Nigeria's Federal Inland Revenue Service (FIRS) plans to boost the nation’s tax-to-GDP ratio to 17% by 2023, from 6% currently. Success could help unleash Nigeria's potential, but the focus should be on increasing collections and compliance, rather than simply increasing rates.
Nigeria lags its peers on tax collection
Although the FIRS was able to double the number of taxpayers in Nigeria to 19mn between 2015 and 2018, Nigeria’s tax-to-GDP ratio remains just 6%, well below the 17% average of 26 African countries considered by the Organisation for Economic Co-operation and Development in its 2019 Revenue Statistics in Africa report. Furthermore, the majority of the nation’s tax revenues are driven by Personal and Corporate income tax, which are relatively easier to monitor.
The FIRS's plan to boost the nation’s tax-to-GDP ratio to 17% by 2023 will largely depend on its ability to increase collections and compliance rather than simply increasing rates.
Capture the informal sector, bridge the VAT gap
In order to boost tax revenues, particularly non-oil tax revenues, we think the government needs to do more to capture the informal sector – which accounts for c60% of the economy – and increase the use of technology, following pilots for automatic VAT reporting and collection.
There remains a huge VAT collection gap (the shortfall between potential and actual VAT collections). Data from the United Nations Economic Commission for Africa shows that Nigeria had the fourth largest VAT gap (71%) of the 24 Africa countries considered.
Figure 1: 2018 VAT gap
Source: United Nations, Tellimer
Nigerians want better tax, not more tax
Higher taxes and double taxation, in the case of the much-discussed VAT on online transactions, could adversely affect consumption – which has been hindered by double-digit inflation over the past four years – rather than lead to significant growth in tax revenues. There is also a reluctance among Nigerians to pay more tax given the lack of transparency on the use of funds in the past.
Higher tax revenues = greater economic resilience
Nonetheless, a substantial increase in tax revenues would increase the resilience of the Nigerian economy to volatile oil prices and support the self-sufficiency sub-national budgets.
According to the World Bank, tax revenues above 15% of GDP help countries generate sufficient domestic resources for economic development, specifically infrastructure, education and health, which could support long-term GDP growth and job creation.
Therefore, improved tax collection and a plugging of the VAT gap could have many knock-on benefits, and could help unleash Nigeria's potential in the 2020s.