Article summary
- Nigeria has 41 million tax papers according to the Federal Inland Revenue Service (FIRS)
- In 2022, Nigeria earned N10 trillion from taxes, the highest ever recorded in the country.
- The planned tax increase may generate more revenue but weaken citizens’ purchasing power and exacerbate inflation.
In 2020, just before the COVID-19 pandemic, the Federal Government announced an increase in the Value Added Tax (VAT) from 5% to 7.5%. The VAT rate is one of the taxes that is paid in Nigeria.
Taxes are important to a country, just as water is important to live. It is a form of revenue for a country, one which the government can use to fund public services. Also, taxes help the government to regulate economic services.
The ripple effects of the COVID-19 pandemic, the fluctuating oil prices, oil theft, Russia’s invasion of Ukraine, and the recent new Naira note issue, are parts of the economic challenges the country is facing. These issues have impacted not just the county’s economy, but the purchasing power of citizens.
Tax challenges and economic impact in Nigeria
In April 2023, President Muhammadu Buhari, as he winds down his 8-year tenure announced the increase in some taxes. In a circular released, titled “Approval for the Implementation of the 2023 Fiscal Policy Measure and Tariff Amendment” additional excise duty on alcoholic beverages, tobacco, and wines; ranging from 20 to 100 percent was introduced
. Also, a tax on single-use plastic was introduced. The recent policies have no doubt generated reactions to the numerous taxes paid in the country, especially in the private sector.
For African countries, Nigeria’s tax-to-GDP ratio for 2022 was at 5.5%. A figure much lower than the average 16% for 31 African countries reviewed by the Organization for Economic Cooperation and Development (OECD).
In 2022, the FIRS announced Nigeria earned N10 trillion ($22 billion) in revenue from taxes. Although the country has a population of 41 million taxpayers, the amount generated from Personal Income Tax (PIT) is lower compared to other African countries.
Pros and cons of tax increase
The country’s debt profile has continued to increase, and this is a worrying sign for analysts, and economists, among others. The rising debt could hit N77 trillion in June 2023. Despite this, the country has continued to borrow, to even finance the 2023 budget.
The planned increase in some taxes will take effect from June 1, 2023. The International Monetary Fund (IMF) has also advised the country to increase its PIT to 15% to get more revenue.
Increasing taxes will generate more revenue for the country to carry out some of its programs and also finance the budget, rather than resort to borrowing which some accrue interest, among other terms.
However, increasing taxes will weaken the purchasing power of the country. The rising inflation in the country, especially food inflation has seen Nigerians could for cheaper options that are not healthy, and sometimes substandard. Increasing taxes will further aggravate this issue and will leave citizens battling with inflation.
Presently, only a handful of Nigerians have had a salary increase in the last five years. Many are on the same salary, while prices of goods and foodstuffs, and transportation have skyrocketed.
The private sector has complained over the amount of taxes it is paying to the government. A tax increase rather than create jobs might give some organizations to downsize, leaving the country with more unemployed people added to the high unemployment rate.
The decision could also lead to foreign investors leaving the country and some avoid investing in the country; with this, the country’s Foreign Direct Investment (FDI) will deplete.
Alternatives to Tax Increase
The country cannot afford to increase taxes at this point, amidst the economic challenges in the country. The FG should rather widen the tax net. Widen the tax net will see individuals who are qualified to pay tax, but do not for some reason now made to pay tax.
Increasing tax will only add to the burden of individuals paying. On the other hand, widening the tax net will increase the number of taxpayers and therefore increase revenue.
Furthermore, the government has to go after tax evaders and ensure strict compliance with tax payments in the country. Tax evasion is a thing in the country where individuals through some means avoid paying taxes.
With compliance with tax payments, there will be an increase in revenue without having to increase taxes.
What you need to know
The government has a social contract with the people and must fulfil them. Transparency and efficiency are key to achieving a nation with tax payments. The government has to step in and take charge to ensure that taxes paid by the people are utilized effectively and the people have much trust in the system.
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