Increasing Government Revenue Through Taxes in the Nigeria’s Growing Economy.
By ATER, Solomon Vendaga
ABSTRACT
Changing and expanding the global economic space demands practical innovative approaches that will tap into the available and underutilized sectors with a greater and feasible capacity to accommodate the global and national financial demands. For us Nigerians, the Oil Sector has reached its diminishing stage, and the need to heed a call for a sustainable source of revenue to revamp the economy has now been higher than ever before. We must utilize the potentials available to salvage the situation. The tax sector has proven over the years to be one of these few alternatives to oil revenue. According to the International Center for Tax and Development, tax revenues account for more than 80% of total government revenue in about half of the countries in the world and more than 50% in almost every country. The government must take the necessary steps to carry every sector along both formal and informal in the making, and implementation of global standards tax policies. More importantly, collection of taxes is a key development priority for every nation. It is fundamental to finance investments in human capital, infrastructure and the provision of services for citizens and businesses, as well as to set the right price incentives for sustainable private-sector investment which often form a basis for a stable economy. It is convincing that keen attention in the tax sector will give the economy, a better place in the global economy. Trust me, it will. The above remains the rationale on which this research is hinged.
It no longer new that Nigeria is currently facing a myriad of challenges, part of these numerous challenges is the inadequacy of monetary resources for the day to day running of government, and the funding of critical infrastructural projects. This informed the recent gargantuan borrowing of foreign loans by the current administration, obtained at scary servicing and interest rates running to billions of Dollars. According to a press release by the Countries Debt Management Office, Nigeria’s public debt stock profile stood at 33.107 Trillion Naira, the highest in the history of the Country.
To this end, the attention of the government has been driven to increasing the revenue to finance the economy.
A drop in oil prices and the resulting economic recession in Nigeria resulted in an increased focus on revenue generation through taxation in Nigeria. However, the tax-to-Gross Domestic Product (GDP) ratio has continued to hover around an abysmal 6% despite the reported tax revenue increase by the Federal Inland Revenue Service (FIRS). This is not a good situation for a bigger economy on the African continent.
Nigeria has a low tax to gross domestic product (GDP) ratio of approximately 6.1% as opposed to the 44.6% obtainable in France, 39% in the United Kingdom, and 11.5% in “lowly” Burkina Faso.
Tax-to-GDP is the portion of a country’s output (i.e. domestic product) i.e, attributable to tax receipts, and it is one of the most widely used tools for measuring the economic scope of each country across the globe.
We must however, know that a low tax-to-GDP ratio is not an uncommon phenomenon with developing economies including Nigeria. Before the economic recession in Nigeria in 2016, the Nigerian GDP figures were rebased and the new figures were greatly celebrated as the news that the Nigerian GDP had grown to be the largest in Africa was widely published.
Nonetheless, the reported growth, the tax-to-GDP ratio has remained at 6% which is even relatively lower when compared to other developing economies and some of the determining factors include unorganized informal sector, narrow tax base, tax exemption, and subsidy policies as well as loopholes in tax laws.
The approach of tax administration is to engage in an aggressive drive to have more individuals, businesses entities, and transactions caught in the tax net.
This is because preliminary analyses estimate the financing gap for achieving the Sustainable Development Goals for developing countries at about $2.5 trillion annually. Much of this financing gap will need to be met by increased private-sector investment in sustainability, which requires appropriate tax policies to create the needed price incentives. Yet, developing countries that are most in need of revenues, including fragile and conflict-affected states (FCS), often face the steepest challenges in collecting taxes.
But there is generally a very poor attitude towards taxation in Nigeria by its citizens which made the country’s tax regime unable to reach a substantive and remarkable result.
It is reported that across Nigeria, the overall size of both businesses and individual taxpayers that are not paying any form of tax is staggering. From the latest data provided by the Federal Inland Revenue Service, as of 2018, over 62 percent of the 120,000 registered businesses do not pay any form of tax at all. The number of uncompliant taxpayers, in both public and private sectors, is much higher at 72 percent of the 69.5 million overall employed, with the tax net covering only 19 million taxpayers.
In a 2019 survey about tax perceptions by the Nigeria Economic Support Group (NESG), low tax morale drives poor tax compliance. As much as a fifth of Nigerians believe it is not wrong to evade tax, and over half the participants believed that while it is wrong, it is understandable to avoid tax payment. How does the government raise funds when its citizens are so averse to tax collection?
The argument can be had that lack of trust by the citizenry that the government will judiciously utilize tax revenue is the primary reason they refuse to voluntarily subject themselves to the tax net, the question is: what is the quality of revenue that can be derived if all of the individuals that should be in the task net are caught in the tax net? What is the quality of economic activities that is available to meet the expectations of the Government to have tax revenue as the driver of economic growth?
Again, it must be said that the above findings represent the reason for which this work is set in motion.
In increasing Tax to GDP ratio, a research conducted by the International Institute for Tax and Development made us to understand that governments also need to be concerned with questions of equity, efficiency, trust and reciprocity, among others. It is a big question. It was addressed by answering three more precise questions that the research posed.
This leads to the list of eight ways of potentially increasing revenue: more actively and effectively combating the transfer mispricing activities of transnational firms; taxing mining activities better; increasing excise taxes on tobacco and alcohol; reducing tax exemptions for investors; implementing valued added tax (VAT) more effectively; more actively taxing the income and assets of the fast-expanding numbers of rich citizens; taxing more heavily the ownership and occupation of urban real estate; and obliging government agencies to be better ‘tax citizens’.
There seems to be considerable potential, notably to use information and communications technology (ICT) facilities more effectively to manage core business processes, including accounting for tax revenue receipts in more integrated, centralised and transparent ways.
Some of the more promising possibilities are: complementing corporate profit taxes with taxes on turnover; signing fewer bilateral international tax treaties; more regional inter-governmental cooperation around a range of tax policy issues; and improving the tools for taxing wealthy individuals. Tax is very political, but so are many things that governments need to do. There is no reason to believe that political obstacles to reform are unusually high in the tax area.
In achieving our desired result, our tax system need to be reformed to meet up with the task with which it has been saddled.
Georgia offers a striking example of what Tax Reform can do. After 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.
Georgia’s sweeping tax reform was made possible after the 2003 Rose Revolution, which gave the new government a mandate to reform the economy and fight widespread corruption. The country’s new leaders adopted a policy of zero tolerance for corruption, and the culture began to change, along with the laws. 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.
3.1.0. LESSONS FROM THE GEORGIA CASE AND RECOMMENDATIONS FOR OUR TAX REGIME.
3.1.1 HAVE A CLEAR MANDATE;
Most countries where tax reforms worked usually would have a clear mandate on what they want to achieve. For example, 2004 Orange Revolution in Ukraine that drastically changed their tax system.
3.1.2 STAKEHOLDER-INVOLVEMENT AND POLITICAL COMMITMENT;
It is not enough to have a mandate to change. There are many countries that had plans for improving their tax systems but achieved very little. This is why a political will coupled with inclusive engagement of relevant stakeholders like the informal sector will go along way in achieving this goal.
3.1.3. BUILD TRUST AND PROVIDE PROOF
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 can start by implementing and publishing a medium-term revenue strategy so that all citizens can be informed about how their tax dollars are being used.
It also requires proof that taxpayers are getting bang for the buck. In countries with a large trust deficit, governments can commit new resources for specific projects that have visible benefits for the average citizen: The building of a new hospital or the construction of a new school can go a long way toward building trust. As trust in a country’s ability to provide good public services grows, governments could then move away from relating new tax revenues to particular projects. Better public services would enhance people’s trust in government, thus lowering tax evasion and increasing tax revenues further, which would sustain the level of government services, feeding a virtuous circle of trust and government services.
3.1.4. SIMPLIFY THE TAX SYSTEM AND CURB EXEMPTIONS
Complex tax systems foster a culture of evasion and can create opportunities for corruption. Consider the example of Latin America: The average company can expect to spend 547 hours each year making 22 separate tax payments. Not surprisingly, countries in Latin America and the Caribbean lost $340 billion in 2015 to tax evasion.
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.
“We are happy that countries see the benefit of making these changes and are taking action. Fifty economies now have just one tax per tax base. Over the past 13 years, 57 economies have merged or eliminated certain taxes.”
Curbing exemptions can also reduce the tax system’s complexity while boosting revenue by broadening the tax base. Many countries incur a sizable loss of revenue through ill-designed exemptions, such as costly tax holidays and other incentives that fail to attract investment. And discretionary granting of exemptions provides opportunities for corruption.
3.1.5. REFORM INDIRECT TAXES ON GOODS AND SERVICES.
The VAT has proved to be an efficient and strong revenue booster: countries that impose this tax tend to raise more revenue than those that don’t (Keen and Lockwood 2010). In addition to reducing the rate, Georgia streamlined its VAT refund mechanism, allowing revenue from this source to rise from 8.5 percent of GDP in 2005 to about 11.5 percent in 2009.
3.1.6. ADOPTION OF DIGITAL TAXATION
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. In Cote d’Ivoire, for example, the time to prepare and file taxes decreased in 2017 from 270 to 205 hours following the introduction of an e-filing system for corporations. But in Gabon, the time to prepare and file increased in 2017 despite the new availability of an e-filing system.
To make e-filing work across the board, many countries will have to overcome basic IT infrastructure hurdles. But once the basic elements are in place, countries 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. Kenya, for example, leveraged its ubiquitous money-transfer system, M-Pesa, to allow taxpayers to file and pay their taxes electronically through the platform.
3.1.7.FIND NEW SOURCES OF REVENUE
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.
The World Bank is supporting the OECD-led global initiative to rethink how huge – and often digitized – multinational enterprises (MNEs) are taxed, which could have a big impact on developing countries. Currently, governments around the world miss out on anywhere from $100 billion to $600 billion in tax revenues due to legal forms of tax evasion and avoidance. The OECD proposal represents a turning point for international tax rules and, if done right, could reallocate more funds to developing country governments, as explained in a recent World Bank paper, International Tax Reform, Digitalization and Developing Economies.
3.1.8. MORE MODERN REGISTRATION, FILING, AND MANAGEMENT OF PAYMENT OBLIGATIONS:
All countries that have reformed their tax systems sought to establish or modernize basic rules and processes in these key compliance areas. For instance, Guyana implemented a unique system of taxpayer identification numbers and streamlined its process. It also introduced income tax withholding, a measure critical to fostering compliance.
3.1.9. ENHANCED AUDIT AND VERIFICATION PROGRAM:
A risk-based audit, which links the likelihood and nature of an audit to the taxpayer’s inherent risks, is the most effective type in terms of encouraging compliance. All tax reformed countries have made this a key part of their revenue mobilization strategy. Notably, Cambodia conducted risk-based audits of taxpayers at customs and of the 150 largest taxpayers and hired some 200 new auditors. Ukraine implemented a targeted audit program, improved the internal control of tax administration, fought fraudulent VAT claims, and developed an anti-smuggling program at the customs office.
Other reforms include the Comprehensive Reformation of the tax administration, close supervision of the management of revenue houses.
Improving the tax sector to increase revenue generation for the financing of government involves the active participation of both the government and the taxpayers(citizens). This is because tax is part of the social contract which according to John Locke and Thomas Hobbes, people unite together for their mutual benefits and transfer some of their powers (here economic rights I.e money) to a political body. That there is an initial contract to form a government based on Unanimous consent. This is the idea of the social contract in which both government and the citizens have their obligations to play. The Citizens are to pay the taxes while the money is used to run the government by developing and providing infrastructures for the country which benefit the citizens. This is a perfect arrangement.
About the Author
Ater Solomon Vendaga is the Program Officer at SabiLaw Foundation and the President, Tax Club, University of Abuja.
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