Imperatives of reforming Nigeria’s tax system


NIGERIA’S persistently piddling tax collection amid an economy battered by low revenue, debt, poor infrastructure and high inflation is a problem which the President, Major General Muhammadu Buhari (retd.), and his economic team have failed to tackle realistically. In another exposé, the Nigeria Extractive Industries Transparency Initiative through its annual audits of the oil industry reiterates that the country is losing billions of dollars to tax evasion. NEITI’s 2020 report indicted 77 companies indebted to the taxman to the princely tune of $6.8 billion. This is highly disturbing but not surprising, as Nigeria suffers doubly from grossly low revenue collection and incompetence by its public officials.

Undoubtedly, the tax system remains crude and unable to keep pace with modern trends epitomised in technology use to detect leakages and mobilise revenue in real time. Defaulters act with impunity because of government’s carelessness. Corruption completes the mix. This results in inconsequential tax returns. OECD data puts Nigeria’s all-time high tax-to-GDP ratio at 9.6 per cent in 2011. In 2016, the first full fiscal year of Buhari’s presidency, it nosedived precipitously to 5.3 per cent. The dangerous trend has persisted all through his tenure.

The International Monetary Fund reckons that an economy requires a tax-to-GDP ratio of at least 12 per cent for viability. This means that without raising tax revenue, economic progress in Nigeria is a mirage. At an average of 33.8 per cent, all OECD countries meet the threshold. Denmark, which has the world’s highest tax-to-GDP ratio (46.3 per cent), deploys it among other first-rate social services in free university education for all EU citizens. In the eight months left of his tenure, Buhari should seriously implement an improved tax collection system by ensuring full compliance, widening the tax net, and punishing defaulters.

NEITI’s Executive Secretary, Orji Ogbonnaya-Orji, reiterates the indisputable fact that perpetual non-tax compliance is a financial crime. “Outside the country, if you don’t pay tax, you will go to jail. It is a very serious criminal offence, and nobody wants to be identified with such.”

NEITI’s report confirms Nigeria’s notoriously derelict tax system. This is a huge concern as the economy is witnessing severe revenue and foreign exchange crises. In 2019, Nigeria’s tax-to-GDP ratio, at 6.0 per cent, was short of the average for 30 African countries by 10.6 per cent.

Although VAT collection has improved after the rate was raised from 5.0 to 7.5 per cent in 2020, it does not change the financial dynamics. In 2019, total VAT collection was N1.18 trillion, compared to N1.53 trillion in 2020, and N2.07 trillion in 2021, said the National Bureau of Statistics. With inflation at double digits, these inflows do not significantly boost public finances.

There are still huge defaults in payments through the Treasury Single Account. Between August 2015 and February 2020, total accruals to the TSA were N19 trillion, according to the Office of the Accountant-General of the Federation. But for leakages and ineffective oversight, it could be much higher.

To the regime’s credit, policies like the Voluntary Assets and Income Declaration Scheme and the whistle-blower scheme began admirably. A tax amnesty policy, VAIDS generated N70 billion between 2017 and early 2020. But these days, VAIDS appears in abeyance. The whistle-blower programme, which led to the recovery of $178 million in the first two months of its inception in 2017; $43 million, £27,800 and N23.2 million in a flat at Ikoyi, Lagos, in 2017, is practically dead.

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The Nigerian government is only paying lip service to taxation. This is manifest in the submissions of a former Finance Minister, Kemi Adeosun, and Vice-President Yemi Osinbajo. In 2018, they said only 914 persons in Nigeria — 912 based in Lagos, and two in Ogun — paid Personal Income Tax of between N10 and N20 million per annum. With all the multimillionaires/billionaires strutting around Nigeria, some zipping around in the latest private jets, this compliance level is abysmally low.

A 2022 report by global consultants, Henley & Partners, further exposes widespread tax evasion. It lists Lagos as the fourth richest city in Africa with 6,300 millionaires worth at least $1 million each. This is insightful. It adds that 330 people in Lagos own fortunes above $10 million; 20 have fortunes above $100 million; there are two who own $1 billion. This is only for Lagos. Other large cities in Nigeria have millionaires, who obviously, are not tax compliant.

This is an eye-opener for state governments, including Lagos, which is adjudged as the exemplar in IGR. Although total sub-national IGR rose by 35 per cent, from N1.31 trillion in 2019 to N1.67 trillion in 2021, this cannot be celebrated going by Henley’s report. Out of the taxable 68.8 million citizens and corporates, only 19 million paid PIT in 2018. As PIT is ideally, the bread and butter of state governments, they should promote new ideas on its collection.

The increasing reliance on borrowings to fund budget deficits creates serious dysfunction in the economy such that over 90 per cent of revenue is now being deployed in debt servicing. This leaves little for infrastructure and social investments.

The second alternative is equally counter-productive: increasing the tax rate, as in the case of VAT in 2020. This is a huge burden on the already overtaxed segments of the economy managing to stay afloat. The Nigerian Employers’ Consultative Association says its affiliates are overburdened by 50 different taxes, levies and fees. This is a myopic way to boost tax revenue.

Governments should expose, recover all outstanding taxes and prosecute persistent defaulters. There should be no sacred cows. This is the lesson from Spain, where superstar footballers like Lionel Messi and Cristiano Ronaldo were prosecuted and millions of dollars in backlogs recovered from them. Tax defaulters are also regularly fined and jailed in the United States.

As the era of sharing money at the centre by governments is ending, it imposes a great burden on officeholders to diversify revenue sources. Therefore, all tiers of government should reform the tax system. It is the modern means of running government, a global ideal that Nigeria should urgently imbibe.


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