For a very long time in Nigeria, oil revenue has dominated the government revenue structure. The bulk of the revenue accruing to the three tiers of government for development purposes comes from federally-collected revenue, out of which oil revenue accounts for about 80 percent. But this is a dangerous pattern. Oil export, which is the dominant source of oil revenue, and oil prices are highly vulnerable to the vagaries of the international oil market. Crude oil output is also subject to quota adjustments by the Organisation of Petroleum Exporting Countries (OPEC) as well as developments in the Niger Delta region where oil activities are concentrated. The government has continued to bemoan the phenomenon of crude oil theft, pipeline vandalism and other forms of militancy as factors adversely affecting crude oil revenues. All these have posed significant risks and challenges to revenue stability. Besides, for a long time too, non-oil tax revenue has been adversely affected by the euphoria of oil revenue and governance problems.
Consequently, the tax effort, that is, the ratio of tax revenue (not related to oil) to the gross domestic product (GDP) has been very low. Although there are over 40 taxes and levies in the Nigerian tax system, the ability of the tax system to generate revenue is low. A study done by the Federal Ministry of Finance in the 1990s showed that personal income tax, which is the most widespread modern tax embracing millions of taxpayers, yields less than 0.5 percent of the overall tax revenue of all the three tiers of government put together. Yet, in modern economies, taxes are the most important source of government revenue. For example, in the industrialised nations, personal income tax and social security taxes constitute the major sources of revenue to the government. The ratio of tax revenue to GDP in the developed countries is about 30 percent or more, suggesting a high level of dependence on tax revenue, compared to Nigeria’s ratios which are insignificant and average less than 10 percent. The rebasing of the GDP exercise carried out in 2014, by which the country’s GDP increased from $360 billion in 2010 to $510 billion in 2013, further diminished the tax/GDP ratio. Even the total non-oil revenue (including all the non-oil taxes and independent revenue)/GDP ratio in Nigeria is about 20 percent.
At the state and local government levels, tax revenues have not fared better. Statutory allocations from the Federation Account heavily dominate their revenue profiles. The internally generated revenue (IGR) of the states which includes tax revenues accounted for 13.4 and13.1 percent of the states’ aggregate revenues in 2002 and 2013, respectively. The situation is even worse at the local government level – internal revenue constituted 1.6 percent of total revenue in 2013. There are a few notable exceptions, however, one of which is Lagos State. In the year 2007, for example, IGR accounted for 62.5 percent of government revenue in Lagos State. Statutory allocation from federal sources accounted for only 25.7 percent. According to the National Bureau of Statistics, in 2012, the state’s IGR stood at N219.2 billion. This represents about 60 percent of the state’s total revenue. The other states that posted fairly high IGRs are Rivers (N66.3 billion) and Delta (N45.6 billion). In contrast, most sub-national governments are fiscally very weak and because of fiscal challenges, most of them have continued to run fiscal deficits. The fiscal deficit of all the state governments increased from –N50.7 billion in 2007 to –N186.2 billion in 2009 but declined to –N131.9 billion in 2011.
Thus, it is clear that all the tiers of government have very poor tax revenue performance. The negative impact of oil wealth on tax revenue cannot be overemphasized. A situation in which the federal, state and local governments depend delicately on revenue from oil and customs and excise duties is dangerous in view of the nature of oil, developments in the international oil market and multilateral trading system. Indeed, the implementation of the ECOWAS Trade Liberalization Scheme (TLS), as reported recently, is very likely to impact negatively on customs revenue.
The implication of the razor-edge dependence of the country on oil revenue is the need to reform the tax system and elevate tax revenue to a significant position among the revenue sources. There are many areas of taxation yearning for reforms. But before much can be achieved from such reforms in the future, one area that the incoming government should immediately explore to shore up revenue for its programmes is the value added tax (VAT) which needs to be reviewed upwards. This, using the language of one analyst, constitutes a low-hanging fruit that can be plucked. A bill can quickly be sent to the National Assembly to adjust upwards the current VAT rate.
It may be recalled that the VAT is a form of consumption tax that was introduced in Nigeria in 1993 by the Federal Military Government, via the Value Added Tax Act 1993, No. 102, and it effectively replaced the sales tax. It is a federal tax that is administered by the Federal Inland Revenue Service but whose proceeds are distributed among the three tiers of government. The distribution formula has been reviewed a number of times in the past; as at today, the distribution is as follows: Federal Government, 15 percent; State Governments, 50 percent; and Local Governments, 35 percent. From the angle of the buyer of goods and services, VAT is a tax on the purchase price while from the perspective of the seller of goods and services, it is a tax on the value added of a product, material or service.
Mike I. Obadan
