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PAYE, MDAs’ revenue, other taxes respond to reforms most in 3 years

Three major components of states’ Internally Generated Revenue (IGR) have responded to reforms the most as they accounted for the largest chunk of IGR revenue of the 36 states and FCT in the last three years, the analysis of the components of IGR of the 36 states and FCT has shown. The three components- Pay As You Earn (PAYE), MDAs’ revenue and other taxes consistently accounted for 95 percent of the internal revenue of the sub national governments in Nigeria between 2018 and 2020.

The reason for the progress in IGR collection in the aforementioned areas is mainly due to automation of the processes, blockage of loopholes and high level of formality of the players from whom such taxes are collected. Others include mandatory tax identification number (TIN) for every individual, firm; bank verification number (BVN) without which bank transactions cannot be conducted, among others.

In 2018, PAYE accounted for 57.3 percent of the total IGR generated by the 36 states and FCT. Its share of the total IGR rose to 60.7 percent in 2019 and 65.2 percent in 2020, even in spite of the pandemic. That comes to an average of 61 percent during the 3-year period.

Other taxes which were responsible for 14.2 percent of the states’ IGR in 2018, and with efficiency in system, saw its fortune improve to 16.9 percent in 2019 but declined to 13.1 percent in 2020 due to the Covid 19 pandemic, resulting in a three-year average of 14.7 percent.

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MDAs’ revenue accounted for 22.7 percent of the IGR of the 36 states and FCT in 2018. Its share in the total IGR moderated to 16.6 percent in 2019 and 16.7 percent in 2020, coming to an average of 18.7 percent during the period.

Thus, the average weight of the three components was 94.2 percent in 2018, 94.2 percent in 2019, and 95 percent in 2020. Averagely in monetary terms, PAYE generated N776.75 billion; other taxes, N187.20 billion and MDAs’ revenue, N235.25 billion annually in the last three years.

The impact of reforms on the system could be seen when comparison is made with their contributions in the previous years. In 2016, PAYE, other taxes and MDAs’ revenue accounted for 50.5 percent, 11.6 percent and 21.3 percent of the total IGR respectively, thus bringing the combined weight of the three IGR components to 83.4 percent as against 94.2 percent each in 2018 and 2019 and 95 percent in 2020.

Growth in PAYE component of IGR was prominent in Abia, Adamawa, Borno, Ebonyi, Imo, Kebbi, Kogi, Ondo, Osun, Oyo, Plateau, Rivers, Taraba, Yobe, and Zamfara states. Abia recorded 25.2 percent growth in PAYE during the period. Growth rate for the same component was 22 percent in Adawawa while Bauchi posted 27.1 percent growth during the period.

On the other hand, other components of the IGR remained at the periphery in terms of contribution to the total IGR pool. Specifically, direct assessment and road taxes still lag behind as their contributions to the total IGR pool over the three-year period averaged 3.4 percent for direct assessment, and 2.2 percent for road taxes.

Source: NBS, BRIU

Direct assessment tax, according to the Lagos Internal Revenue Service (LIRS) is “an assessment raised directly on self-employed persons (e.g. Professionals, Contractors, Traders, and Landlords etc). The self-employed person will without notice or demand, file a return of income earned in the preceding year using Tax Form A.”

Interestingly, it was 60.9 percent growth rate that Borno State recorded in its PAYE component of its IGR. At 47 percent, Ebonyi State is the best performing state in PAYE growth in South East Nigeria. It was rivalled by Imo State which posted 42.4 percent growth in PAYE. Enugu State, the South east regional capital recorded 29.1 percent growth in its PAYE.

Kebbi grew its PAYE by 38.2 percent just as Plateau State outshined other states within the north central zone with 55.6 percent growth in its PAYE. Kogi State recorded 30.6 percent growth rate the same way Nasarawa posted 20.4 percent growth rate in PAYE.
Growth in PAYE in Ondo State was 40.2 percent; Osun, 28 percent; Oyo, 57.7 percent; Rivers, 36.6 percent; Taraba, 39.4 percent; Yobe, 94.3 percent and Zamfara, 58.6 percent.

In the other taxes component of IGR, fewer states saw progress during the period under review. Growth as spectacular in Kebbi, 1,083.5 percent; Kaduna, 290.2 percent; Niger, 154.5 percent; Imo, 86.5 percent; Zamfara, 85.9 percent; Gombe, 77.8 percent; Ebonyi, 71.8 percent, and Kogi,54.3 percent.

In addition, Abia State recorded 23.8 percent growth rate in other taxes component of IGR. We also have Adamawa, 21.9 percent; Cross River, 56.2 percent; Enugu, 21.7 percent; and Nasarawa, 24.5 percent.
Growth in MDAs’ revenue was most outstanding in Nasarawa, 259.1 percent; Niger, 187.5 percent; Ebonyi, 143.8 percent; Ekiti, 113.6 percent; Osun, 104.5 percent; Imo, 47 percent, and Adamawa, 27.7 percent. Others are Akwa Ibom, 39.7 percent; Anambra, 61.4 percent; Kebbi, 33.1 percent; Oyo, 23.2 percent, among others.

In the last decade, state governments in Nigeria has implemented different reforms with which they aimed at shoring up their internally revenue so as to reduce the dependence on the federal government. The zeal got stronger with pronounced crude oil volatility at the international market, which whenever it happens throws government’s fiscal programs in tatters.

For instance, in 2016 and 2020 when crude oil prices crashed at the international market, the Nigerian economy entered recessions twice in five years. Consequently, debt obligations continue to pile up with reduced federal allocation from the Federal Accounts Allocation Committee (FAAC).

For instance, in Kaduna State, the state government during its first tenure embarked on IGR mapping, enhanced its operational model and personnel management framework, as well as transitioned from revenue board to revenue services. The introduction of automation services blocked so many leakages through the prohibition of cash collection.

The conscientious efforts made by the Kaduna State Government have started to pay off. Between 2016 and 2020, Kaduna State grew its IGR by 198 percent from N17.05 billion to N50.77 billion.
While the states are encouraged to sustain the tempo in the components that recorded significant growth, others should be looked at with a view to making the contribute more to the general pool.

Some of the reasons direct assessment and road taxes contribute only a paltry to most states’ IGR is the mechanism for its collection and the level of informality within the Nigerian economy. Others factors are multiplicity of tax, lack of coordination between federal and state tax agencies, and lack of tax payment schedule notification, according to PwC in its 2020 Survey.

“MSMEs find local government levies the most difficult tax to comply with. This is closely followed by Company Income Tax (CIT) and Value Added Tax (VAT). Reasons for the difficulty in compliance comprised: the multiplicity of taxies and levies; lack of coordination between federal & state tax agencies, absence of technology platform(s) for ease of payment of all taxes and levies, as well as lack of fully functional tax refunds schemes at the state & federal level.

“Others included the absence of comprehensive tax payment schedule notification or calendar, and physical harassment/intimidation by local tax collectors”, PwC said in its MSME Survey 2020.

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