The critical challenge of Nigeria today is how to grow her revenue. The International Monetary Fund described it as an ‘existential issue’. The Federal Government, in 2023, will spend only $220 per person, more than half of that to be borrowed. This compares poorly with Malaysia that has proposed a budget of $86.8b, more than $2,400 per capita, South Africa with a 2022/2023 proposal of $135b ($2,250 per capita) and Egypt’s budget of $111b, about $1,000 per capita, although has deteriorated to $67b ($600/capita) today, with the unprecedented decline in the value of Egyptian currency. When our humongous infrastructure requirement is also added to the mix, the scale of the revenue gap can be better appreciated.
It is obvious that the key requirement of government, post 2023, is to grow revenue significantly. The revenue gap is so large that spending fidelity (also necessary) can only give government the needed integrity to address revenue shortfall but cannot put a noticeable dent on our fiscal impotence.
This article looks at our tax revenue and our tax revenue structure to address where there issignificant headroom for improvement. It will also look at our tax rates vis-a-vis other countries to see what the government can do to generate significantly more revenue while granting reprieve to poor Nigerians. This requires a comprehensive tax reform to align our rates to those applicable in developingeconomies like ours.
POOR TAX REVENUE TO GDP
In a comprehensive tax revenue statistics generated by the Organisation for Economic Cooperation and Development (OECD) for 30 African Countries in 2019, Nigeria came last with 6% tax revenue to GDP (Fig.1).
THE NIGERIAN TAX REVENUE STRUCTURE
On Table 1, also from OECD, on tax structure, the area of significant weakness in the Nigeria tax structure is laid bare. Taxes on personal income, payroll and value added taxes are performing significantly lower than our peers, while more revenue burden is placed on Corporate Income Tax.
Source: OECD tax revenue structure
*Nigeria Data is for 2017, other African Countries 2018 & OECD Countries for 2019.
Income tax, the highest revenue yielding tax in the OECD, generated just 10% of our tax revenue in Nigeria while it was 17% for the African average. It accounted for 25% and 35% for Kenya and South Africa respectively. In the OECD, the average is 25% while it was as high as 38%, 42% and 47% in Canada, US and Australia respectively.
Also VAT generated 14% in Nigeria while the African average was 30% with 20% for OECD. While there is a need for improvement in collection in general, there is also the specific need to harmonise tax rates to compare with our peers and reform the process for effectiveness. There is a need to reform the tax system to generate significantly more revenue from income tax and vat.
INCOME TAX: EXCLUSIVE TAX FOR STATES IN NIGERIA.
A unique aspect of our federal structure is that income tax is exclusively for states in Nigeria with 37 Revenue Boards responsible for assessment and collection. By contrast, it is centrally collected in South Africa and Ghana. In US and Australia, it is an exclusive federal tax while it is shared with the provinces in Canada and Germany. Even in Switzerland, that is routinely quoted as reserving all taxation rights for the Cantons (Provinces), the Central government is still availed a portion of the income tax administered and collected centrally. The unique characteristic of the Swiss model is that such tax rights are granted by the Cantons for a specific time frame. On expiration there would be another referendum for a new fiscal right. In India income tax is for the Central government except tax on agricultural income and professional tax that are for the States
In its 2021/22 tax statistics, South Africa collected R1,564B ($81) tax revenue, 35.5% ($28.9b) of that was income tax, 25% ($20.3b) was vat, 20.7% ($16.8b) corporate tax and 18.8% ($15.3b) others. By contrast the total IGR for all states in Nigeria (2021/NBS) was N1.9tr ($4.18b). This is exceedingly poor as it is less than 15% of amount generated by South Africa with a lower gdp and a higher unemployment rate.
On tax to GDP basis the SA tax statistics gave tax revenue to gdp of 24.9%. That implies an income tax of 8.8% of gdp, vat of 6.2% of gdp, CIT of 5.2% of gdp and others averaging 4.7%. In Nigeria, in 2021, with a gdp of $440.8b, the total IGR of all the States was 0.95% of GDP, extremely poor. Note that States’ IGR includes other state taxes like property tax. Also in 2021, FIRS reported vat collection (including import vat) of N2.07Tr ($4.55b), 1.03% of Nigeria GDP. Corporate Income Tax (non-oil) wasN1.75Tr ($3.85B), 0.87% of GDP. From the above comparison Nigeria can target income tax to GDP of 5%, Vat of 4% and CIT of 3% in the immediate while targeting a total of 15% within four years, Note that a country like US collects income tax in excess of 14% of GDP.
While it is politically not feasible to collect income tax centrally, a more coordinated approach is needed for synergy and more effectiveness. A more effective model is the States Boards forming a National Revenue Service (using the template of Joint Tax Board) for a coordinated engagement with tax payers and seamless aggregation and remittances to states based on payers’ residences. This can leverage on BVN for a more robust tax audit. Note that if income tax and Vat are optimised the agitation for more revenue to states becomes mute. States have considerably more revenue rights and potentially more resources than the federal under our current structure. The immediate target can generate 9% of GDP ($40b) almost exclusively for the states. This is more than five times the total funds available to states in 2020 (IGR + FAAC, N3.6Tr/$8B).
REALIGNING TAX RATES
A Cursory look at Nigeria’s tax rates shows a lopsided burden on the poor while the rate for the rich are comparatively very generous. Our marginal tax rate is 24%, which is very low compared with 30%, 25% and 45% in Ghana, Egypt and South Africa respectively. There is an urgent need to reduce tax burden on the poor while increasing the marginal rate for tax payers on higher income. 30% rate is appropriate at the near term while a target of 35% may be for the longer term. Table 2 shows comparative tax payable for various chargeable income amounts in Ghana, South Africa, Egypt and Nigeria.
From the table above it is obvious that Nigerians pay more tax at the lower income brackets compared with the other countries while they pay less at the higher income brackets. The country with the most progressive tax in the table is South Africa with a marginal tax rate which currently stands at 45%. South Africans on equivalent (monthly) chargeable incomes of $250, $1,000, $10,000, $50,000 & $100,000 pay income tax of $0, $97, $3,589, $21,589 and $27,905 respectively. The Nigerian counterparts pay equivalent of $32, $198, $2,358, $11,958 and $23,958 respectively. While a Nigeria on chargeable income of $1,000 (July ’22 rate) pays more than twice his South African counterpart, that on monthly income of $10,000 pays about two thirds of a South African. The very rich on very high monthly chargeable income of $50,000 pays about half of their South African counterparts.
It is imperative that the rates at the lower income bracket should be reviewed downwards, while higher incomes pay at higher rates. The down-side is that rural states with poor workers on very low income will be negatively impacted while states with people in the higher income brackets will enjoy significant positive impact. These could be ameliorated with federal support for a limited period as done in Germany.
CONSOLIDATE TAXES
The Nigeria tax system is littered with multiplicity of taxes and levies. The rule was if there was anything to fix, impose a different tax to fix it. Thus we have education tax, Industrial Training Fund Levy (ITF), Nigeria Social Insurance Trust Fund (NSITF), etc. Some speculate a police tax (or security tax) is coming. In the oil sector, there are additional taxes/levies for Nigerian Content, and others to cater for Niger Delta Development. A major drawback of many of these taxes/levies is that they are not taxes on income/profit but are more of penalties for engaging in business ventures. It is obvious many of these levies were imposed by bureaucrats without adequate consultation with the business sector and entrepreneurs. Venturing into business demands sacrifice and toil, and thus should not attract discriminatory and burdensome levies. Government should consolidate taxes and properly define them into appropriate categories; income/profit tax, consumption tax and wealth (property, inheritance etc) tax. It is more appropriate for government to bet on business success and collect tax on profit. This way it will not kill the ‘goose that lays the golden egg’. Of course, with our dilapidated infrastructures and very challenging business environment, it is difficult to justify a corporate tax rate higher than other countries with better infrastructures. It is recommended that the corporate rate should be reduced to between 20-25%.
REVIEW VAT RATES
VAT is a veritable source of income to government; easy to administer but difficult to evade. It is a form of consumption tax that does not discriminate against business ventures. Those who put their wealth into luxury consumption pay the same way as businesses, if not more. Also essential items like food, education materials and medical supplies are exempted from VAT charge. Additionally, with the recommended reduction in personal income tax at the lower and middle income levels, coupled with the review of corporate tax rate, VAT should be reviewed upwards. As in Ghana, such levies, that today constitute penalties for engaging in business, should be put into consumption tax. Ghana has Education Trust fund charge of 2.5% and Health Insurance Fund of the same rate. Imposing vat at 12.5% of invoice value plus 5% dedicated funds gives (Ghana) an effective vat rate of 13.125% totalling a charge of 18.125% on all invoices (before the IMF intermediated review). South Africa imposes VAT at a rate of 15%. It is recommended that we raise VAT to 10%. It should be noted that the increase of 2.5% must be more than compensated for by the reduction in personal income tax at the lower and the middle income levels.
EDUCATION TAX AND HEALTH TRUST FUND
It is advised we consolidate the multiplicity of charges into another consumption charge of 2.5% each for Education tax and Health Trust Fund like in Ghana. That makes all charges on invoices about 15%, which is still lower than Ghana’s and equals the rate in South Africa. That should eliminate education tax (TETFUND) for corporates and ITF charges as all are for education. With VAT generating N2tr in 2021 (@ 7.5%) and improved collection, it is expected these will gross N800b each which can be applied by the federal government to education and healthcare. This is important since the present taxation rights leave the federal government significantly poorer than comparative federations where income tax (the biggest revenue yielding tax head) is either shared or exclusively for the federal.
SYMPLIFY AND EASE COMPLIANCE
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Tax is a necessary burden. Complying should ordinarily be easy and administrators must be friendly and accessible. That requires enough personnel with requisite training in accessible office locations. States must know that their survival depend on internally generated revenue rather than allocations from the centre that will continue to dwindle. Paying and getting evidence of payment should be easy. Revenues should look at the model in the banking industry. The hassles, hitherto, associated with depositing and taking money from the bank has been almost completely eliminated. All banks today have mobile apps where you can access your money and make transactions.
State Revenues, as in Lagos, should develop apps where prospective tax payers can register, estimate tax, make payment and have evidence of payment which could be accessed and validated by authorities seamlessly. Of course there should be benefit for compliance and penalties for refusal to comply. The greatest benefit is for government to spend on welfare schemes for the citizens and eliminate waste. This will be discussed in detail in an instant.
BOOST TAX REVENUE
The purpose of a comprehensive tax reform is to boost government revenue. Spending $220 per citizen, half of which is spent on poorly targeted subsidies and waste, can never lift people out of poverty. Government spending on education, health and infrastructure must be increased substantially if we are to avoid civil strife. Oil revenue can no more pay for governance and the headroom for loans is no more there. The government (at all levels) are left with no alternative than to collect taxes. As has been demonstrated earlier, the problem is not with the rate of tax we charge. Malaysia has a substantially more liberal personal tax rates coupled with a lower corporate rate but still manages to collect 12% of gdp and improving. Our below 7% tax to GDP is one of the lowest in the world while our rates do not rank as such. The problem with us is collection. A target of 15%-18% of GDP is achievable in the medium term while we target 20%-25% for the longer term. The state government must appreciate that a different system is necessary to capture the agricultural population. It must be preceded by a combination of incentives, financial support and capacity building. We must devise incentives for compliance while punishing evasion. Communication and information management is essential for the success of the scheme. Citizens will not give willingly without benefits in return. Application and enforcement of the law must be fair and uniform across sectors and demographics. Taxes are imposed for welfare of the citizens and this must be demonstrated and communicated.
Of course, governments at all levels must be seen to be responsible and appreciative of the financial situations in the country to demonstrate fidelity. The challenge is huge and urgent. We either reform and pay for governance (and welfare of the people) or harvest the whirlwind of a dysfunctional nation.
Tayo Ayodele, Lagos, 08165388493
