In recent times, it has become evident that Nigeria spends more on servicing its debt than it generates in revenues, putting the country in a precarious fiscal situation. This underscores the urgent need to boost revenue generation. However, research reveals that only a minority of Nigerian firms and individuals pay taxes, making the existing revenue base uneven. To address this imbalance, it might be necessary to consider an increase in the value-added tax (VAT).
There are already discussions in some quarters that the new administration might raise Nigeria’s VAT rate from 7.5 to 10 percent. Efforts by the federal government in recent years to increase revenue have only achieved partial success, with recurring budget deficits. Reputable auditors such as PricewaterhouseCoopers and KPMG have highlighted that some Nigerian corporate organisations and individuals face a heavy tax burden, with approximately 65 different taxes being paid.
The challenge lies in the fact that the tax net needs to be expanded, but widening it has proven to be a formidable task for all three tiers of government in Nigeria. Many Nigerians argue that tax increases reduce demand by reducing disposable income, leading to decreased spending and lower GDP. This contradicts fiscal policy recommendations for addressing a sluggish economy and high unemployment, which usually involve lower taxes.
Nigeria’s tax-to-GDP ratio is among the lowest globally, with the highest recorded at 9.6 percent in 2011, while in other years, it hovered around 6 percent. In comparison, the average tax-to-GDP ratio in Africa during the same period was 17.2 percent.
The root of this issue is clear: a relatively small number of Nigerians actually pay taxes to the government. A recent report from the Budget Office indicated that only about 26 per cent of Nigerian workers pay taxes. This low tax-to-GDP ratio places a heavy burden on honest and compliant taxpayers, hindering the government’s revenue generation.
The International Monetary Fund (IMF) reported that out of Nigeria’s labor force of 77 million, only 10 million are registered for tax purposes, severely affecting tax revenue generation.
The solution to Nigeria’s poor tax revenue generation at the federal level is evidently a broader tax base. Increasing VAT appears to be the most effective way to encourage more Nigerians to pay taxes, as it encompasses everyone conducting business within the country’s borders.
The federal government argues that VAT is a consumption tax, which impacts only those who consume and can be avoided by choosing not to consume certain items. Basic necessities such as food, education, and medical supplies are exempted from VAT, ensuring that only those with a greater capacity to spend would be affected by the increase.
Out of Africa’s 55 countries, only 11 have VAT rates lower than 15 per cent. Nigeria currently has one of the lowest VAT rates on the continent at 7.5 percent, surpassed only by Eritrea at 5 per cent.
Increasing VAT is a promising means to expand the tax net and increase revenue, which can help narrow Nigeria’s infrastructure gap and provide essential development. While the move might be met with some resistance, it could play a crucial role in balancing Nigeria’s fiscal position and fostering economic stability.
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