This is a hard time to be a tax man; an era of economic downturn piles deep pressure on tax agencies worldwide. In Nigeria, pre-pandemic is never rosy ; post-COVID-19 is looking even more challenging. How is FIRS boss, Mohammed Nami coping? What can he do to increase the Tax to GDP ratio?
To start with, politics of FIRS leadership should be set aside by now. Former Chairman of the service,Tunde Fowler has moved on. The ongoing reforms within the agency should also not raise much eyebrow. Every new leader normally repositions structures and organs to achieve designated mandate . The mandate is actually the benchmark. How you increase the tax revenue accruing to the treasury is what matters.
Now back to the question of tax to GDP ratio, I must state from the onsert that mine is an opinion of a young Nigerian lady,; this is not a rigorous experts analysis. My goal is to offer views ,unique in my own way , on the subject matter. One also has the feelings that agency leaders require opinion of citizens even on the most complex of matters. That Nigeria has very low tax to GDP ratio is not in dispute; government leaders are at loss on how to address the issue especially in a looming recession scenario.
Tax to GDP ratio is computed by dividing the total revenue collected by the government from income taxes, value added taxes, payroll taxes, social service contributions and other items with Gross Domestic Product (GDP) of a country. For a well-functioning budget, a fine amount of revenue is a prerequisite, which comes from internal (tariffs) and external sources. The Organisation for Co-operation and Economic Development (OECD) had compiled tax revenue data for countries around the world—including 26 African countries, where tax revenue as a percent of GDP is on average lower than in other regions. On average, this tax-to-GDP ratio for those 26 countries was 17.2 percent, compared to the OECD average of 34.2 and the Latin American and Caribbean (LAC) average of 22.8 percent. The regional OECD report on tax revenue statistics in Africa covers the years 1997 to 2017.
According to the report, between 2008 and 2017, the average African tax-to-GDP ratio increased by 1.5 percentage points, from 15.7 percent to 17.2 percent, mainly due to revenue increases from value-added taxes (VAT, 0.7 percentage points) and individual income taxes (0.7 percentage points). The average ratio has plateaued at 17.2 percent since 2015, as increases in some countries offset decreases in others.Tax-to-GDP ratios vary significantly across African countries, however. In 2017, Seychelles (31.5 percent), Tunisia (31.2 percent), and South Africa (28.4 percent) had the highest tax-to-GDP ratios of the 26 countries covered. Nigeria (5.7 percent), Equatorial Guinea (5.9 percent), and the Democratic Republic of the Congo (6.6 percent) had the lowest.
The Africa (26) average is below the Latin America and the Caribbean (LAC) average of 22.8% and the OECD average of 34.2%. Tax-to-GDP ratios ranged from 5.7% in Nigeria to 31.5% in the Seychelles in 2017, with nearly three quarters of the countries falling between 11.0% and 22.0%. The tax-to-GDP ratio in Nigeria increased by 0.4 percentage points from 5.3% in 2016 to 5.7% in 2017. In comparison, the average for the 26 African countries in Revenue Statistics in Africa 2019 remained at 17.2% over the same period. Over a longer time period, the average for the 26 African countries has increased by 1.5 percentage points, from 15.7% in 2008 to 17.2% in 2017. Since 2010, the highest tax-to-GDP ratio in Nigeria was 9.6% in 2011, with the lowest being 5.3% in 2016.
Looking beyond the above data, let look at the overall population of economically active Nigerians. A World Bank report in that year put the country’s economically active population at 65 million – so even with rising numbers of taxpayers in recent years, that is still less than 30% paying tax. In 2018, 19 million Nigerians paid into federal or state coffers, according to government data. So out of a population of 200 millliom with 65 milllion active set,less than 20 milllion are within the tax base.
Many factors account for this. First is the trust deficit between government and the citizenry. Second is the challenge of good governance. Third is the style and approach of tax agencies. Fourth is low revenue tax base and last but not the least is persistent economic downturn. Of all these , the one I decide to focus on is number three – style and approach of the revenue service.
Ongoing review of tax payment system by revenue yielding agencies like the oil and gas companies, is a step in the right direction. In actually fact, FIRS needs to be firm in the oil sector because a lot of leakages are ongoing. Same close watch and relationship should be sustained with the custom service. Whatever may be said, there is a believe that custom based revenue is still low and that a lot of improvement is still required. Even when the single window thing is yet to be perfected, a partnership visitation to the custom Chief wont be out of place. In any case , both Nami and the custom Chief are sitting on very hot seats. It is in the duo’s best interest to deepen collaboration.
Now to the area of interest- Nami will do well to target widening the tax base rather than focussing on increased tax rate. Let him give a target of 50 million tax base. Let him target 50 percent increase in informal sector enrolment. This is not the time to look at why those targets are not possible.It is about setting ambitious goals. I am waiting to see Nami playing the good governance guy, build trust with the citizenry, embark on advocacy diplomacy, engage and achieve.This is not the time to focus on only established tax points; a point of achivement is to target the informal and semi-formal sectors.
How can this be achieved? In my humble submission, the first way to go is a rewarding partnership with Chambers of Commerce and Industry across the 36 States. Chairman Nami should ensure a robust linkage between the service and the Chamber which represent small amd medium scale businesses. This is a strategy adopted by some countries with rewarding outcomes. The Chambers will push for lower tax rate during recession but will assist to bring huge percentage into the tax base. Chairman Nami can extend the partnership to include artisans and technicians’ associations which are incredibly well organised locally and nationally. This is what was done in Nepal and other countries outside Africa.
I know the situation is tight, rough and tough especially with COVID-19 devastation of the economy. We must however plan for survival. All agency Chiefs must Innovate to grow the system out of this quagmire. For Chairman Nami, push harder; the good work must continue.