrol prices to around N900–N1,000 per litre in many areas.
What you should know
Scope: The tax imposes a 5% surcharge on all chargeable fossil fuel products produced or provided in Nigeria, including petrol, diesel, aviation fuel, and other petroleum-derived fuels.
It functions similarly to a carbon tax by adding a direct cost to fossil fuel consumption at the point of sale, effectively increasing the pump price of affected products.
Kick-off date and implementation: The surcharge begins on January 1, 2026. It will be collected monthly by the newly established Nigeria Revenue Service (NRS, formerly the Federal Inland Revenue Service).
The Minister of Finance has the authority to issue an official gazette order confirming the start date and any regulations for administration. Businesses and fuel marketers must update systems for compliance, including e-invoicing for VAT-related aspects.
Exemptions: The tax explicitly excludes clean or renewable energy products (e.g., solar, wind, hydropower), household kerosene, cooking gas (liquefied petroleum gas or LPG), and compressed natural gas (CNG).
This aligns with government efforts to promote alternatives like CNG for vehicles and solar for households.
Revenue projection: Based on 2024 data from the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA), Nigeria consumed about 18.75 billion litres of petrol at an average price of N850 per litre, totalling N15.93 trillion in value.
Applying the 5% surcharge could generate approximately N796 billion annually, with additional revenue from diesel and other fuels.
Funds are earmarked for climate change mitigation, renewable energy projects, and sustainable development initiatives, supporting the nation’s Nationally Determined Contributions (NDCs) under global climate agreements.
Objectives: The policy is designed to discourage fossil fuel use and accelerate the shift to renewables, building on post-subsidy trends.
Nigeria’s solar capacity grew to 385.7 MWp in 2024 (ranking fourth in Africa), partly due to higher fuel costs prompting households and businesses to seek alternatives.
It draws inspiration from models like Sweden’s 1990s carbon tax, embedded within broader reforms to minimise backlash and align with fiscal sustainability goals.
Impact on consumers: For every N10,000 spent on petrol, consumers will pay an additional N500 in tax. This could raise fuel prices by at least N50 per litre, depending on market dynamics.
Transport operators, small businesses (e.g., those using generators due to unreliable electricity), and low-income households are expected to be hit hardest, potentially increasing transport fares, food prices, and overall inflation.
Critics, including energy analysts and groups like ActionAid Nigeria, argue it exacerbates inequality in a country with widespread poverty, as the flat rate ignores income disparities.
Oil marketers, such as the Independent Petroleum Marketers Association of Nigeria (IPMAN), warn that it will reflect directly in pump prices.
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