The Federal Government will in the next two months or so launch a new tax strategy that would help it create a more efficient tax system, improve compliance to tax laws, capture more people into the tax net and particularly shore up its revenue.
Ngozi Okonjo-Iweala, coordinating minister for the economy and minister of finance, described this strategy as “a better tax collection and tax administration effort of government”.
In an exclusive interview on the sidelines of the recently concluded spring meetings of the World Bank and International Monetary Fund in Washington, Okonjo-Iweala told BusinessDay that the new approach is an outcome of a thorough diagnosis of the Nigerian tax system jointly conducted by the Federal Inland Revenue Service (FIRS) and McKinsey and Company, a global management consulting firm.
With the diagnosis, government, surprisingly, found that about 75 percent of ‘registered’ firms in Nigeria were not in the tax system. It was also observed that about 65 percent of registered tax payers have not filed their tax returns in the past 2 years.
The main culprits in these were intermediate group of medium-sized professional service providers, contractors, and landlords. This non-compliant group falls in the grey area between the informal sector and large companies. For instance, it is estimated that tax leakages due to unpaid real estate rentals in Nigeria amounted to about $250 million per annum.
Okonjo-Iweala told BusinessDay that these are some of the anomalies that the coming strategy intends to address as she believes that so much success would be recorded focusing on this particular group.
And in her own words, “McKinsey helped South Africa and Angola to review their tax systems and so we said if they can do it in these countries, they can also help us. So we brought them, they have done a very thorough diagnostics with the Federal Inland Revenue Service and working together they have identified gaps where we could collect more taxes and do better in a systematic way, we don’t want the fire brigade approach.
“We want to put in place a systematic approach to capturing those who are currently outside the tax net. We hope to launch this within the next two months, we just finished the diagnosis, we have seen the potential and FIRS would take the lead in trying to do this, so we are indeed doing very specific things. It is a better tax collection and tax administration effort.”
Making a presentation at the joint IMF-World Bank fiscal policy forum at the spring meetings, Okonjo-Iweala had noted that improving domestic resource mobilisation in developing countries has become an important policy issue given the anticipated decline in official development assistance (ODA).
The IMF estimates that many low-income countries still have their tax revenues fall below the generally-accepted threshold of 15 percent of GDP. For example, low-income countries in Africa are below the 15 percent of GDP.
She had told the audience that in Nigeria, tax to GDP ratio is at an unacceptable level of 7 percent of GDP as the economy depends mostly on government’s direct share of oil revenues, a situation which she said must change.
With the strain on revenues following recent drop in oil output due to various reasons, including massive vandalism and theft, government seems quite under pressure to diversify its revenue base especially through tax mobilisation.
Oil output is being estimated to have dropped to between 2.1 and 2.2 million barrels per day recently, lower from the 2.528 million estimated for this year’s budget as well as the actual production level in 2012. This has also led to a revenue loss of about $1 billion (N160 billion) and about 300,000 barrels per day total losses in output is being estimated.
ONYINYE NWACHUKWU, Abuja
