Federal Inland Revenue Service

 

Obinna Chima

The federal government has been advised to strengthen its tax system, which has been described as a more sustainable option to raise government revenue.

 Analysts at the Financial Derivatives Company Limited (FDC) gave the advice in the latest economic report.

 The Lagos-based research and investment firm noted that unlike revenue from oil and other exports, taxes have a very limited vulnerability to external pressure, adding that it takes less time, effort and cost to improve tax collection than to implement other long-term development plans such as agricultural reformation, construction of refineries that are expected to contribute to revenue.

 Many have advocated the revival of the agricultural sector as the way out of the present economic challenge facing the nation. It is expected that agriculture would diversify the nation’s exports and thus expand the supply source of its foreign exchange.

 In 2014, total tax revenue from the Federal Board of Inland Revenue was N4.69 trillion, from N4.78 trillion in 2013.  From this, the tax to Gross Domestic Product ratio was 5.9 per cent in 2013 and 4.3 per cent in 2014, which was substantially lower than the sub-Saharan African average of 21 per cent in 2014.

To this, the FDC report stated: “This declining trend is not a problem of inappropriate policy but rather one of an inefficient tax collection system. Currently, the Nigerian tax system is generating much less than its potential. Because the tax officials are not well trained and equipped or well-paid and monitored there has been inefficiency and corruption in the past.

 “In addition, the wide-spread perception that the government is corrupt and will not efficiently expend the collected revenue for the good of the general public, acts as a deterrent to tax payers. This is further complicated by the unnecessarily onerous process involved in the payment of tax.”

According to PwC’s report, “Paying Taxes 2016,” a research that measures the ease of paying tax, Nigeria ranks 181 out of 189 countries.

“Thus, the problem of inefficient mobilisation of tax needs to be solved to improve internally generated revenue. At the state level, Lagos offers a valuable lesson. As the nation’s commercial hub, Lagos state has a population of about 21 million, of which at least 20 per cent are in the working class. In 2012, the Lagos State government generated N219 billion internally, amounting to 55 per cent of the proposed budget for that year.

 “Of this internally generated revenue, 78 per cent stemmed from pay-as-you- earn taxes (income tax).  The state’s success is due to its rigorous collection of tax at all levels of enterprise- even small scale businesses. This cumulative collection has funded Lagos’ fast development and industrialisation.

 “In conclusion, it is necessary to diversify the government’s revenue base from oil proceeds, to more stable sources like taxes, which are dependent on the national income and can be stimulated by monetary and fiscal policies.  Such diversification will reduce the level of exposure to external shocks and boost stability.

 “Where there is economic stability, the country becomes more at-tractive to foreign investments which are what Nigeria needs in this critical moment to spur economic activity and output. Thus, diversification acts as a springboard for economic growth- the primary concern of every government for its economy,” it added.

 It however pointed out that in terms of economic output; the Nigerian economy had already been diversified, revealing that in third quarter 2015, the non-oil sector contributed 89.73 per cent of total real GDP while oil contributed only 10.27 per cent. Amongst the top non-oil contributors were: agriculture, trade, and information and communication.

“On the other hand, government revenue remains largely dependent on oil. This lack of diversification is all the more problematic because of the volatility of the oil sector. Commodities are notorious for their volatility.

 “This volatility affects prices, production and inventories. The weak fundamentals are driven by an elastic demand. Thus, prices are extremely susceptible to changes in demography, climate, exchange rates, growth and policies in major economies

Currently, an estimated two-thirds of the government’s budgetary revenue is derived from oil.  This dependency has been especially catastrophic for the government in the wake of falling oil prices,” it added.