Introduction
Nigeria’s tax-to-GDP ratio at 10.8% as at 2021, is one of the lowest amongst countries of similar economic size1. It is also below the International Monetary Fund (IMF) recommended ratio of 12% and World Bank’s minimum ratio of 15%2 required for economic growth and poverty reduction. The current administration led by President Bola Ahmed Tinubu has set a target to surpass Africa’s average tax-to-GDP ratio of 16.5% by achieving a tax-to-GDP ratio of 18% by 2025.3 This should reduce the Nation’s reliance on borrowing and ensure financial sustainability. The Federal government also set up a Fiscal Policy & Tax Reforms Committee (‘the Committee’ ‘the Fiscal Reforms Committee’) in 2023, with the mandate to review and redesign Nigeria’s fiscal system with respect to revenue mobilisation (tax and non-tax). One of the areas of focus of the Committee is to achieve the target tax-to-GDP ratio. The Committee has however expressed its intention to not introduce new taxes, though this then begs the question of how the 18% target will be achieved by 2025?
The 2022 Organization for Economic Co-operation and Development (OECD) report on revenue statistics shows that OECD countries had an average tax-to-GDP ratio of 34.1%4 in 2021. A cursory review of the tax revenue profile of the OECD countries shows that most of them lean more on tax revenue from consumption taxes (31.9%), social insurance taxes (25.6%), and individual income taxes (25%) compared to revenue from corporate income taxes (10.2%) and property taxes (5.6%)5. In more developed countries, tax revenue from Personal Income Tax (PIT) accounts for the most significant contribution to total tax revenue. In 2022, the U.S. federal government collected nearly $5 trillion6in tax revenue, the bulk of which came from individual income taxes while in the United Kingdom, individual income taxes accounts for 29.7% contributing more that corporate income taxes (7.9%)7.This system stands in stark contrast to those in lower-income countries where revenue from PIT is far more limited.
Nigeria currently has one of the highest corporate income tax rates in the world at 30%, which has led to a tremendous amount (over 40%)8 of the total tax revenue emanating from corporate taxes. This is understandable due to the ease of driving compliance in the sector, however, there is a need to strike a balance, by reducing excessive pressure on corporate entities and aligning with global practices. This article explores some challenges associated with tax revenue generation from individuals in Nigeria and various strategies for expanding tax revenue sources beyond the traditional corporate entities.
Current Tax Landscape in Nigeria
The Nigerian tax landscape is plagued with several issues inhibiting maximum revenue generation particularly from individuals. We have discussed below key challenges with the current tax landscape in Nigeria as it relates to taxation of individuals.
- Fragmented Tax System
The current tax framework in Nigeria seems to pose a challenge to our ability to generate and collect tax revenues from individuals effectively. Nigeria has thirty-seven (37) state tax authorities administering personal income tax in 36 states and the Federal Capital Territory (FCT). Nigeria has a huge population of over 200 million9, deploying 37 state tax authorities to administer the large population seems like a great approach, however, it appears that having multiple tax authorities may give room for potential leakages and inefficiencies.
The legal basis for the administration of personal income tax is the same across board, but the approach of collection, the technology employed, the level of accountability is different across the different States. This increases the chances of unequal application of the law, thus encouraging the possibility of low compliance and unstandardized processes in certain areas. The decentralized tax system also makes it impracticable to unify tax strategies, leverage information and utilize collective data and intelligence to deepen tax penetration. Hence, the current decentralized tax approach may not be beneficial to the overall tax objective of generating increased revenues.
- Low Voluntary Compliance
The statistics on tax paying persons vis-à-vis economically active individuals in Nigeria is quite low. As of 2022, it was reported that there were approximately 60 million employed individuals10]in Nigeria. According to research, data on individual taxes suggests that only about 16.7% of Nigeria’s economically active population pay taxes11. This underscores a dismal level of tax compliance, compared to other African countries.
One of the major contributors to the low voluntary compliance is a perceived lack of trust in Government and absence of the necessary social infrastructure. The average Nigerian may argue that government is generally not financially accountable with respect to the taxes collected so there is no basis to pay. Also, government’s inability to meet up with the infrastructure and social needs of the people may discourage individuals from complying. It is disheartening that there seems to be little or no motivation for voluntary compliance in Nigeria.
- Inadequate Intelligence Framework for Capturing
Unregistered Taxpayers
One of the major challenges in the Nigerian tax system is the lack of a robust system to effectively capture high net worth individuals, players in the informal sector, individuals doing remote work and other players in the e-commerce space. According to the International Monetary Fund's estimates, the informal sector accounts for approximately 50% to 65% 12 of the country's GDP, surpassing the Sub-Saharan average of 34%. However, efforts by the tax authorities to capture taxable persons in the informal sector, has not yielded much success due to certain challenges. This includes, existence of non-state actors, insufficient information on businesses in the sector amongst others. It appears that the strengths associated with businesses in the informal sector also contribute to the difficulties in bringing players in this space into the tax net. For example, the ease of starting a Micro Small and Medium Enterprise (MSME) in the informal sector increases the possibility that MSMEs might not be legally registered, thus making it challenging to account for their taxable presence. Similarly, the lack of proper business structure also makes MSMEs victims of non-state actors. According to research conducted by SBM Intelligence, 98% of players in the informal sector pay taxes but to non-state actors13. This is a major challenge in the Nigerian tax system as trillions of Naira collected yearly as taxes may not be properly reported.
In addition, it has been argued that there are considerable number of affluent individuals who frequently conceal assets/income to evade taxes. For example, due to improper data and intelligence structures, state authorities may miss out on Capital Gains Tax (CGT) due from disposal of chargeable assets by individuals. Similarly, the framework for capturing stamp duties due on dutiable instruments for individuals seem to be difficult to verify. Furthermore, the rise in global mobility and the prevalence of remote work has further revealed the gap created by the absence of intelligence framework for capturing unregistered taxable individuals in the country. There may therefore be a notable number of individuals residing in Nigeria, working remotely for nonresident companies (NRCs) but do not fulfill their tax obligations in the country. This may represent a typical example of tax leakage from individuals in Nigeria.
Nigeria has experienced significant growth in e-commerce and increased activities from players within this space who are largely individuals. The Nigeria e-commerce market size currently estimated at USD 8.53 billion, is expected to reach USD 14.92 billion by 202914. Nigeria is the 38th largest market for e-commerce placing ahead of Pakistan and behind Finland15 . The tax strategy to leverage e-commerce platforms and ensure income tax compliance is currently uncertain. Research shows that Nigeria is expected to outperform the global average growth of eCommerce market of 10% with a yearly growth rate of 12% between 2021 and 202516. It is disappointing that despite the huge growth opportunities that abound, insufficient tax intelligence framework continues to impede tax revenue growth in Nigeria.
Recommendations - Imperatives for Expanding the Tax Base
Expanding the tax base is crucial for increased revenue, as this will ensure reduced dependency on a limited group of taxpayers, promote fairness, stimulate economic growth, ensure fiscal sustainability, and provide budgetary flexibility. We have therefore discussed below, key recommendations which addresses the challenges identified with the current tax system.
- Centralized Tax Administration System
The Nigerian government should consider centralizing tax administration. This model will entail central administration and collection of tax revenues which could be shared among the three tiers of governments through a pre-agreed sharing formular. This approach will streamline tax strategies and ensure a more efficient tax administration. A unified tax system will strengthen tax collection process, enhance use of uniform technology, and simplify the compliance process for taxpayers. In the United Kingdom, His Majesty’s Revenue and Customs (HMRC) is the sole authority for tax and customs matters and is responsible for administration and collection of taxes, duties, and levies. This is the same with the South African Revenue Service (SARS) and most developed/developing countries around the world. A centralized tax administration system ensures a streamlined tax process and removes the burden of having to file tax returns to multiple authorities. This way, tax authorities can spend less time on routine compliance processes that could be automated and focus more on deepening tax penetration and expanding the tax base.
- Financial Accountability and Investment in Social
Infrastructure
Addressing the issue of low tax compliance among economically active individuals in Nigeria requires an approach that ensures Government can earn the trust of the people. The Nigerian Government has a lot of work to do to improve the public’s perception on how taxpayer funds are spent and demonstrate genuine interest in improving the social needs of the people. Proper focus should be given to implementing mechanisms that ensure tax revenues are efficiently used to develop essential social infrastructures to motivate voluntary compliance among the public. This process may entail rigorous auditing of public spending and periodic reports on how tax revenues are utilized. In addition, taxpaying individuals should be able to derive some direct or indirect benefit from tax compliance that is compelling enough to elicit voluntary compliance from others.
In Sweden for example, many people are generally willing to pay tax. The Swedish Tax Agency, despite the high-income taxes is able to earn the confidence and trust of the Swedes, such that the Swedish name for tax, skatt – means treasure17. A growing number of Swedes will accept even higher taxes due to a largely fair and well-functioning society with decent public service and a universal safety net. The Swedish Tax Agency is considered an important part in the life of every Swede’s life. The Agency does more than collect taxes. They are responsible for population registration from birth till death. The Agency requires individuals to obtain personal identification number at birth, and provision of constant updates is required where there is change in status of the individual such as marriage and relocation. The Nigerian tax authorities should consider adopting a cradle to death monitoring approach of individuals to ensure a comprehensive data capturing approach to taxation.
- Investment in Comprehensive Intelligence Tax
Framework
A comprehensive intelligence tax framework will require huge investment in technology and data analytic tools (including use of artificial intelligence) across various government functions. Capturing unregistered taxpayers within the informal sector, e-commerce space, remote employees of NRCs and HNIs will entail extensive network of information from different sources that can identify tax footprints and predict noncompliance. For instance, the Estonian government has a unified data platform that allows for seamless sharing of data across all government departments. Data entered in any system is automatically made available to relevant Government departments that might need it. This robust and unified system has enhanced tax compliance over time18.
Another example is the HMRC’s Connect Computer System, HMRC has spent more than £100 million developing the System19. This System is designed to improve HMRC’s ability to identify those understating and underpaying tax. The System is able to draw huge amounts of information from Government, corporate sources as well as social medial profiles to gain an idea of a taxpayer’s expenditure. Information from banks, peer to peer lenders, platforms such as Airbnb and access to land registry records also helps the HMRC to profile individuals and compare with existing tax information as well as identify unregistered taxable individuals. Utilizing centralized data and advanced analytics framework will expand the tax bracket in Nigeria greatly. This will also strengthen revenue monitoring capabilities, enable more effective identification of non-compliant taxpayers and enforcement of tax regulations.
- Simplified Tax Compliance Processes
Several countries have implemented measures that have effectively expanded their taxbase to cover persons that can be challenging to reach. One of the ways this was achieved is by simplifying the tax process from onboarding to compliance. A typical example is Kenya, where tax administration and especially tax audits are done via mobile phones and electronic devices20. Kenya has experienced significant growth in tax base, with increase in GDP growth rate and increase in tax revenues collection of up to 31%, within the first two years of implementing a simplified tax system. In addition, within two years of implementing the simplified tax system, Kenya tax revenue hit the trillion mark for the first time, demonstrating the importance of a simplified tax system.
A consolidated and simplified tax system will go a long way to ensure tax compliance is appealing to the informal sector in Nigeria. This should also minimize interference of non-state actors as there will be certainty on where and how tax should be paid, thereby easing the burden on players within the informal space and encouraging compliance. Additionally, a simplified tax system will provide clarity on tax obligations and procedures, thereby reducing ambiguity and minimizing opportunities for non-state actors to exploit gaps or inconsistencies. Ultimately, a simplified tax system has the potential to foster a more inclusive and equitable tax environment, benefiting both the Government and taxpayers.
Conclusion
There is a need for the Nigerian Government to shift its focus beyond corporate taxes by addressing the challenges impeding the great revenue generating potential that abound with individual taxpayers. The changes/investments required to achieve the desired tax revenue will not only ensure the fiscal objectives are met, but also contribute to the overall economic resilience and development of the country.
It is commendable that the Fiscal Reforms Committee has recommended some short to medium term initiatives to address some of the fiscal issues which the country may be faced with. Some of the Committee’s recommendations include reform of withholding tax regulations to ensure simplicity and ease the pressure on working capital of businesses. As well as suspension of multiple taxes which place burdens on the poor and small businesses among others. These initiatives are commendable however, there seems to be no clear strategy geared towards increasing collection of taxes from individuals. As a result, the focus remains predominantly on businesses. We urge the Committee to take a broader perspective in addressing the fiscal challenges bewildering Nigeria at this time, to avoid pressuring corporate taxpayers beyond necessary.
Footnotes
1. Nigeria seeks to almost double tax-to-GDP ratio in three years | Reuters
2. Why Is Tax Collection Low in Nigeria? | The Republic
3. New FIRS Chairman targets 18% tax-to-GDP in 3 years - Businessday NG
4. Revenue Statistics 2022 (oecd-ilibrary.org)
5. 9d0453d5-en.pdf (oecd-ilibrary.org)
6. Why Do Taxes Matter? | World101 (cfr.org)
7. Revenue Statistics: Key findings for the United Kingdom (oecd.org)
9. Nigeria Population (2024) - Worldometer (worldometers.info)
10. Key indicators of Nigeria's economy - Statistics & Facts | Statista
11. 202108_Taxation-report.pdf (sbmintel.com)
12. The Informal Economy in Sub-Saharan Africa: Size and Determinants (imf.org)
13. https://www.thecable.ng/report-98-of-businesses-in-nigerias-informal-sector-pay-taxes-but-to-non-state-actors/
14. Nigeria E-commerce Market Size (mordorintelligence.com)
15. E-Commerce in Nigeria: Growth and Future Trends 2024 (go-globe.com)
16. E-Commerce in Nigeria: Growth and Future Trends 2024 (go-globe.com)
17. Why Swedes are okay with paying taxes | SPCC
18. https://www.icaew.com/-/media/corporate/files/technical/technology/thought-leadership/digitalisation-of-tax.ashx?la=en
20. IMF elibrary on Digitalization in Kenya, page 253
The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.