Nigeria’s high significant tax expenditure has hit the spotlight, raising concern from the International Monetary Fund (IMF) as it accounts for four percent of the country’s Gross Domestic Product (GDP) N6.8 trillion in 2021 according to estimates. In terms of comparing tax spending to gross domestic product, Nigeria ranks third, below South Africa and Central Africa, as stated by the IMF. In order to attain fiscal stability, the IMF said, Nigeria needs a substantial tax overhaul measure.
For the government to be able to support critical development areas like education and healthcare, it will need to address inefficiencies that are currently hindering it from effectively collecting taxes. By “tax expenditure,” we mean governmental revenue lost due to tax incentives such as tax breaks, tax credits, fiscal incentives, tax deferrals, and tax exemptions. In addition, tax credits provided to businesses make up a significant portion of Nigeria’s tax outlays. Over the years, the federal government has paid little to no focus to the management and transparency of tax incentive schemes.
Substantial tax breaks undermined Nigeria’s revenue base.
The IMF put more emphasis on the massive discrepancy between the value of the prospective result tax revenue may generate and the actual amount collected. As a result, the Nigeria value-added tax (VAT) collection efficiency ratio is the lowest of any nation in sub-Saharan Africa (SSA). In a continent where South Africa, Equatorial Guinea, and Zambia all have VAT collection efficiency rates in the 70 percent range, Nigeria lags far below with a low of 20 percent.
According to a recent IMF analysis, in order to improve its fiscal stability, Nigeria should gain knowledge from nations that have implemented successful tax changes. As it is, Nigeria’s revenue base is being undermined by the country’s substantial tax breaks, allowances, and exemptions. Based on projections from the Tax Expenditure Statement (TES) for 2021, Nigeria is projected to have one of the highest per capita tax expenditures in sub-Saharan Africa (SSA), with an estimated 4% of GDP (N6.8 trillion) in 2021.
Nigeria has the ability to boost revenues with priority tax changes.
Furthermore, it was also noted that low tax rates have a negative effect on tax collection, with experts estimating that Nigeria’s indirect taxes (value-added tax and excise) had rates around half the average of ECOWAS nations due to their small bases. Import VAT refunds, duty and surcharge waivers, and surcharge reductions are all part of the 2021 exemption. It proposes that Nigeria learn from the experiences of Rwanda, Uganda, Mauritania, and Gambia by looking at how their reforms dealt with revenue shocks and led to some degree of fiscal stability.
Notably, the highlighted instances enacted tax policy and administrative improvements together. A number of tax administration measures and tax policy changes, including rate increases, base widening, and rationalizations of tax incentives, were simultaneously adopted in the highlighted nations. Although acknowledging that a tipping point exists between tax capacity and growth, the research argues that Nigeria has the ability to boost revenues if priority tax changes are implemented. Significant growth is also linked to a revenue-to-GDP ratio of at least 12-13%.
Experts stated that tax incentives have been severely exploited.
In addition, data published on the Medium Term Expenditure Framework (MTEF) for 2023 to 2025 have shown that the country has a planned tax expenditure figure of N21.815 trillion between 2020-2023. Meanwhile, the country’s capacity to maintain its high tax expenditures is becoming a source of considerable worry. Meanwhile, the Nigerian Senate has voiced concerns over the country’s plan to waive taxes totaling almost N6 trillion in 2023, saying that the tax waiver scheme was being exploited. Likewise, experts posit that tax incentives and expenditures have been severely exploited or poorly implemented noting that Nigeria should not give away so much.