Nigerian development and effective tax administration

While addressing journalists at the just concluded Spring Meetings of the World Bank/International Monetary Fund (IMF) in Washington, Finance Minister, Mrs Kemi Adeosun, expressed the concern of the Federal Government about the poor rate of the country’s tax revenue, saying it could not produce the kind of development desired by the people.

According to the minister, who noted that domestic revenue mobilization is critical to the nation’s development, Nigeria has just six per cent tax to the Gross Domestic Product (GDP), which is one of the lowest in the world.

Mrs Adeosun noted that the government was determined to shift its revenue base from petroleum to tax to guard against fluctuation in revenue.

She said that every developed country relies on tax revenue, adding that the case is different in Nigeria with her over-reliance on revenue from oil. She noted that while Nigeria has just six per cent to GDP, Ghana has 15 per cent, South Africa has 30 per cent, most advanced countries have between 30 and 35 per cent. The minister added that to experience real development, the country has to move its tax to GDP ratio to at least 30 per cent.

According to her, “We only have about 13 million tax payers in Nigeria, most of them are PAYE. Many people evade tax in Nigeria and it is really the wealthy that evade tax. We are going to be more aggressive in tax collection, not because we want to witch hunt anybody but because we have to collect the taxes. It is the job of the government to redistribute income.”

According to the minister, the bulk of the six per cent tax revenue generated by the country came from petroleum tax. “If price of oil goes up, we collect more PPT (Petroleum Profit Tax), if it goes down we collect less. This makes us more vulnerable. The solution is broader taxes that are reflective of the entire economy. We have got to deal with the issue of tax. People just have to pay taxes. Societies where people pay taxes are the ones that develop. If everybody pays a little the money is enough to do a lot. The problem is tax evasion and government has to stop that,” she said.

She, however, said the government would not increase taxes or introduce new ones but would work hard to bring every eligible person into the tax net.

“We will make sure it is very difficult to evade tax. We have already started that by gathering data because to tax people you must know how much they have. If you don’t know how much they have, taxing them would be a guess work.”

Stressing the resolve of the government to shore up its tax revenue, the minister said, “Just like some of our contemporaries in the G24 have done successfully, we are going to focus on tax in 2017 through an asset and income declaration scheme to address our low tax revenue collection and ensure improved compliance, a broader tax base and more sustainable revenue. This is fundamental to delivering on our reform plans.”

Speaking on the strategy to be deployed by the government, Adeosun said, “Everything we are doing is driving people into the tax net. That is what happens in every country. Nobody pays tax because they want to; people pay tax because they have to. We will make it much difficult for people to evade taxes. At every point of government, we will be picking up data that we will use to compel tax payment. If you buy a business class ticket, we will find out if you are paying tax. You come to government for a payment, we will find out if you are paying tax. You want something from the government, we will find out if you pay tax. That is how we are going to get better payment.”

The government’s position was probably informed by the assessment of the Executive Board of the IMF on Nigeria which recommended that the government should consider increasing Value Added Tax (VAT) and excise rates to boost revenue base.

The board assessment known as 2017 Article IV Consultation with Nigeria noted that priority should be given to increasing non-oil revenue, including strengthening compliance, and closing loopholes and exemptions.

The assessment observed that the Nigerian economy has been negatively impacted by low oil prices and production and called for stronger macroeconomic policies to rebuild confidence and foster economic recovery.

But while the government is quick to state its desire to improve its tax revenue generation, it is not giving thought to what the IMF had earlier said about why it is difficult for developing countries like Nigeria to shore up their tax revenue.

The IMF, in the publication, posits four reasons developing countries find it difficult to buoy their tax revenue.

The first is that most workers in developing countries are typically employed in agriculture or in small, informal enterprises.

The report stated further, “As they are seldom paid a regular, fixed wage, their earnings fluctuate, and many are paid in cash, ‘off the books.’ The base for an income tax is therefore hard to calculate. Nor do workers in these countries typically spend their earnings in large stores that keep accurate records of sales and inventories. As a result, modern means of raising revenue, such as income taxes and consumer taxes, play a diminished role in these economies, and the possibility that the government will achieve high tax levels is virtually excluded.”

The IMF publication also stated that poor remuneration for tax officers as well as the inability of countries to evolve a modern system of tax computation is another albatross. It says, “It is difficult to create an efficient tax administration without a well-educated and well-trained staff, when money is lacking to pay good wages to tax officials and to computerize the operation (or even to provide efficient telephone and mail services), and when taxpayers have limited ability to keep accounts. As a result, governments often take the path of least resistance, developing tax systems that allow them to exploit whatever options are available rather than establishing rational, modern, and efficient tax systems.”

The third reason advanced by the publication is the non-availability of statistics, adding that the informal structure of the economy in countries like Nigeria coupled with financial limitations make it almost impossible for them to generate reliable statistics. “This lack of data prevents policymakers from assessing the potential impact of major changes to the tax system. As a result, marginal changes are often preferred over major structural changes, even when the latter are clearly preferable. This perpetuates inefficient tax structures.”

The publication also states that because income is unevenly distributed in countries like Nigeria, raising high tax revenues will require taxing the rich more than the poor. It, however, observed that “the economic and political power of rich taxpayers often allows them to prevent fiscal reforms that would increase their tax burdens. This explains in part why many developing countries have not fully exploited personal income and property taxes and why their tax systems rarely achieve satisfactory progressivity, where the rich pay proportionately more taxes.”

Tax is a tool for development. It is a practical means of raising revenue to finance government spending. So, bringing in everybody into the tax net is the way to go. But the questions will be; are the measures put in place by the Federal Government, as enunciated by Minister Adeosun, enough to ensure an efficient tax system? How does the government intend to capture those in the informal sector? How will VAT be charged on raw farm produce and products of small scale businesses? Is the government ready to enforce actual tax payment by the rich? Is the government willing to invest in technology to guard against tax revenue ending up in personal accounts? These are the issues the government needs to pay attention to even as it gets the machinery in motion to achieve effective tax administration.