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Nigeria needs 9% tax-to-GDP to boost revenues

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By Okunloye Abiodun

Tax-to-GDP ratio will be increased to 18 percent within three years - IMF.

The International Monetary Fund has charged the federal government with growing tax revenues by 9 percent of GDP amid declining revenues and rising debt levels. This follows the Federal Inland Revenue Service, an arm of the Nigerian government’s decision to raise the country’s tax-to-GDP ratio from its December 2021 level of 10.86 percent. Upon taking office, Zacch Adedeji, the acting chairman of FIRS, made a commitment to increase the tax-to-GDP ratio to 18 percent within three years, which would put it above the average for Africa of 16.5 percent. This, he said, will lessen the country’s need for foreign aid and keep its finances stable.

In a document titled “Building tax capacity in developing countries,” the International Monetary Fund (IMF) noted that a substantial and sustainable increase in tax revenue is necessary for low-income developing countries (LIDCs) in order to achieve the Sustainable Development Goals (SDGs), which tackles climate change, and stabilise their debt levels. Given the current institutional and economic systems, the organisation maintains that increasing the tax-to-GDP ratio by an average of 9% points is now necessary to realise its full potential and enable the state to fulfil its role more effectively.

More transparency in its administration and policy is needed.

It also suggested enhancing the design of key taxes, which include value-added tax, excises, and both personal and corporate income taxes, with an emphasis on tax base widening through revising inefficient tax expenditures, more equitable taxation of capital income, and greater utilisation of real property taxes. It added that the key to successful tax reform is strengthening the institutions that regulate the tax system. There needs to be more transparency and certainty in how administration and policy are translated into law, as well as more professionalisation of public officials involved in tax planning and execution, enhanced utilisation of digital technologies to bolster revenue administrations and more.

Furthermore, enhancing the efficiency with which the most fundamental domestic taxes are structured and administered is the primary focus for bolstering tax capacity. International cooperation on taxing the earnings of MNEs is essential, but more is needed to cover the revenue mobilisation needs of LIDCs, and it should not detract from the broader goal of enhancing countries’ tax capacities to promote economic growth. The agency estimates that LDCs may need to spend an extra 16% of GDP on the SDGs by 2030 and debt sustainability management.

Financial crises in several LIDCs necessitate revenue mobilisation.

IMF noted that the urgency of revenue mobilisation has increased due to the current financial crisis in several LIDCs and that increasing global cooperation on the taxation of the profits of MNEs has generated prospects for extra revenue. Nevertheless, it is expected that these will have a minimal impact on LIDCs. It was suggested that, although necessary, reforms for revenue mobilisation should focus on the imperative of leveraging key domestic tax policies. Additionally, it was stated that there is a great possibility to collect additional revenues in LIDCs, as indicated by their tax potential.

Tax revenues in LDCs are significantly lower than their potential of 19.9 percent, coming in at an average of 13.2 percent of GDP; this is when the economic framework and the quality of institutions are held responsible. This potential rises by an additional 2.3 percentage points of GDP if governmental efficiency is brought up to the level of that of nations with emerging markets. It was added that when changes are supported by appropriate political buy-in and appropriately integrated across complementing policies and institutions, they can bring about swift and actual revenue, improved tax progressivity, and enhanced incentives.

Investment should be made in tax policy units to improve its framework.

Lastly, it also recommended governments invest more in tax policy units to help with issues like climate change and industrial policy that cut across jurisdictions and require consideration during the policymaking process. The organisation also emphasised the importance of preventing political interference in Nigerian tax agencies and the necessity to digitise and strengthen them. Reforms that can have a lasting effect on revenue collections include greater utilisation of digital services and procedures, taxpayer classification, and risk-based compliance management. A clear and solid legal framework is required for taxpayers to feel confident in their tax outcomes. It also stressed the importance of prioritising changes and coordinating efforts among government entities.

Related Link

IMF: Website

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2 months ago

Nigeria needs 9% tax-to-GDP to boost revenues. – Tax-to-GDP ratio will be increased to 18 percent within three years – IMF. – Express your point of view.

Last edited 2 months ago by Kenny Adetunji
Adeoye Adegoke
Adeoye Adegoke
2 months ago

That’s an interesting development! Increasing Nigeria’s tax-to-GDP ratio to 18 percent within three years, as suggested by the IMF, could have significant benefits for the country’s revenue generation and overall economic stability.
A higher tax-to-GDP ratio indicates that a larger portion of the country’s economic output is being collected as tax revenue. This can provide the government with the necessary funds to invest in infrastructure development, social programs, and other essential services that contribute to the overall well-being of the population.
By boosting tax revenues, Nigeria can reduce its reliance on oil revenues and diversify its income sources. This is crucial for the country’s long-term economic sustainability, as it can help mitigate the impact of volatile oil prices and create a more stable revenue base.
Increasing the tax-to-GDP ratio requires a comprehensive strategy that includes both broadening the tax base and improving tax compliance. It is important to ensure that the burden of taxation is distributed fairly and that the tax system is transparent and efficient.
Broadening the tax base involves reducing the reliance on oil revenues and expanding the tax net to include more sectors of the economy. This can be achieved by implementing measures such as reducing tax exemptions, closing loopholes, and introducing new taxes or increasing existing tax rates in a balanced and equitable manner.
Improving tax compliance is equally important. This requires strengthening tax administration, enhancing tax collection mechanisms, and promoting a culture of tax compliance among individuals and businesses. Effective enforcement of tax laws and penalties for non-compliance can help deter tax evasion and increase voluntary compliance.
It is crucial to consider the potential impact of these tax reforms on different segments of society, particularly low-income individuals and small businesses. Adequate measures should be put in place to protect vulnerable groups and ensure that the tax burden is distributed fairly.
Overall, increasing Nigeria’s tax-to-GDP ratio to 18 percent within three years, as suggested by the IMF, can be a positive step towards enhancing revenue generation and promoting economic stability. However, it is important to implement these reforms in a balanced and inclusive manner, taking into account the specific needs and circumstances of the Nigerian population.

2 months ago

In fact, the 9% tax on GDP is crucial to the expansion of our economy. If we can acquire it, it will contribute to increasing our revenue. It will also aid in economic stability. As quickly as possible, we need to seek for a mechanism to tax individuals.

2 months ago

In Nigeria, a tax-to-GDP ratio of 9% would significantly increase revenue. It would make it possible for the government to spend money on important industries, upgrade the nation’s infrastructure, and give citizens better public services. This goal can be attained by implementing efficient tax policies.