FIRS gets new ultimatum to raise tax collection

The Federal Government on Monday gave the Federal Inland Revenue Service (FIRS) a new ultimatum to quickly raise collection from taxes, following the rebased Gross Domestic Product (GDP) which showed Nigeria’s tax-to-GDP ratio dropping from 20 to 12 percent.

Ngozi Okonjo-Iweala, minister of finance and coordinating minister for the economy, said Nigeria’s revenue, especially from taxes, did not look too good for a country with as much as $509 billion GDP size.

The minister said before the National Bureau of Statistics (NBS) began the rebasing exercise, tax-to-GDP ratio was about 20 percent, which was not even as good as the 22 percent target by the country. Non-oil tax revenue-to-GDP ratio was estimated at 7 percent then.

But with the rebasing of the GDP, Nigeria has seen its tax revenue-to-GDP ratio even decline to about 12 percent, and 4 percent for non-oil tax, which the minister said was of concern to government.

Meanwhile, analysts said yesterday that the confirmation of higher income inequality and the current perceived expensive governance and political risks have made it more expedient for government to provide the promised social safety net, but warned that financial leakages and wastages in governance might serve as impediments.

Stressing that the exercise would make the economy to reflect a sectoral distribution of the banking industry’s loan books, the analysts observed that the higher GDP implied that banking penetration is now lower than the previous GDP and has increased the gap between Nigeria’s and East Africa’s bank penetration.

Razia Khan, analyst with Standard Chartered Bank, London, said that while the rebasing showed positively that the economy was vast, it also highlighted the persistence of problems relating to economic informality.

“Existing revenue collection is simply inadequate – far lower than any frontier economy in Africa – and FIRS will need to drive much more efficient revenue collection. Its success in doing so will be key to people accepting that the Nigerian economy is indeed as large as the rebased statistics suggest. In a sense, it is key to the credibility of the rebasing,” said Khan.

She further observed that another area where the spotlight was likely to shine fiercely was personal incomes, and that with the substantial higher revision of the average per capita GDP, many Nigerians who lived less than the current figure might have the feeling of marginalisation.

Ayodeji Ebo, head, investment research, Afrinvest, while  acknowledging that the 89.3 percent increase in Nigeria’s GDP to N80.3 trillion or $509.9 billion positioned the country at positive advantage as regards attracting Foreign Direct Investment (FDI) to the country, said, however, that there were downsides.

These, according to him, include: increase in the government run rate regarding its non-oil tax and manufacturing sector’s  contribution to GDP, as a result of the drop in ratios, as well as the reduction in the value of the current account surplus, as a ratio of GDP (currently at 7.6 percent for 2013).

“Subsequently, we expect growth rate should moderate Y-o-Y, increasing government’s drive to channel resources to sectors with greater potential for growth to ensure sustainability,” Ebo said.

Samir Gadio, emerging markets strategist at Standard Bank, London, said while Nigeria was now officially the largest economy on the continent, the country would continue to trail South Africa over the next decades, in terms of GDP per capita, basic infrastructure, institutional capacity and financial market sophistication.

“Obviously, this will make it increasingly harder for companies looking at Africa to overlook Nigeria, especially considering the size of the domestic market and its potential, but the main constraints on a sizeable turnaround in FDI will still persist. These include persistent energy and infrastructure bottlenecks, weak institutions and governance issues, as well as the slow pace of structural reforms in the economy. Addressing these shortcomings will probably have much more impact on investment than the perception that Nigeria is now a bigger economy,” said Gadio.

Okonjo-Iweala spoke in Abuja as she inaugurated the FIRS multi-disciplinary training centre, with which the tax office hopes to substantially increase tax effort by building capacity of staff and boosting citizens’ knowledge about tax payment.

“Nigeria is confronted with many constrains when attempting to increase tax revenues. We have just celebrated the fact that Nigeria has now become the largest economy in Africa with N80 trillion of GDP ($509.9 billion), which makes us the 26th largest economy in the world and advances us on our goal to become one of the 20 largest economies in the world,” she said.

“But I want to tell you that there is one piece of the news that is not so cheery. With the increase in GDP, all our revenue ratios have been recalculated. As you know, our revenue ratio to GDP before was 20 percent, just about in the middle of the emerging market economy, not as good as the 22 percent that we want to be. But now, with this recalculation, our revenue-to-GDP ratio is 12 percent and our non-oil revenue ratio to GDP is 4 percent, which means that we live worse than before,” she added.

The minister further said those who thought that Nigerians just needed large GDP to live well were wrong because by this ratio, it didn’t look so good.

“For tax revenue-to-GDP, we now have to redouble our effort to get back to the 20 percent ratio, at least, that we were before. I want all of us to rise up to the challenge with the continuous improvement on the capacity of tax officials through training in the modern methods of auditing of companies,” she said.

Kabir Mashi, acting chairman of the FIRS, admitted that more work was needed in tax collection as the service was yet to achieve the objective of institutionalising tax culture among Nigerians.

He said, however, that capacity building remained an integral part of the tax reform programme of government, which would also drive tax generation processes, further noting that the institute, built at a cost of N800 million, would help in taxpayer education.

John Omachonu & Onyinye Nwachukwu