• Saturday, June 22, 2024
businessday logo


Tax trouble or trust trouble? Why reform must go beyond numbers

Here are 12 new firms that got tax waivers in Q1

Nigeria’s tax conundrum just got a fresh round of spotlight, and it is not exactly flattering. Two weeks ago, the International Monetary Fund (IMF) threw a red flag over the nation’s alarmingly low tax revenue. Abebe Selassie, the Fund’s Director for Africa, didn’t mince words. He painted a stark picture, calling Nigeria’s tax-to-GDP ratio of 8–9 percent “problematic” for a country with Africa’s largest population and a laundry list of pressing development needs. This is not just an economic footnote; it’s a major roadblock on Nigeria’s path to progress.

This is not the first time such concerns have been raised. In 2019, during its Article IV consultation with Nigeria, the IMF highlighted the nation’s “low tax mobilisation,” emphasising that the revenue base was insufficient to address pressing challenges. With Nigeria’s tax-to-GDP ratio languishing at 8–9 percent compared to the sub-Saharan African average of 18.6 percent, it is evident that urgent action is needed.

Q: “However, addressing Nigeria’s tax revenue woes requires a comprehensive approach that goes beyond superficial solutions.”

However, addressing Nigeria’s tax revenue woes requires a comprehensive approach that goes beyond superficial solutions.

While recent initiatives spearheaded by President Bola Tinubu, such as the Presidential Committee on Fiscal Policy and Tax Reforms, signify a step in the right direction, they must be complemented by a deeper understanding of the underlying issues plaguing tax collection in Nigeria.

One of the primary obstacles to effective tax administration is endemic corruption. Despite efforts to digitise tax collection processes, evasion and avoidance of taxes persist, facilitated by complicit officials and preferential treatment for affluent individuals and corporations.

Moreover, Nigeria’s tax base is inherently weak, exacerbated by the dominance of the informal sector in the economy. With an estimated 93 percent of all employment classified as informal and the majority of businesses operating at subsistence levels, the potential for substantial tax contributions is severely limited.

Dr Segun Aganga’s observation that most micro, small, and medium enterprises (MSMEs) lack the profitability to sustain significant tax obligations underscores the systemic challenges at play. In a country where 67 million out of 77 million workers are not registered taxpayers, the need for structural reform becomes glaringly apparent.

Taxation serves as the lifeblood of a nation, fueling public services and shaping the socio-economic landscape. It embodies the implicit agreement between the government and its citizens, where individuals contribute a portion of their income in exchange for collective benefits and protection.

However, the pervasive non-compliance with tax obligations in Nigeria signifies a deeper issue than mere reluctance to pay. It represents a profound disillusionment with the state’s ability to uphold its end of the social contract.

In a society where basic necessities like adequate healthcare, quality education, and reliable infrastructure remain elusive for many, the willingness to contribute financially to a government perceived as inefficient and unresponsive dwindles. This disillusionment breeds a vicious cycle of non-compliance, further eroding trust in institutions and hindering the nation’s progress.

Thus, addressing Nigeria’s tax challenges requires not only administrative reforms but a concerted effort to restore faith in governance and rekindle the belief that taxation can indeed be a catalyst for positive change.

In the absence of meaningful representation and the provision of essential services, voluntary tax compliance becomes untenable. The Nigerian state must prioritise the welfare of its citizens, ensuring their basic needs are met and fostering an environment conducive to economic prosperity.

Ultimately, the solution to Nigeria’s tax conundrum lies in fostering a robust economy that nurtures businesses of all sizes, incentivizes formalisation, and engenders trust between the government and the governed.

As we navigate the complexities of tax reform, let us remember that sustainable progress is predicated on equitable development and a commitment to upholding the social contract.

A robust tax system is not just about collecting revenue; it is about ensuring a fairer distribution of resources and fostering a sense of shared responsibility amongst citizens.

By implementing reforms that broaden the tax base, ensure efficient collection, and invest tax revenue back into critical areas like education, infrastructure, and social safety nets, Nigeria can build a future where everyone benefits.

This collective action, coupled with genuine structural reform, is the key to unlocking Nigeria’s full potential and securing a brighter, more prosperous future for all its citizens.