Nigeria Grapples with Formidable Tax Collection Challenge

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Friday, February 21,  2020 /09:30 AM / By FDC / Header Image Credit: The Malaysian Reserve

 

Improving crumbling infrastructure and poor services in Africa's largest economy is one of the top priorities for Nigeria's government. But with debt repayments ballooning to nearly two-thirds of revenues, it has struggled to find the money to tackle the problems and is ramping up efforts to boost tax collection.

 

However, the challenge will be formidable in a country with one of the lowest tax-to-GDP ratios in the world, analysts say.

 

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Economists point out that Nigeria's public debt - which at 20 per cent of gross domestic product is low by emerging market standards - is not the issue. "It is not that interest payments are too high; it is government revenue that is too low," Yvonne Mhango, sub-Saharan Africa economist for Renaissance Capital, said in her 2020 outlook report for the region. The Federal Inland Revenue Service has said it loses $15bn annually to tax evasion and that it has roughly doubled the tax base since 2015, when President Muhammadu Buhari was first elected.

 

With the senate set to approve Mr Buhari's plan to borrow $30bn for infrastructure projects in the coming months, the government wants to raise its tax take from roughly 6 per cent of GDP in 2017 to nearer 15 per cent, the threshold the World Bank says is necessary for economic growth and poverty reduction.

  

Despite being Africa's biggest oil exporter, Nigeria is among the world's poorest countries, with 87m of its 200m people living on less than $1.50 a day. Economic growth is stagnant at about 2 per cent, below the country's population growth rate of about 2.6 per cent. Meanwhile interest payments swelled last year to 62 per cent of the revenues retained by central government after it distributed funds to the states. In an effort to tackle the problem, the government this month raised the value added tax rate from 5 per cent to 7.5 per cent as part of a finance bill that aims to bolster revenue collection.

 

To encourage investment and draw more smaller businesses out of the informal economy, the bill also exempts companies with less than N25m ($70,000) in annual revenues from corporate income tax and cuts the rate for those making up to N100m from 30 per cent to 20 per cent.

 

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Mr Buhari has also pledged to expand the economy and tax base by weaning Africa's largest oil producer off its reliance on crude.

 

Shubham Chaudhuri, country director for the World Bank, said domestic revenue generation was one of the top three issues the government had asked him to help with when he arrived last year, along with power generation and job creation. "This is clearly one of the things that Nigeria has to get its head round, and it has to be a concerted effort to raise domestic revenues," he said. "The main challenge will be... broadening the [tax] base."

 

This will not be easy, say analysts. According to the latest World Bank economic report for the country, "tax morale is low" in Nigeria because of the system's complexity and because the population receives few services or infrastructure improvements from the tax the government does collect. "Nigerians have essentially not been given public services... so there is tremendous resistance to trying to raise revenue where the social compact of paying taxes and receiving services is not functioning," said Andrew S Nevin, chief economist for PwC Nigeria.  

 

According to PwC, scores of levies, including state consumption, road and development taxes, cost more to collect than they generate. The top six taxes in terms of revenue raised - including VAT and corporate tax - provided 97 per cent of federal tax revenue, Mr Nevin said, adding: "So a bold but productive step would be to simply eliminate all the other taxes."

 

Nigeria's 36 states would also need to boost collection, Mr Chaudhuri said. Nearly 70 per cent of state revenue comes from the federal government, and few states have been able even to pay public employees the new federal monthly minimum wage of N30,000, let alone improve services.

 

"The fiscal needs are huge... for investments in infrastructure, and investments in people and human capital, basic services, healthcare, basic education, water and sanitation," he said.

 

The Buhari administration has long made boosting non-oil revenues a priority, but after five years in office, it continues to struggle. The administration's 2017-18 tax amnesty programme - allowing Nigerians to bring undeclared income back into the country - met only 8% of its target.

 

The oil industry still provides more than half of government revenues and 94 per cent of foreign exchange, according to the IMF.

 

Diversifying the economy will take time, but there was one way the government could spur revenue collection and convince more people to pay taxes, said Mr Nevin: requiring government agencies to comply with all taxes and fees. "It is not possible to ask the private sector to be tax compliant if the [federal government] is not," he said.


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