• Government has announced its tax recovery method using third parties, including banks, employers, tenants
• Lagos state government recent notice cited plans to invoked the statutory “Power of Substitution” under new tax law
• The move has generated a lot of question in the public, with many worried about government plans on tax payment

Legit.ng journalist Dave Ibemere has over a decade of experience in business journalism, with in-depth knowledge of the Nigerian economy, stocks, and general market trends.

The Lagos State Internal Revenue Service (LIRS) recently drew public attention after announcing plans to recover unpaid taxes directly through third parties, including banks, employers, tenants, debtors, and business partners.

A public notice confirmed that under the new tax law, the government can invoke its statutory “Power of Substitution” to compel the recovery of established unpaid tax from individuals and organisations connected to defaulting taxpayers.

The LIRS noted the move is backed by Section 60 of the Nigeria Tax Administration Act, 2025 (NTAA 2025), which empowers tax authorities to intercept funds belonging to or owed to taxpayers who fail to settle confirmed tax assessments when due.

To provide further clarity, Taiwo Oyedele, Chairman of the Presidential Fiscal Policy & Tax Reforms Committee, has released 10 frequently asked questions about the power of substitution for recovering debts.

Below is a comprehensive Q&A guide explaining what it is, how it works, and who it affects.

Q1. What is the “power of substitution”?

The power of substitution is a tax recovery mechanism that allows the tax authority to direct a third party (a “substitute”) to remit funds belonging to a defaulting taxpayer to settle a final, established, and unpaid tax liability. This power is exercised only after all legal and administrative processes, including court appeals, have been exhausted.

Q2. Is there a risk of arbitrary use of this power?

No. The power of substitution is neither arbitrary nor discretionary. Its use is strictly governed by due process and can only be invoked after all enquiries, assessments, objections, final notices, and court appeals have been concluded. It is a controlled, last-resort measure, not a routine administrative action.

Q3. Does this affect low-income earners or small businesses?

No. Individuals earning the national minimum wage and small businesses operating below taxable thresholds are outside the scope of this measure. The power of substitution applies only where there is a substantial tax liability, which these groups generally do not have.

Q4. Is the power of substitution a new provision in Nigerian tax laws?

No. This power already exists in Nigeria’s tax legislation, including Section 50 of the repealed Personal Income Tax Act (PITA) and other statutes.

Q5. Is this a globally accepted practice?

Yes. Using third-party collection mechanisms is consistent with global best practices in tax administration. Similar powers, such as garnishment or third-party payment notices, exist in many tax jurisdictions worldwide.

Q6. Why is this power necessary?

• This power ensures fairness in the tax system. Without it:
• Compliant taxpayers are unfairly burdened
• Tax evasion may increase
• Government finances face undue pressure, potentially leading to higher tax rates for everyone

Q7. Under what conditions can the tax authority exercise this power?

The power of substitution is strictly a last-resort measure and requires all of the following:

• Exhausted process – All procedures to establish a tax liability (enquiries, assessment, objection, final notice, and court appeals) have been completed.
• Final liability – The taxpayer has a confirmed, legally due tax liability.
• Refusal to pay – The taxpayer has failed, neglected, or refused to pay within the specified period set by the tax authority.

Q8. Who can be appointed as a “substitute”?

The tax authority can issue a notice of substitution to any person who holds funds belonging to or owes money to the defaulting taxpayer, including banks, employers, tenants, and business partners.

Q9. What are the obligations of a substitute, and can they decline the appointment?

Upon receiving a notice, the appointed party must either: Comply, or formally object in writing within 30 days, specifying the grounds for refusal.

Legal provisions for appealing tax assessments also apply to the substitution notice.

Q10. What safeguards exist to prevent abuse of this power?

• Several legal and administrative safeguards ensure the power is controlled, accountable, and subject to review:
• Due process – Mandatory procedures to establish the final tax assessment
• Right to object – Substitute can object in writing within 30 days
• Appeal rights – Comprehensive appeal framework under tax dispute resolution laws
• Taxpayer protections – Oversight by the Office of the Tax Ombud

Oyedele concluded that the power of substitution is a carefully controlled mechanism designed to ensure equity in Nigeria’s tax system.

He said:

“It is not punitive or arbitrary, which explains why its use has been historically rare. Its purpose is to ensure that confirmed and lawful tax debts are ultimately paid by those who might otherwise ignore their statutory obligations.”

How to recover tax ID

Earlier, Legit.ng reported that the Nigerian government has introduced the Tax ID Portal to simplify the process of getting a Tax Identification Number (TIN).

This unique 13-digit number is assigned to every taxable individual and organization for official tax purposes.

For individuals, the TIN is linked to their National Identification Number (NIN), while businesses and other entities are associated with their Corporate Affairs Commission (CAC) registration numbers.

Source: Legit.ng