May. 5, 2019
Commodity price fluctuations of recent years have severely dented Nigeria's less-than-diversified, oil-heavy economy. A deep recession still overshadows economic potential. And to this may be added colossal tax evasion. Official data as of May 2017 identified just 14 million of Nigeria's 70 million economically active citizens as taxpayers. Sector research indicates that Lagos on its own is home to 6,800 millionaires and 360 multi-millionaires. Yet, as recently as mid-2017, the Finance Minister announced just 214 people in the entire country paid over USD55,600 in taxes. Despite being Africa's largest economy, Nigeria has a tax-to-GDP ratio of 5.9%, by IMF reckoning. According to the IMF, in 2017, the informal sector was worth about 50-65% of Nigeria's GDP. This constitutes a gigantic loss of tax revenue for Nigeria, which in short, has the most ineffective tax-to-GDP ratio in sub-Saharan Africa.
Incentivizing, but to What Effect?
In early 2016, the authorities examined 52 types of incentives in place for businesses in terms of their actual rate of return to the economy. It emerged that between 2011 and 2015, the government had extended NGN1 trillion, at 1.28% of GDP, in the form of import duty waivers, grants, and VAT waivers, among others. The estimated figure did not include government incentives available under laws including the Companies Income Tax Act, Personal Income Tax Act, Petroleum Profits Tax Act, or the Minerals and Mining Act. The extent of the imbalance at play in Nigeria becomes clearer still when we consider that in 2Q2018, the oil sector jumped to 8.55% of real GDP, versus the non-oil sector's 91.45%. Bizarrely though, government tax revenue from the oil sector in Petroleum Profits Tax was at about 39.26% of total tax revenue collected, while tax revenue from non-oil business was at 60.74%. The World Bank urges FIRS to shift up a gear by conducting regular reassessment of incentives to gauge genuine economic justification.
One route several countries have gone down, having lifted their hands to the inevitability of tax evasion, is amnesty via a temporary hall pass that seeks to expand the tax base by forgiveness. Nigeria's equivalent was the Voluntary Assets and Income Declaration Scheme (VAIDS) spanning July 2017 and March 2018, which true to tradition promised to look the other way on past discretions. After the deadline is another story. Limited traction was gained as FIRS collected around USD50 million over the period, a paltry sum given the wealthy social bracket. VAIDS, to be fair, took a deep look into the evaders, reportedly even leveraging information gleaned from the infamous rogues gallery of the Panama Papers; to this was appended a five-year jail term for caught evaders. To keep the idea alive over its duration, every Thursday became “tax awareness day." Endemic widespread irregularity at all levels, however, inevitably hamstrings such initiatives. Lagos state, Nigeria's beating commercial heart, has a workable tax base accounting for around 30% of all 36 states in the country. Revenue that has been channeled to infrastructure such as the bridge linking the Ikoyi and Lekki neighborhoods.
…Yet Ultimately a Root Problem
President Buhari, returned for a further four years in February 2019, has targeted doubling the tax-to-GDP ratio by 2020. Yet, political stability is a prerequisite for regular economic discipline and public commitment to regularity. It is telling of the future then, that of the 72.8 million citizens eligible to vote this year, just 29,364,209 actually did so; effectively, a cynic may conclude, the abstentions won the day. Nigeria has sought to spend its way out of recession whereby this year it faces NGN2.3 trillion of debt servicing from a 2019 budget of NGN8.83 trillion. The country remains battered by 91 million citizens in extreme poverty, social division between rural citizens and nomadic herders, and lingering fundamentalist terror in the northeast.
This social portrait, wherein the individual has scant confidence in a politician or economist, cannot but dent the best government intentions to levy taxes for national improvement.