The jig looks well and truly up for government. The era of crude oil as the major sustainer looks to be over, and that was clear even before the COVID-19 pandemic hit. The federal government was already running record deficits financed through “creative” methods and many states were struggling to just pay salaries. Despite the revenue challenges the governments cannot just pack up and leave. Public services need to be provided. Security services, courts, public schools, hospitals, and so on are needed. As we are finding out, public health crises do not care if the government has money or not. If crude oil can no longer generate enough to provide essential public goods, then what will?
One area where Nigeria is systematically lacking is in the collection of personal income taxes (PIT). Our PIT rates are not that low but compliance is poor. In the United States for instance, the equivalent of personal income taxes accounted for 27 percent of all tax revenue and 9 percent of GDP in 2017. This is not a US specific statistic. In a wide range of countries from Canada to Denmark and from Japan to Turkey and South Africa, PIT makes up a significant share of all tax revenue. In the average OECD country, PIT accounted for 24 percent of all taxes and was eight percent of GDP. This does not include things like social security contributions by the way. In Nigeria though, personal income taxes only made up about seven percent of all taxes collected and only about one percent of GDP in 2018.
I know the next question will be something about how “we have oil” or how Nigerians are poor or something about corruption. We can ignore the “we have oil” question because we already know the answer to that, but what of the poverty question? According to the latest NBS data Nigeria has a poverty rate of around 40 percent. Very high of course. But that also means that 60 percent of Nigerians are not poor and can contribute something to the tax net. Also remember that N146 trillion worth of economic activity was generated in this same Nigeria in 2019. The corruption question is valid but the status quo of not paying taxes and not demanding accountability is not tenable. Remember the “stop corruption before removing subsidy” slogan? That did not turn out so well.
The reason compliance for PIT is so poor is largely because it is too easy for people to evade. If you happen to work for a big and visible company then PAYE is deducted automatically, although not for the side hustle. For most others who have to file through direct assessment, the incentives to comply are very poor. Part of the reason is that the responsibility is left to state governments who do not have enough information to enforce compliance. There is no national residency register or any other framework that identifies where people live and who they should be paying taxes to. Most states do not have the technical capacity to go after tax evaders, especially the high net worth individuals. There was a joke I heard a while ago of tax advice given to a certain governor. “Just go and beg the rich people in your state to drop something because we all know you cannot properly tax them”.
If the question is compliance then the federal government is the party most likely to be able to make improvements on that front. First, in terms of simple organisational capacity, ensuring that everybody is on the same standards and that every identifiable individual is counted somewhere. Secondly, in terms of enforcing compliance for high net worth individuals. In many countries, that group is responsible for a big chunk of all PIT. No other entity is as capable as the FIRS with regards to its capacity to pull in information from companies, capital markets, international data sharing partners, and so on, to enforce compliance in that segment.
The reason there is currently no federal PIT is largely due to our historic dance with crude oil. That history is coming to an end and we need something new. A federal PIT also does not necessarily mean a higher overall tax rate. If the federal government’s tax rate replaces some of the current state governments’ tax rates then the overall tax rate can remain the same. Of course, if you want state governments to cut their rates then it needs to be replaced somehow. I still think it is preposterous that Nigeria has a “derivation” for crude oil production but not for corporate income taxes. This could be part of a renegotiation of the tax structure which probably needs to happen soon.
We may have become attached to the current tax structure that says states keep this and the federal government keeps that. But that structure was not handed down on a tablet to Moses. It was agreed on by ordinary Nigerians. Which means we can agree on something else. If we are truly hoping to transform the Nigerian governments from oil dependent ones to tax dependent ones then more fundamental tax reform is necessary. And a federal PIT should be on the agenda.
Dr. Obikili is chief economist at BusinessDay.
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