Despite successful initiatives to bring in a significant number of new corporate and self-employed individuals as Nigeria’s tax payers, these efforts have not delivered expected revenue.
Of 1.5 million registered corporations, only 522,000 could be matched (as of May 2016) to any type of data available within the Federal Inland Revenue Service (FIRS), and only 77,000 filed Value Added Tax (VAT) returns in 2016, suggesting an active taxpayers’ population of only 5 percent.
According to the International Monetary Fund (IMF), comparing Nigeria’s tax structure with those of a selected sample of advanced, emerging, and developing economies, showed that none of its domestic tax collection indicated a promising performance, as Africa’s largest economy raised the least revenue of all comparators and at 5.3 percent of Gross Domestic Product (GDP) revenue in 2016 was significantly below the 22 percent of GDP average.
“The very low tax collection rates in Nigeria are a direct reflection of weaknesses in revenue administration systems and a high level of systemic noncompliance,” IMF said in a statement.
Nigeria’s tax to Gross Domestic Product (GDP) ratio at 6 percent, is significantly lower than Ghana and Egypt at 16 percent, Morocco at 22 percent and South Africa at 27 percent.
“For me it’s not the rate of tax that is important, in an economy like this, increasing the rate of tax is not even the issue and we have argued this a lot of times and you see what the federal government is trying to do, there is a bill now to reduce the tax levied on the small scale businesses to 15 percent, and corporate tax to 25 percent.
In a very fragile economy, you need to stimulate the economy to ensure that there are more businesses that are making profit. What government needs to do is to ensure that they increase the tax base by bringing in more companies by developing and enabling environment that will encourage investment,” Ayo Akinwunmi, Head of Research, FSDH Merchant Bank said.
Although, the government of Africa’s most populous nation last year laid out plans to increase the ratio to 15 percent by 2020. Earlier this month an increase in excise duties on tobacco and alcohol came into effect.
The tax-to-GDP ratio is a ratio of a nation’s tax revenue relative to its gross domestic product (GDP). Some countries aim to increase the tax-to-GDP ratio to address deficiencies in their budgets.
Meanwhile, the Nigeria 2018 budget proposes to raise non-oil revenues of N4.2 trillion.
Babatunde Fowler chairman of the Federal Inland Revenue Service (FIRS) said on Wednesday June 6 2018, that about N30 billion ($98 million) has been recovered from individuals and companies through Voluntary Asset and Income Declaration Scheme (VAIDS), a tax amnesty scheme which is almost a year old.
Fowler, who is also the chairman of the Joint Tax Board, stated that the national taxpayers’ database had increased from 14 million in 2016 to over 19 million in 2018. This data was however not seen on the FIRS website when BusinessDay checked Tuesday, 19 June 2018.
The Washington-based international organisation, IMF in its 2018 report themed; Nigeria- Selected Issues expressed its optimism of Nigeria having a significantly higher revenue potential.
Internationally, there is a tipping point in the relationship between tax capacity and growth. A minimum tax-to-GDP ratio of about 12 ¾ percent is associated with a significant acceleration in the process of growth and development, and likely with changes in social norms of behavior and state capacity.
According to IMF, taxation is not an end in itself, but an instrument for advancing citizens well-being as part of a well-functioning state. It further stressed that tax is also a core part of state-building and constitutes a visible sign of the social contract between citizens and the state, enshrining the principle of revenue for-service.
“Estimates of tax potential suggest that a non-oil tax capacity of 16 to 18 percent would be optimal for a country with Nigeria’s economic structure and per capita income levels. This estimate implies space for additional tax collection of 12 percent of GDP,” the IMF explained.
Africa’s largest exporter of crude oil, last year emerged from a recession brought on by low oil prices. Its crude sales make up two-thirds of the nation’s revenue and the government is trying to boost its income from non-oil sources.
The Voluntary Assets and Income Declaration Scheme (VAIDS) gives tax evaders immunity from prosecution, penalty charges and interest if they voluntarily declare their previously undisclosed assets and income.
VAIDS is to increase the tax to GDP ratio, reduce tax evasion, widen the tax net, increase level of tax compliance and awareness and when all this is done, businesses would feel a positive impact not just on their businesses but in everyday life.
Iyalode Alaba Lawson, the National Chamber of Commerce, Industry, Mines and Agriculture (NACCIMA) stressed that there was a need to educate the masses now more than ever before, as she described tax as a vital aspect of the nation’s economy, especially as a source of Internally Generated Revenue (IGR) and a way by which government finance social activities for citizens.
She noted that even though it was important to be tax compliant as it gives the people the audacity to question the government when it doesn’t fulfill basic civil responsibilities to the citizens, she pointed out that several challenges continue to prevent people from complying.
They include; high tax rates, segmentation and valuation criteria, collection, multiple taxation and perceived inefficient utilization of the funds generated from tax.
On the way to go for Nigeria in maximizing its tax revenue IMF suggested that there is significant scope for broad-based and comprehensive policy and administration reforms.
“Achieving higher revenue performance depends heavily on building capacity in tax administration to gain control of the tax system, complemented by targeted tax policy reforms being implemented in parallel—as also demonstrated by the experience of countries that implemented successful reforms over the past 15 years.”
“Staff will argue that in the short term, the tax reform should include broader use of revenue-productive excises (such as alcohol, tobacco products, fossil fuels, and mobile phone air use), and placing a moratorium on new business tax holidays; followed by decisive steps to transition toward a broad-base consumption VAT at a higher rate, an all-embracing rationalization of expenditures, and a reform of personal income and property taxation in the medium term,” IMF said.
The international organisation cited out reform of excise taxation in Nigeria as an act that can strengthen its revenue-raising efficiency and externality-correcting properties.
The relevant measures mentioned by IMF include: Converting ad-valorem excises on alcohol and tobacco to specific (and higher) rates indexed for inflation to reflect the external costs of consumption and production, improving tax progressivity by increasing excise duties on luxury goods and air time, contributing to the cost recovery of road transport infrastructure and recognizing the role of environmental charges in increasing resource efficiency and revenues.
