Nigeria stands at a critical juncture in its economic trajectory, with the Medium-Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP) 2024-2026 designed to chart the course for sustainable growth and fiscal stability. In line with this, the 2024 budget proposal was unveiled by the Federal Government of Nigeria (FGN) and is reflective of the government’s stated intentions to increase spending to stimulate economic growth, invest in infrastructure and address social issues accentuated by the adverse impact of the ongoing reforms. Underpinning the record-high expenditure plan of ₦27.5 trillion is a revenue expectation that is equally ambitious given the underperformance in recent years, the resultant degeneration of fiscal ratios and the escalation in the sheer scale of the country’s public debt profile. Since 2015, Nigeria’s public debt has soared seven-fold to ₦87.4 trillion. Servicing those obligations consumed 96% of government revenue in 2022  leaving little for crucial capital expenditure. The aforementioned have thrust the country’s revenue profile squarely into the spotlight.

Current Tax Revenue Profile: A Comparative Analysis

Nigeria’s tax revenue profile currently presents a complex picture. The tax-to-GDP ratio, a crucial indicator of a country’s tax performance, has historically been below the desirable levels for sustained economic development. At a revised estimate of 10.86% at the end of 2021, Nigeria’s tax-to-GDP ratio pales in comparison to those of its African peers and also lagged behind the regional average of 15.6%. This indicates both untapped potential and challenges facing revenue collection in Africa’s largest economy. The World Bank asserts that tax revenues of at least 15% is crucial in mobilising sufficient resources for investments in health, education and infrastructure, and is typically associated with accelerated economic growth and development.

Figure 1: Peer Comparison – Tax-to-GDP ratio (%)

Source: OECD Data

Nigeria’s tax system has been characterised by multiple taxes and revenue collection agencies, a fragmented and complex tax system, low tax morale, high prevalence of tax evasion, high cost of revenue administration, lack of coordination between fiscal and economic policies, and poor accountability in the utilisation of tax revenue. The FGN acknowledges that revenue mobilisation remains the significant constraint to Nigeria’s fiscal viability and has made a comprehensive tax reform agenda central to the realisation of the objectives of the MTEF and FSP.

Tax Reform Initiatives

Recognising the imperative for tax reform, the administration of President Bola Ahmed Tinubu has undertaken a multifaceted approach to reshape Nigeria’s tax landscape. He has appointed a Presidential Committee on Fiscal Policy and Tax Reforms, chaired by Mr. Taiwo Oyedele, a renowned accountant and economist with extensive expertise in fiscal policy and taxation. The committee is responsible for the various aspects of tax law reform, fiscal policy design and coordination, as well as revenue administration. The reforms are designed to transform the tax system to support sustainable development and achieve a minimum of 18% tax-to-GDP ratio within the next three years.

Figure 2: Medium Term Expenditure Framework (₦’ Trillion)

Source: Budget Office of the Federation

In an interim report, the committee revealed that approximately 96% of total revenue collected by the government comes from fewer than 10 taxes, and in line with this, is proposing the streamlining of over 60 officially collectable taxes and levies in Nigeria to a manageable single-digit number, to reduce the burden on the populace. In line with these findings, the Fate Foundation identified multiple taxation as one of the top five barriers impeding the growth of Micro, Small and Medium Enterprises (MSMEs). Unofficially, there are more than 200 separate taxes in Nigeria, and this tax multiplicity has long been a headache for many Nigerian enterprises.

Crucially, the proposed tax reforms are expected to digitise revenue collection and create a more conducive and internationally-competitive business environment, which are crucial in supporting the growth and sustainability, particularly for MSMEs.

Reasons for Optimism: Learning from Past Attempts

The optimism surrounding the current attempt at tax reform under the administration of Bola Ahmed Tinubu is rooted in a strategic learning curve from past attempts. Tax reform in Nigeria has encountered significant obstacles in ensuring compliance. These challenges include limited institutional capacity, insufficient statistical data, and inadequate utilisation of technology. The current endeavour aims to enhance administrative efficiency and the overall effectiveness of tax policies in Nigeria through outright revision of tax laws. In addition, it is our belief that the harmonisation of taxes and the digitisation of tax collection are two integral factors that will play a critical role in determining the success of this ongoing endeavour. The presence of political buy-in, which was previously lacking, and is a crucial factor in driving significant changes, is now evident and sets this effort apart from previous attempts. Please see below some successful tax reforms in sub-Saharan Africa:

Table 1: Some Successful Tax Reforms in SSA

Source: The International Monetary Fund (IMF)

Plugging the Leakages

While the committee has a one-year mandate to achieve its goals, the Federal Inland Revenue Service (FIRS) has introduced a time-limited concession window – available until 31 December – that allows for complete waivers on accumulated penalties and interest related to unpaid tax obligations. This is being done to acknowledge the difficulties that numerous taxpayers have encountered while attempting to resolve their unpaid tax obligations. This appears to be an acknowledgment of the difficulties encountered by numerous taxpayers when attempting to resolve their past-due tax obligations. A similar initiative, the Voluntary Assets and Income Declaration Scheme (VAIDS), which ran from June 29, 2017, to March 31, 2018, aimed to provide amnesty for tax defaulters. However, it failed to achieve its objective of adding four million new taxpayers, despite being extended multiple times. In addition, the initiative was unable to penalise defaulters who did not utilise the scheme, making it seem largely unsuccessful.

Nonetheless, offering a one-time opportunity to tax defaulter is one thing, but reeling in collecting incentives and waivers that have cost the FGN over ₦6 trillion each year for the previous three years is quite another. Nigeria’s grim fiscal picture simply means revenue losses of such magnitude, on the back of incentives that cannot be really be accounted for, are neither justifiable nor affordable. The potential attainment of this objective, despite anticipated opposition from the recipients, suggests that the 18% tax-to-GDP ratio goal may be within reach.

Conclusion: Navigating Fiscal Challenges

Government attempts to reduce debt and finance infrastructure, education, and health initiatives have been impeded by the heavy reliance on borrowings to cover public expenditure needs caused by low revenue receipts. Weaning itself off debt and raising revenues to levels consistent with those of its regional peers, hinge significantly on the success of this attempt at tax reform. The establishment of a resilient and efficient tax system is crucial for promoting economic growth, and the initiatives implemented by the present administration mark a significant step in the right direction. On the flip side, it is imperative to address the issue of fiscal indiscipline that has led to the current dire financial situation. We also believe that it is crucial to prioritise reducing the cost of governance and promoting the prudent utilisation of existing resources. These actions are pivotal in fostering compliance and, ultimately, lowering the costs associated with tax collection.