Recently, the International Monetary Fund (IMF) expressed concern over Nigeria’s insufficient tax revenues. Abebe Selassie, the Director of Africa for the IMF, highlighted the low Tax Revenue to GDP ratio of 8-9% in Nigeria, considering the country’s high population and development requirements. In its 2019 Article IV consultation with Nigeria, the IMF had previously highlighted the issue of insufficient Tax Collection in the country, stating that Nigeria’s Revenue base was inadequate to adequately tackle the present difficulties.
The country’s staggering 8-9 percent Unemployment rate pales in comparison to the sub-Saharan African average of 18.6 percent. Despite various Nigerian administrations expressing concern, they have consistently failed to accurately identify and address the underlying issues, instead opting to focus on surface-level signs. President Bola Tinubu assumed office last year and immediately set his sights on improving Nigeria’s Tax revenue. He announced plans to raise the country’s tax-to-GDP ratio to 18 percent by 2026. In July 2023, Tinubu established the Presidential Committee on Fiscal Policy and Tax Reforms, led by Taiwo Oyedele, a tax specialist at PwC.
Nigeria’s tax system is currently lacking in efficiency.
In October 2023, the committee presented their findings, focusing on opportunities for simplifying and modernizing the tax system to achieve immediate positive results. At the recent World Economic Forum in Saudi Arabia, Tinubu engaged in a conversation with Bill Gates, the co-founder of Microsoft, about leveraging digital Technology to streamline tax collection processes in Nigeria. When speaking with Tinubu, Gates promised to collaborate on developing a digital identity system to streamline payments and simplify tax collection under his leadership. However, Nigeria’s tax system, which is currently lacking in efficiency, is not the main factor contributing to wealthy individuals avoiding paying their taxes in full.
For instance, the Federal Ministry of Finance reported that only 241 individuals paid over ₦20 million in personal income tax annually, while the former head of the Federal Inland Revenue Service claimed that more than 6,772 billionaires evade tax. Despite this, it is clear that the issue is not due to the absence of a digitalized payment platform. Corruption is identified as the main cause of this issue. Many wealthy individuals manage to escape paying taxes through various means, with the help of tax officials who are willing to turn a blind eye in exchange for personal gain.
Majority working in the informal sector evade paying taxes.
Regrettably, the economic situation in Nigeria is failing to generate sufficient revenue for its taxpayers. The dwindling middle class is gradually vanishing, with the remaining population barely scraping by. The International Labour Organisation (ILO) approximates that a staggering 93 percent of employment in Nigeria falls within the informal economy. It is widely recognized that a significant portion of individuals working in the informal sector evade paying taxes. This is mostly because of their low earnings, meaning that they rely on daily income for survival, with the added challenge of being untraceable by the state for tax purposes.
According to data from the National Bureau of Statistics (NBS), a significant percentage of Nigeria’s working-age population are self-employed, with the majority working as small-scale traders or microentrepreneurs struggling to earn a liveable income. Due to this reality, it is understandable that a large portion of the country’s labour force, estimated at 67 million out of 77 million, are not officially registered as taxpayers based on one analysis. In order to increase its tax revenue, Nigeria must have a strong Economy where businesses thrive and generate good salaries, and must encourage informal sector workers to transition to the formal sector and pay taxes.
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Another problem often faced is that Nigeria’s population consistently fails to comply with tax regulations, posing a significant challenge. Even though they have the ability to pay, a large number of Nigerians refuse to contribute their fair share. Nigeria needs to focus on Economic Growth and upholding the social agreement in order to boost tax revenue. Additionally, improving tax administration is crucial, with digitalization being a key aspect of this reform. Ultimately, it is essential to have a strong economy and effective governance in order to increase fiscal revenue.