How Nigeria's Petrol Tax Law Will Impact Your Finances

In May 2023, the Nigerian government formally lifted a policy that had long cushioned consumers against the real market price of Premium Motor Spirit (PMS), also known as petrol subsidy. Another major change that will affect the lives of Nigerians is the introduction of a 5 per cent surcharge on petrol by January 2026 through the Nigeria Taxation Act. This two-fold policy reversal, involving the elimination of subsidies and a subsequent petrol tax, marks a turning point in Nigeria's energy and economic history.

The article is a critique of the implications of such changes by a veteran international economist, exploring the rationale, opportunity, and risks with examples and evidence-based forecasts in the real world.

 

The 2026 Petrol Tax: Key Details

It is stated in official policy documents that of January 1, 2026, as a part of the implementation of a new taxation system, the Nigerian government will introduce a 5 per cent excise tax on petrol (both local and imported). The Federal Inland Revenue Service (FIRS) will collect this tax in conjunction with the Midstream and Downstream Petroleum Regulatory Authority (NMDPRA), at the pump.

The charge will be imposed on PMS alone, and not on other fuels like kerosene, Liquefied Petroleum Gas (LPG), Compressed Natural Gas (CNG) or renewables. The rationale here is twofold, to not only protect poorer households who depend on the use of kerosene, but also to encourage the transition to cleaner forms of energy.

 

Projected Revenue: 796 Billion/Year

The surcharge is likely to raise about N796 billion per annum based on the current petrol consumption of about 18.75 billion litres per annum in the country. This number can be seen as a massive fiscal stimulus in a nation where oil revenues traditionally took up 70-80 per cent of government revenue.

The government has vowed to invest this income in infrastructure developments, fiscal stabilization and economic diversification, which is much-needed in a country with a GDP of 432 billion (World Bank, 2023) but an infrastructure shortfall it estimates to exceed 100 billion dollars.

 

Economic Effect on the Consumers

The fiscal reasoning may seem to be sound, but the consumer reality is bleak. The surcharge on pump prices could rise by N50-75 per litre as suggested by current modeling. In the case of the average Nigerian family that consumes 40 litres of petrol per month, that amounts to an extra N2,000-3,000 monthly payment.

On a macro level, such a policy runs the risk of increasing the pressures of inflation. Inflation in Nigeria is already at 33.4 per cent as of mid-2025 (National Bureau of Statistics). The cost of transport and food, both extremely sensitive to petrol prices, is set to increase further. World Bank simulations also forecast that, unless compensatory social protections are implemented, 400 to 500,000 Nigerians will be reduced to poverty.

 

Arguments for the Petrol Tax

1. Fiscal Sustainability: The cost of the subsidy regime in Nigeria was 10 billion a year before it was removed. Withdrawing subsidies and introducing taxes are also the best global practices to achieve fiscal sustainability. Indonesia and Egypt are examples of countries that adopted a similar reform to release funds towards education and health.

2. Infrastructure Financing: Nigeria has a chance to bridge its infrastructure gap, as it is estimated that the country will generate up to ₦800 billion in revenues. When invested well, this tax can be used to finance roads, rail networks and renewable energy projects.

3. Energy Transition Incentive: LPG, CNG, and renewables are automatically left out, which is the implicit way that the government is pushing consumers and industries to use cleaner fuels and is consistent with the climate commitments made by Nigeria in the Paris Agreement.

 

Reasons to Oppose the Petrol Tax

1. Inflationary Shock: This will, in turn, lead to higher pump prices and propagate into the transportation and food inflation. With a weak economy, this may clip real incomes and aggravate inequality in Nigeria.

2. Poverty Risk: It is estimated that there are already 133 million multidimensionally poor Nigerians (NBS, 2022). And introducing another 4–5 million would expose the population to even more social unrest, as it did in 2012 with the Occupy Nigeria protests against subsidy removal.

3. Implementation Concerns: The governance issues faced in Nigeria cast questions on whether the estimated N796 billion will be effectively collected and the money transparently invested. It is a known fact that in history, oil revenues tend to leak out through corruption and inefficiency.

 

Global Comparisons

Fuel tax is widespread all over the world. In the EU, almost half of the price of petrol is paid in taxes. Fuel levies in South Africa yield over six billion dollars a year, which is used to finance road infrastructure. This differs, however, with social protection: countries which have good fuel taxes tend to balance consumer effect with a well-established welfare system, which Nigeria has yet to establish.

 

Policy Recommendations

1. Targeted Cash Transfers: Nigeria needs to increase the coverage of conditional cash transfer programs to alleviate the effects of poverty, including protecting the poorest households against the effects of fuel prices.

2. Transport Subsidies: Implement urban transport subsidies (e.g. bus rapid transit) to limit the use of petrol-powered vehicles in big cities.

3. Transparency Mechanisms: have petrol tax revenues ring-fenced by having them deposited in a separate infrastructure fund, with its own independent control, as in the Petroleum Revenue Management Act of Ghana.

4. Energy Diversification: Increase LPG, CNG and solar energy solution investment within the next year to offer low-cost substitutes and decrease reliance on PMS.

 

Conclusion

The abolition of petrol subsidy in 2023 and the 5% tax that will be introduced in 2026 an unprecedented changes in the course of the Nigerian economy. Although the surcharge would raise N796 billion every year to support infrastructure and stabilise fiscal revenues, it would equally bring about inflation, poverty and inequality when mismanaged.

Nigeria has a decision either to keep the petrol tax continuing to make life harder or to use it as a stimulus to diversify the economy and safeguard the society. It has been observed all over the world that fuel taxation can be effective with good governance. In the case of Nigeria, however, the effectiveness of this policy will be more determined by the clarity and fairness in the utilisation of proceeds rather than the levy.