At a time of increasing pressure on company profits, tax receipts are curiously rising. The Federal Government earned N358 billion in Corporate Income Tax (CIT) in the third quarter of 2019, the highest this year and more than twice the average of N169.5 billion per quarter in the first half of the year, according to the Central Bank of Nigeria’s economic report published Friday.
The amount recorded in the third quarter is also double the prorate 2019 budget estimate of N169.45 billion per quarter.
It means that the Federal government has collected N707 billion in CIT so far in 2019 and is only now N106 billion away from meeting its full-year revenue ambition of N813 billion.
Given the negative impact of Nigeria’s macro-economic headwinds on corporate bottom lines, the driver of the significant uptick in CIT is down to a wider tax net rather than increasing company profitability.
This means more companies are increasingly paying taxes.
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Babatunde Fowler, the country’s chief tax collector said in October that the taxpayers’ net widened 11 percent to 20 million in 2018 from 18 million the prior year.
Fowler, who is executive chairman of the tax agency, Federal Inland Revenue Service (FIRS), said N5.32 trillion ($17.39 billion) was collected in taxes in 2018 and his office was targeting N8.9 trillion this year. The target refers to gross federally collectible revenues, which is shared among the federal, state and local governments.
Again, Fowler alluded to an increase in the tax net rather than improving company profits as the basis for the expected surge in taxes, from CIT to Value Added Tax (VAT), by year-end.
He said the increase was possible because the number of taxpayers was expected to jump over two-fold to around 45 million this year from 20 million in 2018. That was largely due to the inclusion of people identified in a tax amnesty that ended this year.
For a country struggling with weak revenues, the uptick in corporate taxes comes as a big boost for the cashstrapped government.
The government of Africa’s largest oil producer has turned its attention to the taxman to prop up underperforming revenues since the collapse in crude oil revenue in 2016.
A low tax to GDP ratio of 6 percent, which for instance compares to South Africa’s 20 percent, always leaves room for growth in tax receipts.
A raft of schemes targeted at boosting taxes has since been unveiled by the government but with subdued impact.
The Voluntary Assets and Income Declaration Scheme ( VAIDS) is one of such schemes aimed at capturing more taxpayers. The scheme was billed to fetch some N360 billion but has only raised less than 10 percent- N30 billion, since its 2017 launch.
Company profits in the doldrums
Over the last six months, Nigeria’s real economic growth though remaining positive has decelerated for 2 consecutive quarters, posting GDP growth of 2.1 percent in the first quarter (Q1) of 2019, a decline from 2.38 percent recorded in the fourth quarter (Q4) 2018 and growth of 1.9 percent in the second quarter (Q2) 2019, which marked another decline from Q1 levels.
The Nigerian Stock Exchange, which gives some representation of the performance of the economy as it houses some of the biggest companies in the country, offers a glance into the weakening economic fundamentals in the country.
Read also: ‘Nigeria needs to coordinate tax payments better in order not to distract entrepreneurs’
Seven (7) of the nine (9) major sectors represented on the Exchange recorded declines in their profit margins over the last 6 months, enabling economists to trace the potential source of weakening macroeconomic fundamentals.
Healthcare and Consumer Goods sectors on the local bourse felt the greatest hit to their net profit margins. The average net profit margin of companies in the Health sector dipped to 2.88 percent in the first half of 2019 from 5.38 percent at the end of 2018.
The healthcare sector contributes slightly over 6 tenths of a percent to the GDP of the country, so the decline in corporate margins in that sector is not as alarming as what was recorded in the consumer goods sector.
Consumer goods companies are represented by the manufacturing sector in terms of GDP contribution and the Manufacturing sector is the fourth largest contributor to the Nigerian economy.
Profit margins of companies in the fast-moving consumer goods space are thinning as costs increase and revenues fail to grow as fast.
The net profit margin in the FMCG sector on the NSE declined to 3.51 percent in the first six months of 2019 from 5.80 percent at the end of 2018.
