Nigeria’s tax woes revealed by low active VAT accounts - BUSINESSDAY
…Higher compliance could boost VAT receipts 800%
Sourcing for revenues to fund Nigeria’s 2019 budget would have been a little easier if the country was able to widen its tax base, especially the proportion of its Value Added Tax (VAT) accounts that were active.
Sources tell BusinessDay that of the over 1.5 million registered VAT accounts in 2018, only an estimated 77,000 were actively remitting funds to the government.
Africa’s most populous nation continues to struggle with revenue generation despite its VAT collection maintaining an upward trajectory in the past five years, according to figures obtained from the National Bureau of Statistics (NBS).
From 2013 when BusinessDay started collating the data, VAT collection in Nigeria rose by N980 billion, from N127.83 billion to N1.11 trillion in 2018.
The collection rate jumped 491 percent in 2015 when the Federal Inland Revenue Service (FIRS) was able to collect N759.43 billion, from N128.54 billion the previous year.
The active VAT accounts paid a total of N1.11 trillion as consumer tax for full year 2018.
The total VAT of N1.11 trillion remitted into the Federal Government coffers in 2018 represents only a fraction of the N9 trillion in potential VAT remittances. Peer nation South Africa’s tax agency collected R1.216 trillion ($101.3 billion) in taxes last fiscal year, of which VAT contributed 25 percent to the total or some 7 percent of GDP.
“A lot of factors are linked to that low rate,” said Ayo Akinwunmi, head of research at FSDH Merchant Bank. “What we need to do at the current level is to broaden our tax base and you will get more revenue.”
Taking into consideration the fact that an equal amount of VAT may not have been paid by each registered accounts as some may have paid more than others, BusinessDay used a less average amount to do the same calculation.
Thus, if a VAT-compliant account pays an average of N10 million annually, this implies that Nigeria would realise N15 trillion from the tax. The amount would, however, fall to N7.5 trillion if each accounts paid N5 million a year.
In 2014 when Ngozi Okonjo-Iweala, then finance minister, hired McKinsey, a consultancy, to plug tax leakages and boost non-oil tax revenue, it was discovered that 65 percent of registered taxpayers had not filed their returns in two years.
A survey by BusinessDay revealed that 75 percent of small and medium businesses are not currently in the tax system and about 30 percent of companies operating under the Pioneer Status incentive are alleged to have abused their tax exempt status.
The estimated N8.83 trillion 2019 budget contains many tax components as FGN mulls new taxes and a VAT hike in order to meet a higher wage bill following the approval of a new minimum wage.
Akinwunmi said having a higher tax rate is not the major issue affecting the nation’s revenue because it would depress consumption and discourage investment in the country.
He, however, said what Nigeria needs to have are strategies to bring in more people into the tax basket such that the country would have a larger base on which it is applying the current tax rate.
“Once you do that, government will be able to generate more revenues,” he said.
The Federal Ministry of Finance recently initiated the Voluntary Assets and Income Disclosure Scheme (VAIDS), an initiative that gives Nigerians with tax liabilities dating back to 2010 the opportunity to regularise their tax status by declaring and spreading payments over a maximum three-year period.
This led to a record high sum of N5.32 trillion remitted from tax revenues in 2018, despite missing the target of N6.7 trillion.
The historic revenue generation was still abysmal as checks by BusinessDay revealed that Nigeria’s tax-to-Gross Domestic Product (GDP) ratio, one of the most widely used tools for measuring the efficiency of a country’s tax system, has remained stagnant at 6 percent.
Nigeria’s tax-to-GDP ratio is relatively lower when compared to other developing economies like Ghana with 17.6 percent ratio and Kenya’s 18.5 percent, and also lower than the average for the African countries in Revenue Statistics which is 18.2 percent, as compiled from the Organisation for Economic Cooperation and Development (OECD), an intergovernmental economic organisation with 36 member countries.
The FIRS says it wants to raise N750 billion from wealthy defaulters. Under Babatunde Fowler, the FIRS head, the success of VAIDS remains unclear, just as that of the just-introduced Voluntary Offshore Assets Regularisation Scheme (VOARS). Both are meant to woo defaulters with waivers and amnesties.
“We still have a large percent of our population – over 50 percent – in the informal economy, so now in terms of raising the revenue, it doesn’t make much sense to put more pressure on the existing taxpayers,” Andrew S. Nevin, advisory partner and chief economist, PwC Nigeria, said.
Endurance Okafor & Oluwasegun Olakoyenikan