Unqualified success of LIRS

Late last December, an investigation into the finances of states in the country by the Abuja-based Daily Trust newspaper yielded an astonishingly unflattering verdict. Of the 36 states of the federation, only Lagos, the paper reported, is capable of paying workers’ salaries without the monthly lashings from the Federation Account.

The report of the investigation re-invited public attention to depressing, but age old problem: near-total dependence of states on the Federal Government.

In general, states have the appearance of patients  requiring assisted respiration devices. The paper made use of information on the wage bills of states, comparing them with their internally generated revenue figures released by the National Bureau of Statistics, NBS, and the Joint Tax Board, JTB, that month. NBS’ figures showed that in 2010 and 2011, only seven states had IGR in two-digit billions. Lagos was the only  one with a three-digit figure. The others had single digits.

While 2012 witnessed slight improvement in  2012, with 12 states hitting double-digit figures in billions, only Lagos was in the three-digit category. The dismal capacity of the states at income generation offers an indication that most of them would be distressed, very gravely, without monthly federal subventions.

Most states get around this by taking short-term bank loans to settle wages whenever there are delays in the monthly disbursements by the Federation Accounts Allocation Committee (FAAC).  Mr. Dauda Garuba, coordinator of the Revenue Watch Institute, was quoted in the report as blaming the trend on a paucity of creative revenue-generation ideas among governors, whom he said had conditioned themselves to depend on Federal Allocation. “Because of the oil revenue they collect monthly, state governors are no longer serious in making money for their states,” he said.

Lagos does the exact opposite. Through the Lagos State Internal Revenue Service, LIRS, the administrative arm of the Lagos Board of Internal Revenue, an immensely successful revenue generation model has been instituted.

In eight years, the LIRS, under its Chief Executive, Mr. Babatunde Fowler, has raised the internally generated revenue of the state from N6billion monthly in 2006 (considered huge by the standards of the time) to the sumptuous current figure of over N20billion monthly.

Back in 1999, at the dawn of the current democratic experiment, Lagos posted a less-than-eye-watering average of N600million monthly as IGR. Six years after, under the Bola Tinubu administration, it rose progressively until it reached N3.6billion monthly, a 500 per cent leap. That administration knew that there was more where that came from and acted accordingly. This manifested in a conscious effort to tear down the structure of tax administration in the state and design a modern, efficient and effective alternative.

The first hint of the audacious initiative was the appointment in 2005 of Mr. Babatunde William Fowler as the Chairman, Lagos Board of Internal Revenue and Chief Executive Office of the Lagos State Internal Revenue Service, LIRS.

 Fowler, a US-trained economist, business administrator and accomplished banker, would be helped by a piece of legislation that the government had conceived and sent to the state legislature. The bill, which sought to make the  Board of Internal Revenue an autonomous and self-accounting agency, was passed into law in 2006, making it the first agency of its kind in the country to attain that status. Having a law in place is one thing, having the will to implement its spirit and letter is another. Also, the age-old problem of tax avoidance, caused in part by an absence of faith in government, posed its own challenge. In 2006 when the engine of the reform started chugging, LIRS kicked off by knocking down some of the obstacles to willing tax compliance by setting up mini-tax offices in markets around the state. These ensured that many participants in the hidden economy were effectively brought into the tax loop. As at the last count, there are 38 of such offices across the state.

In January 2008, more players in the hidden economy were brought into the tax net through the introduction of the Self Assessment Filing System for individuals, the first of its kind in the country and Africa. This gave individuals outside the Pay As You Earn loop the chance to pay based on the income. Payment was made more convenient because it could take place at either any of the 1,200 branches of the banks designated for collection or at the LIRS tax stations. They could also receive their receipts within 72 hours of payment. The designated revenue collecting banks and tax stations are electronically linked to databases that issue electronic receipts to tax payers. This greatly encouraged voluntary compliance.

The LIRS also introduced personal electronic tax clearance cards (e-TCC), the first of its type in the country. This effectively banished the lack of transparency that blighted tax collection in the past, as the process was made more open to tax payers, who have access to their records via the internet.

Side by side with these ran a vigorous assault on tax avoidance. The success of this effort, also remarkable, was largely based on the enlightenment of Lagos residents on the benefits that tax compliance could have on the provision of amenities as well as other indices of development. An important part of this was the LIRS publicity campaign, which uses prominent Lagos residents for testimonial adverts communicating the need to pay tax and the benefits derivable. Among the taxes collected by LIRS are personal income tax, capital gains tax, stamp duty and business registration fees.

Between 2008 and 2012, the average monthly IGR of the state soared from N18.9 billion to N29.9billion. Currently, Lagos State IGR accounts for over 65 per cent of government revenue, making the state less dependent on proceeds from the Federation Account. Attestation to LIRS’ success is also provided through the various developmental projects of the government in the state. So are figures from various bodies, including the NBS and JTB, which released figures last December showing that Lagos State generated more revenue than any other state of the federation between 2010 and 2012. A scrutiny of the figures would reveal that the state recorded N185.9 billion in 2010, which increased to N202.76 billion in 2011 and rose further to N219.2 billion in 2012.

Of the N219.2 billion in 2012, Lagos earned the highest revenue of   N172.44 billion from through PAYE.  The sum of   N4.36 billion came from road taxes, N1.89 billion from direct assessment of companies in the state, while N40.513 billion came from other revenue sources.

About N120.25 billion was realised from PAYE in 2011; N7.97 billion from direct assessment, and N74.54 billion from other sources, while N104.681 billion came from PAYE in 2010; N7.51 billion from direct sources, and N73.704 billion from other sources.

Next to Lagos was oil-rich Rivers State, which earned about N49.59 billion in 2010; N57.19 billion in 2011 and N66.28 billion in 2012.  The state earned N55.1 billion through PAYE in 2012; N485.9 million through road taxes; N22.075 million through direct tax assessment and N10.668 million through other revenue sources.

Delta State recordedN106.4 billion within the three years under review, earning N26.1 billion in 2010, N34.75 billion in 2011 and N45.57 billion on 2012. PAYE fetched Delta State  over N42.565 billion in 2012. Also, N244.195million was realised from road taxes,   N123.4million from direct assessment, while N2 .635billion came from other sources.

Delta State, unsurprisingly, is one of the states casting covetous glances in the direction of LIRS. Its Delta Beyond Oil initiative is conceived to lessen dependence on oil revenue by, among other things, ramping up efforts on internal revenue generation. For this, a team from the state has visited the LIRS to study its model. Delta is not the only state affected by the contagion that is LIRS success. Others include Ogun, Oyo, Ekiti, Bayelsa and Kano.

Despite its success,  LIRS continues to aim higher. In January, Fowler, its Chief Executive, revealed that an additional 1.1million taxable adults have been captured by the tax net, raising the number of taxable adults in the state  to 4.2million from 3.1million. This, Fowler reckons, is on account of the government honouring the fiscal social contract between it and the citizenry.  “We now have 4.2million adults in our tax net. And this testifies to the fact that residents can now see the importance of paying their tax through the various projects that have been embarked upon by the government,” he said.

Bamidele Johnson