Friday, January 17, 2020 / 02:15
PM / KPMG Nigeria / Header Image Credit: KPMG Nigeria
Tax Revenue Gap
Nigeria's domestic revenue mobilization has been one of the lowest in the world. This has had a severely limiting impact on economic growth and creation of an enabling framework for investments.
According to the Organisation for Economic Co-operation and Development (OECD)'s Revenue Statistics in Africa 2019 report, Nigeria's tax-to-Gross Domestic Product (GDP) in 2017 was 5.7%. This was a moderate increase from the figures reported in 2016 (5.3%).
However, when compared with the same index across other African countries over the same period, it was apparent that Nigeria's tax revenue generation was significantly low for the level of economic activities in the country. Specifically, the 26 African countries (including Ghana and Botswana) reviewed in the OECD's study reported an average tax to GDP ratio of 17.2% (11.5 basis points higher than Nigeria's ratio).
The Federal Government implemented tax amnesty initiatives between 2016 and 2018 to drive up tax revenue and expand the tax base. However, these initiatives have proven insufficient to stimulate the type of revenue growth required. As at 2018, the nation's tax to GDP ratio was estimated at roughly 6%, a slow and unimpressive growth from 2016.
Recent data from the National Bureau of Statistics indicates that Nigeria's GDP was N31.79 trillion in the first quarter of 2019 (Q1 2019), while the total government collection in taxes was barely N1.5 trillion in that quarter. This produced a tax to GDP estimate of about 4.7%, which was a decline from prior periods.
Oil production disruptions and price shocks have accounted largely for the unimpressive tax revenue return as the nation has largely depended on revenue from oil sources. Oil revenue remitted to the Federation Account has been lower than its potential level due to the cost of petrol price subsidy and insufficient contributions from Nigerian National petroleum
Commission. Other factors, such as legislative uncertainty, have also impacted investment in the sector. Non-oil revenues have been stagnant at less than 4% of GDP, offering no buffer against oil revenue volatility.
How the Finance Act Seeks to Address Tax Revenue Gap
Some of the factors highlighted as contributing to the poor tax to GDP ratio are a sub-optimal Value Added Tax (VAT) system (which deviates from modern consumption tax designs), comprising a low standard VAT rate of 5% and restricted recoverability of input VAT. Other factors, such as extensive use of tax incentives to encourage investment, have resulted in a narrowing of the corporate tax base.
A weak tax administration system coupled with high cost of taxpayer compliance has also resulted in a systemic non-compliance and a lack of faith in the tax system. These challenges are typical of a number of tax jurisdictions, however, the lack of responsiveness of the Nigerian tax system in a dynamic and ever changing economic and business environment further exacerbate these issues.
It is imperative that the Nigerian tax legislation is updated frequently to respond to the challenges of today's business environment which therefore underscores the importance of the Finance Act 2020. The Finance Act is the first of its kind in over two decades and is intended to support the funding of the 2020 budget. The Finance Act contains several long-awaited changes to the tax framework which seek to address issues of low tax revenue growth, such as an increase in the VAT rate to 7.5% and the introduction of tighter deductibility rules.
In view of global economic and tax trends, the Finance Act also seeks to modernize the Nigerian tax system by incorporating recommendations of the OECD on taxation of the digital economy and profits earned by non-resident companies.
These proposals have been recommended for global adoption in recognition of the impact of globalization and technology, whereby trade flows increasingly transcend traditional and formal frameworks. Nigeria will thus be one of the few early adopters of globally relevant tools for tracking and harnessing tax revenue from economic activities that occur within our fiscal community.
Furthermore, the Finance Act seeks to provide a boost to small and medium scale enterprises by reducing their tax burden. It also seeks to replace existing tax incentives with more targeted incentives to stimulate economic activity in the capital market and infrastructure sectors.
Finally, the Finance Act amends several onerous tax provisions which have impeded investment in Nigeria, such as the complex insurance tax rules and the excess and interim dividend tax rules that limit the dividend available for distribution to shareholders as contained in the Companies Income Tax Act.
Overall, the provisions contained in the Finance Act are intended to incentivize economic activities to stimulate GDP growth and facilitate increase in the revenue generated.
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