Nigeria could raise its tax-to-gross domestic product (GDP) ratio to about 7 percent and generate an additional ₦10 trillion revenue into its coffers between 2021 and 2024 if it adopts coordinated policy reforms, combined with revenue administration enhancement policies aimed at achieving improved revenue potential, the World Bank has said.
Although Nigeria is reputed to be Africa’s biggest economy, with GDP at almost $450 billion, the World Bank ranks the country’s tax-GDP ratio of about 4.5 percent as lowest on the continent.
Amid the growing devastation of COVID-19 pandemic on global economy, the country has continued to grapple with pressures from declining crude oil prices in 2020, which highlighted the need to seek alternative sources of revenue to tackle challenges of poverty and unemployment as a result of the crisis.
In 2020, crude oil exports dropped by over 43 percent with production down by 8.9 percent, resulting in fiscal revenues dipping by close to 30 percent.
Remittances by revenue agencies fell by about 50 percent, although recovered slightly by the fourth quarter of the year, while net capital portfolio investment flows dropped, with foreign direct investment declining by about 25 percent due to global risk aversion, uncertainty around foreign exchange policies and a low interest rate regime.
The non-oil industry and services were heavily affected by mobility restrictions, with a 3.9 percent and 2.2 percent contraction respectively.
Poverty levels spiked, while inflation spiraled, amid falling purchasing power, triggering fears about over 7million Nigerians at risk of being pushed into poverty
But, as Nigeria is trying to “build back better” after the COVID crisis, the World Bank report said “the approach to revenue mobilization needs to be more strategic: not just taxing more, but taxing better; not just how much to collect, but how to collect, what to collect, and from whom.”
To achieve this objective, the World Bank in the latest edition of its Nigeria Development Update Report said this demands policy and administrative measures to grow revenues without negatively impacting investment.
One of its recommendations is a focus on tax revenues, which it described as “necessary to ensure essential services, provide security to citizens, help tackle hunger
and poverty, and deliver critical health and education services.”
“This rules out any increases in traditional ad valorem taxes, like the value-added tax (VAT), but opens a window to fully implement the already existing tax policies and reform tax administration to seal compliance gaps.
“There is potential for harvesting revenue-yielding fruits such as increasing “sin taxes,” charging fees for electronic money transfers, rationalizing tax expenditures, removing loopholes in tax laws, and improving tax compliance by reinforcing revenue administration.
To achieve set revenue targets under the reforms, the World Bank highlighted immediate, medium and long-term strategies and areas of reforms Nigeria requires to improve its revenue mobilization efforts and yield under the post-COVID 19 economy.
With reforms expected to potentially raise the country’s revenue yield by between N4trillion and N6trillion and 7 percent of the aggregate value of goods and service called gross domestic product (GDP), the Bank said the key areas of reforms included excise reforms through policy measures and value-added tax administration and closing compliance gaps.
The other areas included rationalizing tax expenditures in the corporate income tax; improved personal income tax revenue raising measures and access to data, as well as property reforms and updating/completion of property records.
For immediate implementation, the Bank proposed an enhanced excise rates imposed on “sin goods” like alcohol and cigarettes, which could potentially help in generating about N930billion or 0.6 percent of GDP, while the introduction of token rate of consumption tax on petroleum products like petrol and diesel and airtime could fetch as much as between N500 and N600billion, or 0.4 percent of GDP.
Also, the Bank believes the implementation of electronic money transfer levy, and improvement in overall tax compliance focused on the full implementation of the increased rate of value added tax (VAT) could generate as much as N600billion, or 0.4 percent of GDP.
These, the Bank said, must be complemented by measures to enhance efficiency of the Federal Inland Revenue Service (FIRS) through improved ICT capacity, human resource management and training of staff, organizational reforms and process improvements.
In the medium term, the Bank proposed the need to rationalize tax expenditure, particularly on granting concessions and incentives on capital importation tax (CIT) and VAT, to help realize over N1trillion, or 0.7 percent of GDP.
Again, it said reforms on tax statutes at the federal level including Corporate Income Tax Act (CITA) and the Value Added Tax Act, including plugging loopholes, rationalization of the treatment of expenditures (CITA) and credits, and development of anti-fragmentation rules could generate additional N800billion and N2trillion, or between 0.4 to 1.4 percent of GDP.
For the long term, the World Bank called for improved revenue mobilization from cross border transactions and international tax measures, including improvement of personal income tax from undisclosed oversees deposits and illicit financial flows through better use of information on online transactions and application of transfer pricing rules to help realize about N300billion, or 0.2 percent of GDP.
It also called for enhanced internally generated revenue towards improved personal income tax collection and other taxes like property tax from States of about N300billion, or 0.2 percent of GDP.
On VAT, the World Bank called for the revision of sanctions for non-compliance regulation, as the current sanction of N50,000 imposed on individuals and corporate tax payers for failing to file VAT tax returns was not an effective deterrent.
The Bank called for clear definitions in law and Ministerial Orders for VAT rules regarding cross border digital transactions; place and time of supply of goods and services; reverse charge VAT and order of charge.
With current VAT revenue potential at about N4.5billion, the Bank says Nigeria’s revenue potential from VAT could be as high as N3.1trillion, given that there is no input tax credit on capital goods, that makes VAT in capital investments that impacts all sectors to be embedded.
Considering that capital investment was key to productivity gain, the World Bank is of the view that an efficient VAT system is capable of stimulating such investments.
Besides, since a significant VAT revenue currently comes from taxation of capital investment, the Bank is convinced the reform in VAT would have significant impact on the country’s revenue.
In 2019, the Bank noted that about N1.11trillion was lost in corporate income tax concessions. These included about N999.7billion on interest on loans for agriculture, fabrication and cottage industry; N57.7billion on interest on securities; N34.1 billion on research and development, and N17.8billion on deductibles under the corporate income tax Act.
The Bank made the following recommendations for reforms in expenditure on CIT, including the need for banks and financial institutions to access specific incentives account for more than 90% of CIT forgone.
On personal income tax (PIT) reforms, the Bank insists on revenue-raising policy measures, including eliminating the exemption for foreign income remitted through official channels, inclusion of a residence rule for individuals, reviewing and improving valuation rules for employee benefits, and confining the exemption for compensation for loss of employment to genuine redundancy payments.
On equity-enhancing policy measures, the Bank recommended the introduction of higher threshold of at least equal to minimum wage, and higher maximum marginal rate for high-net-worth individuals.
For coordinated and strengthened PIT administration in the country, the Bank called for the need to address tax affairs of self-employed individuals; taxation of business income of individuals who also have employment income as well as review of internal information sharing between State Tax Administrations and FIRS, including
through Joint Tax Boards (JTBs).
It emphasized the need for a decentralized revenue keeping that would make estimating revenue potential difficult.
Further details on reforms to boost excise revenue on traditional “harm” commodities, like beer, wines and spirits and other alcoholic beverages, cigarettes and tobacco, the World Bank, said could potentially generate additional N900billion, or 0.7 percent of GDP to the economy.
Under immediate reforms, the Bank proposed the need to maintain mixed system and increased specific component, and rates structure of spirits and cigarettes; gradual increase in cigarette rate, and base broadening through adding scope to other tobacco products.
In the long term, the World Bank proposed reforms in the areas of sugar, salt and fat content based the World Health Organization recommendations. With the current cigarette market estimated to have about 32-40 sticks of cigarette and excise payment of on 17.8billion, the World Bank believes additional revenue yield could be as high as N135billion through the reform on excise rate.
Besides, the WHO estimates that 91 percent of alcohol consumption in Nigeria is illicit, the Bank estimates that additional N158billion, N612billion, N33billion and N150billion revenue could be realized from reforms affecting beer, stout, wines, spirits and cigarettes consumption in the country.
Post-COVID-19 crisis: How Nigeria can raise additional N10trn from tax revenues in 3 years – World Bank