For a nation of nearly 200 million people, not many Nigerians pay taxes. Indeed, as of May 2017, only 14 million—or one in five—of Nigeria’s estimated 70 million economically active citizens were paying taxes. As such, Nigeria’s government has typically earned much less than it could have from taxes.
Back in June, Nigeria’s finance minister revealed only 214 people in the country pay more than 20 million naira ($55,600) in taxes.
Like several other African countries, Nigeria has seen its economy slow down due to the drop off in commodity prices over the last two years. Africa’s largest economy is under pressure from multilateral organizations like IMF and World Bank to diversify its revenue base away from an over-reliance on oil and gas export revenue. The IMF suggests “better balancing income taxes and indirect taxes, and broadening the tax base to improve the resilience of tax revenues.”
When it comes to taxes in Nigeria, the problem is less about raising taxes but more of a focus on improving collection rates. This is easier said than done in an economy which is dominated by its cash-led informal sector.
Earlier this year, as part of a planned increased tax collection drive, the government introduced a Voluntary Assets and Income Declaration Scheme (VAIDS) to try to plug the gap. The idea of the scheme was simple: within an amnesty period (July 2017 to March 2018), the government would allow anyone who hadn’t paid taxes or had under-declared their income to pay what they owe without being prosecuted or paying penalties. After the deadline, tax evaders could face criminal prosecution.
The hope for the tax amnesty period was to widen the tax base by registering more individuals and businesses that previously didn’t pay taxes and, so far, it appears to be paying off. Babatunde Fowler, head of Nigeria’s internal revenue service, says the country has collected nearly $47 million from former tax evaders through the scheme in the past six months. Increasing its tax base means Nigeria can also improve its tax to GDP ratio which currently ranks among the lowest globally.
Beyond an amnesty program, Nigeria could also remarkably boost its tax base if the government can crack how to tax its vast informal sector. For many in formal employment, taxes are typically deducted from monthly salaries making tax evasion more tricky. But for many local businesses owners or artisans, with government unable to track their income, tax evasion is possible and likely rampant.
In the short-term, generating more revenue via taxes is essential to Nigeria as the government is looking to finance a record budget in 2018. Even though oil production, Nigeria’s primary source of revenue, is making a rebound, it remains around 200,000 barrels per day short of the oil production benchmark needed to fund the record budget.