Nigeria’s tax viability, when compared to other African countries, reveals both strengths and weaknesses. Tax viability refers to the ability of a country to efficiently collect revenue through taxation, which is crucial for financing public services and fostering economic development. Across the African continent, there are notable variations in tax systems, tax-to-GDP ratios, and the overall effectiveness of tax administration. Nigeria, despite being Africa’s fourth largest economy, faces significant challenges in this regard, especially when contrasted with some of its peers on the continent.
One of the most glaring contrasts is Nigeria’s low tax-to-GDP ratio compared to other African nations. Nigeria’s tax-to-GDP ratio has hovered around 6-7 per cent, one of the lowest in the world, and far below the African average, which stands at around 16 percent. Countries such as South Africa and Kenya have managed much higher tax-to-GDP ratios, with South Africa achieving around 26 per cent and Kenya around 18 per cent. This stark difference can be attributed to several factors, including a narrow tax base, widespread tax evasion, and inefficiencies within Nigeria’s tax collection system. The reliance on oil revenue in Nigeria has historically reduced the focus on non-oil tax revenue, leading to underperformance in domestic tax collection.
Another point of contrast is the tax structure. Nigeria relies heavily on oil revenues, and its non-oil tax base is underdeveloped. The bulk of its tax revenue comes from corporate taxes, value-added taxes (VAT), and customs duties, while personal income taxes contribute significantly less compared to countries like South Africa, which has a more diversified tax base. South Africa and Kenya, for instance, have robust systems for collecting personal income tax, which are integral to their higher tax-to-GDP ratios. Nigeria’s VAT rate, at 7.5 percent, is also relatively low compared to other African countries like South Africa, which has a VAT rate of 15 per cent, and Kenya, which levies 16 per cent.
In terms of tax administration, Nigeria faces challenges such as inefficiency, poor tax compliance, and corruption, all of which undermine its tax viability. The informal sector, which represents a large portion of Nigeria’s economy, remains largely untaxed, making it difficult for the government to broaden the tax base. This issue is common across many African nations but has been tackled more effectively in countries like Rwanda and Botswana, which have made significant strides in tax reform and digitisation, improving both tax compliance and collection.
While Nigeria’s tax system has been criticised for its inefficiencies, efforts have been made to improve it. In recent years, the government has implemented reforms aimed at increasing tax compliance, including the introduction of the Voluntary Assets and Income Declaration Scheme (VAIDS) and strengthening the Federal Inland Revenue Service (FIRS). These efforts mirror similar reforms seen in Kenya, which has also invested in digitising its tax system through the Kenya Revenue Authority’s (KRA) iTax platform, leading to improved compliance and higher revenues.
On the positive side, Nigeria has the potential to significantly enhance its tax viability given its large population and economic size. The informal sector, while currently under-taxed, represents a vast untapped resource. Countries like Ghana have begun to implement policies to bring more of the informal sector into the tax net, which could serve as a model for Nigeria. Additionally, Nigeria’s recent efforts to improve tax enforcement and expand its tax base indicate progress, although it lags behind more developed African tax systems.
In contrast to countries like South Africa, which has a more progressive tax system that places a greater burden on higher earners, Nigeria’s tax system is seen as regressive, with indirect taxes such as VAT affecting the lower-income population more heavily. South Africa’s well-established social welfare system, funded by its tax revenue, contrasts sharply with Nigeria’s limited ability to provide public services and infrastructure improvements due to its lower tax revenue.
Nigeria’s tax viability, while showing signs of improvement, is considerably lower than that of other African countries like South Africa, Kenya, and Rwanda. Factors such as a narrow tax base, reliance on oil revenues, and inefficiencies in tax administration have hindered Nige-ria’s ability to maximize its tax potential. In contrast, countries like South Africa and Kenya have more diversified tax bases, higher tax-to-GDP ratios, and better compliance mechanisms, making them more successful in leveraging taxes to finance development. For Nigeria to enhance its tax viability, it will need to focus on reforms aimed at broadening the tax base, improving compliance, and reducing reliance on oil revenues.
