Tax revenue-to-GDP: Do Nigerians pay tax?

Public revenue in Nigeria has dwindled over the years and is highly susceptible to external vulnerabilities because of the country’s dependence on oil revenue. In a bid to diversify to more sustainable sources of revenue, the fiscal authorities have shifted focus to tax revenue which has historically been low. According to the OECD, Nigeria’s tax-to-GDP ratio in 2018 stood at 6.3%, significantly lower than the 16.5% average for 30 African countries. Expectedly, the index has become a recurring feature in policy discourses and interventions towards chatting a more sustainable pathway to fiscal resilience.

The lagging tax revenue index is often attributed to non-compliance by a good number of taxpayers. Conclusions are therefore drawn, and tax policies formulated on the strength of direct comparison with other countries which, conceptually speaking, is not wrong. However, there are two key constraints burdening such standpoints. On tax non-compliance, while there is substantial scope for bringing taxable individuals to the tax net for improved public revenue, is it empirically true that a vast majority of Nigerians do not pay taxes? Framed differently, is the proximate cause of the low tax revenue profile in Nigeria due principally to non-compliance? Secondly, is there a social comparison bias in the choice of data for benchmarking Nigeria’s tax revenue performance vis-a-vis other countries with the singular focus on the tax-to-GDP ratio?

To start with, the idea that tax revenue can be improved because of population size without a concomitant improvement in the business environment and general macro-economic stability is not tenable. Perhaps this is possible but not sustainable. Tax revenue is largely a function of income and general economic well-being. Although the population is important, the prospect of a significant share of tax in the public revenue may exist in a state of perpetual latency if structural issues in the economy are not addressed. To drive home the point, a misnomer arises when a country with a low Human Development Index (HDI) with all assortments of social challenges is expected to generate as much tax revenue as other more productive economies.

Nigeria’s tax-to-GDP

Now specifically on South Africa which came up as a reference point recently, there is no arguing the fact that South Africa has a higher tax revenue and a smaller population base compared with Nigeria, but the point must be made that some key drivers are central to the realization of such revenue. One of the enablers is capital formation measured by the infrastructure index where South Africa scored 83% against Nigeria’s 25% in 2019. There is no gainsaying the fact that investment in infrastructure has a multiplier effect on the economy and tax revenue.

Apart from infrastructure, the minimum wage in South Africa is, in Naira terms, almost four hundred thousand naira (N400,000) per month, equivalent to the take-home pay of an Associate Professor in Nigerian Federal Universities. It is pointless to even attempt a direct comparison of minimum wage in both countries. Aside from the fact that the minimum wage of thirty thousand naira (N30,000) in Nigeria is less than 10% of the minimum wage in South Africa, payment is characterized by non-compliance even by state governments, and whatever is paid is assailed by the combined forces of inflation and exchange rate. Inflation currently hovers below 5% in South Africa while Nigeria contends with a double-digit inflation rate.

It is no surprise that Nigeria’s tax-to-GDP ratio of 6.3% lags the African average of 16.5% as it, in a way, also reflects the country’s HDI score of 0.54 below the 0.55 average score by African countries. Meanwhile, South Africa’s HDI score of 0.72 ranks 7th in Africa with Nigeria sitting in the 29th position. These metrics should be analysed in conjunction with tax-to-GDP for the purposes of policy decisions.

The argument may then be that the states of infrastructure, as well as low HDI, are precisely some of the justifications for the pursuit of the target tax revenue mix. On that point, lack of infrastructure is partly a revenue question, and perhaps more of expenditure allocation and accountability challenge. Improved transparency, a complete overhaul of the budgeting process, more efficient procurement procedures, and changes in public sector spend priorities could release substantial funds for optimal public investments without an adjustment in budget size.

Therefore, a direct comparison of countries’ fiscal position through the prism of tax-to-GDP ratio alone as a basis for policy decision obscures certain realities and strips such analysis of contextual insight. A multi-perspective approach that conjunctively analyses institutional factors, composite indices of governance, and other key metrics such as fixed capital formation, gross fixed capital formation per capita, Infrastructure spend-to-GDP, unemployment rate, minimum wage, bureaucratic quality, corruption index provide a more holistic perspective for an optimal policy outcome.

Now to the issue of non-compliance by taxpayers. The real question is not whether Nigerians pay taxes but how and to whom do Nigerians pay taxes. To be clear, just as there is the informal economy, so also is the existence of informal tax collection in Nigeria for which activities and proceeds are not measured and reported as part of the share of tax in the GDP. The interesting thing about informal tax collection is that the activities straddle both the informal and formal sectors of the economy. Levies imposed by non-state actors in ungoverned spaces or as agents of government fall within this space and constitute leakages in the tax loop. In this category also are multiple taxes imposed on individuals and businesses by various tiers of government that go unreported. Moreover, empirical evidence suggests that the informal sector is overtaxed. The combined size of informal tax collections, if adequately captured, is likely to significantly alter Nigeria’s tax-to-GDP ratio.

Lastly, in so far as taxpayers intervene in the provision of public goods that should ordinarily be provided by the government such as security, drinking water, roads, and to some degree electricity, such interventions assume the character of crypto or hidden taxes. Even the occasional dispensation of “social payments” by taxpayers to the growing population of known and unknown dependents due to unemployment and harsh economic environment, qualify as a form of indirect tax. One may therefore reasonably conclude that most Nigerians pay one form of tax or levy. The problem is more of streamlining, formalization, measurement, and reporting of the various forms of taxes.

Ubohmhe writes from Lagos.