A typical developing economy collects at most 15 percent of GDP in taxes, compared with the 40 percent collected by a typical advanced economy. The ability to collect taxes is central to a country’s capacity to finance social services such as health and education, critical infrastructure such as electricity and roads, and other public goods. Considering the vast needs of poor countries, this low level of tax collection is putting economic development at risk.
Nigeria is no exception. The country’s current tax to GDP ratio is 6.1 percent, one of the lowest in the world. That has contributed to the fact that over the decades, Nigeria has struggled with the perennial fix of budget deficit. For example, statistics by Statista, a German company specializing in market and consumer data shows that Nigeria’s budget balance in relation to GDP between 2015 and 2019, with projections up until 2025 are all in the negative.
The deficit in relation to GDP in 2015 was -3.17; it was -4.01 in 2016, -5.4 in 2017, -4.31 in 2018, -4.76 in 2019, and -6.74 in 2020.
It is projected to be -4.97 in 2021, -5.09 in 2022, -4.42 in 2023, -4.53 in 2024 and -4.59 in 2025.
Generally, Nigerians and quite a number of foreign investors complain about multiple and complex taxation. The multiplicity and complexity of taxation may be a factor to the low collection of taxes.
Studies by the World Bank have shown that a complex tax system discourages taxpayers from remitting taxes and creates loopholes and incentives for tax evasion. On the other hand, a simple and straightforward system shows transparency and encourages prompt tax payment. On the basis of that finding, there is need for tax reform in Nigeria.
The state of Georgia offers a striking example of successful tax revenue reform. Following the collapse of the Soviet Union, the government struggled to collect tax revenue. By 2003, rampant corruption involving tax evasion, illegal tax credits, and theft of government tax revenue had left public finances in shambles. The government was no longer able to honor its obligations to public servants and pensioners, even though salaries and pensions were very low.
A revised tax code, passed in 2004, simplified the tax system, reduced rates, and eliminated a series of minor local taxes that had been generating little revenue (on pollution and gambling, for example). Only 7 of 21 taxes remained, and many of the rates were reduced.
Progressive personal income tax rates (12 to 20 percent) were replaced with a flat rate of 20 percent, and the social security contribution tax rate was first reduced from 33 percent to 20 percent and then eliminated altogether. Corporate income was taxed at a flat rate of 15 percent, and the value-added tax (VAT) was reduced from 20 percent to 18 percent. The revenue lost from lower tax rates was made up through a broader tax base, better compliance, and stricter enforcement.
The government also made it easier to pay taxes by introducing measures such as an electronic tax filing system. In this way, technology both improved efficiency and reduced opportunities for corruption. In parallel, the government lowered the minimum capital required to start a business, which also generated more tax revenue.
The improvement in the country’s ability to mobilize revenue between 2004 and 2011 is all the more impressive given the sharp reduction in tax rates. By 2008, Georgia’s tax-revenue-to-GDP ratio had doubled to 25 percent.
No doubt, however, it requires salient improvement in the way government is run to get the buy-in of its people to become tax compliant. For example, government would have to make an effort at building the trust of its people.
For taxation to work, citizens must trust their governments. They need proof that their hard-earned resources are being used wisely, and that in the long run they will benefit from projects completed using taxpayer funds. That requires transparency regarding government spending. Governments at all levels can start by implementing and publishing a medium-term revenue strategy so that all Nigerians can be informed about how their taxes are being used. It is necessary for government at all levels to reduce any trust deficit Nigerians may have developed over the decades
Government must also strive to keep taxation simple. Complex tax systems foster a culture of evasion and can create opportunities for corruption. A 2014 World Bank Group report found that a 10 percent reduction in both the number of payments and the time to comply with tax requirements can lower tax corruption by 9.64 percent. A simpler code can bring more small businesses into the taxable formal sector. It also creates a more predictable environment for international investors, attracting investment and tax revenues in the process.
The simpler a tax system is, the easier it is to enable electronic tax payments. More countries are moving in this direction, although progress is uneven.
Recently, the Federal Inland Revenue Service (FIRS), in conjunction with the Nigeria Governors’ Forum (NGF) identified the adoption of technology as a veritable means of improving tax collection and blocking leakages in Nigeria. That is a welcome development.
Taxation, in most advanced jurisdictions, has gone beyond the bricks-and-mortar model but relies more on data and intelligence, which are driven by technology.
The adoption of technology in revenue administration processes is crucial and a major enabler for enhanced and sustainable revenue generation in a globalized and knowledge-driven world.
Therefore, revenue authorities at all levels must adopt automated processes and embrace e-solutions both in their internal operations and in dealing with the taxpayers within their respective jurisdictions.
The director-general of the NGF, Asishana Okauru acknowledged that most contact-intensive taxes are at risk, given the lessons learnt during the period of the lockdown where taxes collected from contact-intensive taxes fell by an average of 40 percent across all states in Nigeria. He added that coupled with a weak environment for tax policy and tax legitimacy, low technological integration in tax administration has undermined efforts to mobilise domestic revenues in the country.
To make e-filing work across the board, Nigeria will have to overcome basic IT infrastructure hurdles. But once the basic elements are in place, we can make progress by pairing digitized taxes with other innovative approaches such as digital identification, digital finance, online tracking of invoices and sales or auto-populating tax returns that citizens simply have to confirm.
Governments at all levels also need to find new sources of revenue by widening the tax net. Property taxes, excise taxes, and carbon taxes are a potentially significant source of revenue in low-income countries because they apply primarily to wealthier households. They can also deter unwanted behaviors, such as driving cars in already congested areas, smoking, or consuming unhealthy foods.
Nigeria would be much better off in terms of revenue collection if she had a wider tax net, simpler and more efficient collection system. There are identifiable thriving sectors and subsectors in the economy that are being virtually sidestepped in the collection of taxes. For example, the cattle industry in Nigeria, estimated to be worth between N13 and N30 trillion. At most, only a part of that industry (at the slaughterhouses) pays levies.
An expert, Mr. Kola Kuku, the chief executive officer of Cattleman Feedlot Service, estimates that about 8,000 cows are slaughtered in Lagos State on a daily basis. By that reckoning, and assuming each cow sells at the modest average of N100,000, the cattle industry at the slaughterhouses in Lagos State alone would be worth close to N1 billion daily. That excludes goats, sheep, pigs, etc.
At the slaughterhouses in Lagos and other states, fees are charged. But that is just one segment of the industry. A huge segment of the value chain of the cattle industry is at the rearing stage. There is hardly any record of tax imposition, to talk less of collection at that level.
The federal government can widen its tax net by passing into law that landlords pay taxes on unoccupied buildings, especially for residences where the landlords, for unknown reasons, prefer to keep their property empty for months, sometimes years by pegging rates for their property beyond the financial capability of the average Nigerian, as is common in places like the Federal Capital Territory (FCT).
There are many avenues out there for the government to tap into for revenue generation. It requires will in that direction to reduce Nigeria’s dependency on oil, an unstable source of revenue.