Nigeria’s tax system:  An overhaul is overdue  

Tax
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The Nigerian government has to quit its addiction to oil dollars. The price of oil and its production are volatile and often beyond government’s control. When petrodollars are plentiful, the government in power can afford to be aloof, spending as it pleases. Whatever the political belief of that government, be it crony capitalism or statism, oil-dependence has hampered transparency and accountability in our democracy. A government less dependent on oil and more dependent on revenues from taxes will be transparent with and accountable to the people, and certainly pro-growth and business.

Which is why the federal government’s plan to introduce a higher VAT rate from 5 percent to 7.5 percent (for yet to be specified goods and services), more excise duties and improve tax collection aren’t bad ideas. Its reason, to find a new stable stream of non-oil revenue to ensure “fiscal buoyancy and resilience”, is valid. Low revenue mobilisation is “among the factors dampening long-term foreign and domestic investment keeping the economy reliant on volatile oil prices and production”, according to a recent IMF country report.

Government is realising how expensive a habit addiction to petrodollars is, hopefully. And also how costly borrowing, which depends on its oil income, is too; for every N100 Nigeria earns today, N60 goes to pay interest. Thus, the administration of President Buhari wants new sources of revenues to fund education, health, power and other infrastructure. Besides, the success or failure of the Economic Growth and Recovery Plan (EGRP) depends on tax reforms.

Low tax rates have dogged the economy for years; Nigeria has one of the lowest tax-to-GDP ratios and VAT rates in the world. But for its proposed Strategic Revenue Growth Initiative to work it must take into consideration three major factors: Nigeria’s tax laws are outdated, its tax base low and its tax policies poorly implemented.

Poor compliance and a difficult business environment where government is seen more as an obstruction than a catalyst and mistrusted because no one knows what it does with the tax it collects compound the problem. Besides, the VAT will have a negative impact on consumption.

To alleviate the expected impact on consumer demand the income from a higher VAT rate must be spent well to stimulate the economy and provide for the more vulnerable. Coupled with a revamped and simpler tax system that boosts the productivity of small and medium enterprises (SMEs) and their capacity to generate jobs.

The Ministries of Budget and Planning, Finance, Nigeria Customs Service and the Federal Inland Revenue (FIRS) shouldn’t focus only on meeting immediate revenue shortfalls. They need to think long-term. A higher VAT rate and more excise duties are necessary but insufficient.

Currently, over 90% of Nigeria’s VAT revenue comes from 3 percent of registered payers. Raising the VAT rate without enhancing enforcement by making it simpler, easier and faster to comply, as was done in Rwanda, won’t bring as much as expected.

Closer home, there are lessons to learn from Lagos. When the recession began, it was the only state that didn’t need a loan from the federal government. Rather, it re-inflated the economy through infrastructure projects and provided jobs which improved security. The Governor also deliberately encouraged a 24-hour economy. All without raising taxes; instead it expanded the tax base. It’s difficult to imagine how quickly Nigeria would have exited the recession if Lagos State, which gets more than half its revenues from taxes, was hooked on petrodollars.

 

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