Danne Institute for Research

Nigeria had its highest tax receipt this decade in 2018. That year, the federal government received about N5.4 trillion in total tax revenue. That was a big deal to the government considering its precarious fiscal position: the country had just come out of its first recession in 25 years. About N2.9 trillion (54 percent of total tax revenue) was collected in non-oil tax revenue in 2018. The Company Income Tax (CIT) component generated about 50 percent of that at over N1.3 trillion. This was followed closely by total VAT revenue (about N1.1 trillion), which represented 30 percent of total non-oil tax revenues.

Last year, as Coronavirus cases rose worldwide, governments across the world enforced various lockdown or movement restriction measures to check the spread of the deadly virus. Consequently, factories and businesses were shut down and the demand for oil tanked. Nigeria felt the heat immediately as the crude oil’s share of the country’s total revenue fell to 42 percent in the third quarter of 2020, according to data from the Central Bank of Nigeria. At the end of the year, only about N1.5 trillion (30 percent) was generated internally from oil taxes (Petroleum Profit Tax (PPT) – tax on the income of companies engaged in upstream petroleum operations) while non-oil taxes raked in the remaining 70 percent (about N3.5 trillion). CIT contributed about N1.3 trillion (37 percent) of the non-oil taxes despite the harsh economic realities and the unfriendly business conditions.

Nigeria’s fiscal architecture needs a rebirth

As it becomes clearer that Nigeria cannot continue to rely on oil revenues due to its volatility and the uncertainties around its future, there is a need for the government to diversify its revenue sources, focusing on tax revenues which are more stable and less exposed to external shocks. Although oil proceeds have averaged 70 to 80 percent of total government revenue since 1988, it has started falling significantly since 2012 according to data from the National Bureau of Statistics (NBS). In fact, the World Bank in its 2020 Nigeria Development Update, Nigeria in Times of COVID-19: Laying Foundations for a Strong Recovery, estimated that crude oil as a share of the Nigerian government revenue averaged 50 per cent in the last five years.

Time has indeed come for the re-imagination of the Nigeria’s fiscal architecture. The NBS Q4 2020 Unemployment Report revealed that over a third of the nation’s labour force don’t have jobs to do (including over 40 percent of young people, over 30 percent of urban dwellers and over 40 percent of first degree holders); almost half of the country (87 million people) are poor according to the World Poverty Clock (India whose population is six times larger than Nigeria’s has fewer poor people); and the government must spend at least $100 billion that it does not have annually for the next 30 years to plug the nation’s infrastructure deficit.

From 2011 to 2014, cumulative CITs collected by the federal government totalled about N3.620 trillion, according to FIRS tax statistics. About N5.1 trillion was collected from the four-year period of 2016 to 2019 despite the country experiencing recession from the third quarter of 2016 to the second quarter of 2017. Perhaps this means that the federal government was more incentivised to drive up its tax revenue (including CIT) while the oil proceeds were low from 2016 to 2019 than they were when oil revenues spiked from 2011 to 2014. For a tax type like CIT whose significant increase largely depends on the expansion of registered companies in number and revenue, state governments are in a better position to align their respective state industrial or corporate development agenda with private investment in their local top growth sectors and thus ramp up CIT. The incentive for them in this case is that they, not someone else, will simply receive the bounty when private investment efforts become fruitful. That is a fair deal.

No tax, no exit

Tax revenues fuelled by corresponding economic development offers a way out of the fiscal quagmire that the Nigerian government has found itself. If the fiscal architecture is to be truly revived to engineer national development, perhaps now is the time to shed some of the federal government’s tax receipts and obligations by giving subnational governments some control over the collection of CIT. This will serve as the much-needed incentive for state and local governments to aggressively attract and retain private and foreign investment into potentially viable sectors in their respective domains. Subnational governments are closer to the people and are more suited for this task. It would be in the interest of the states for example to ensure that companies do not close shop and relocate to say Ghana. The FG is too far away to do this effectively. It cannot efficiently coordinate investment in all states in order to increase the volume and base of the CIT. The pace is incomparable to when all the states are doing that actively in areas of comparative advantage.

In light of the current national discussions about restructuring and fiscal federalism, there is evidence that the subnational governments can increase tax receipts when they have limited revenue options or are incentivised to do so.

Let us have a look at Lagos, for example. Lagos state is Nigeria’s commercial capital, contributing 26.7 percent ($136 billion) of the country’s GDP and over 50 percent of non-oil industrial capacity. It hasn’t always been that way. In 2000, the state’s total Internally Generated Revenue (IGR) was only N11.6 billion, according to BudgIT’s Lagos State Data Book. The state was forced to look inward after the Obasanjo-led federal government withheld the state’s FAAC allocation due to disagreement over the creation of 37 new Local Council Development Areas (LCDAs) in addition to the existing 20 Local Government Areas (LGAs), which the FG saw as the only recognised local government authorities in the state. The State grew its IGR consistently as it was the major source of funding left. The total IGR of the state from 2000 and 2005 was about N152 billion. In 2020 alone, NBS data shows that the state generated about N420 billion despite the harsh economic effects of the covid-19 pandemic.

Our analysis of Lagos’ IGR data across two decades of democratic governance since 1999 revealed that PAYE (or Personal Income Tax) is at the core of the state’s IGR drive. From 2010 to 2015, Lagos state cumulatively generated about N1.130 trillion internally. In the same period, the total revenue the state got from PAYE remittances was about N730 billion. That represented over 64 percent of the total IGR in the said period. (The state’s 2013 PAYE records aren’t available. So, the 2013 IGR figure was also removed to align the calculations).

It is therefore noteworthy that when push came to shove, the go-to alternative for Lagos to ramp up its IGR was PAYE. This was possible because they had reasonable control over its collection and management.

What’s more, the BudgIT’s 2020 State of States report ranked Rivers, Anambra, Ogun, Lagos and Kano (in that order) as the top five fiscally sustainable states in the country. Fiscal sustainability, according to the report, is the ability of the states to meet their recurrent expenditure with only IGR and VAT. At the bottom of the ranking are Benue, Adamawa, Plateau, Ekiti and Bayelsa.

Analysing the full year 2020 NBS Internally Generated Revenue Report, we found that PAYE remittance as a percentage of total tax receipts wasn’t less than 60 percent in any of the top five viable states – Rivers (88 percent), Anambra (67 percent), Ogun (81 percent), Lagos (76 percent) and Kano (63 percent). As a share of the total state IGR for last year, none of them had a PAYE remittance of less than 35 percent – Rivers (83 percent), Anambra (38 percent), Ogun (50 percent), Lagos (67 percent) and Kano (49 percent). In fact, the two least viable states, Ekiti and Bayelsa, had their PAYE remittance as a share of total tax revenues at 65 percent and 91 percent respectively. As a share of total IGR, Ekiti’s PAYE remittance was 48 percent while it was 90 percent for Bayelsa. The states seem to be getting as much as possible from PAYE, a tax they have control over.

Company Income Tax is 30 percent of the profits of registered companies in Nigeria and those of foreign companies carrying on any business in Nigeria. Only a handful of sectors or business categories or sizes are exempted from either paying up to that or paying at all as the case may be. As Nigeria realises that it is no longer sustainable to operate as an oil state and takes steps to wean itself of that status, it is important to have conversations around the reliable, sustainable and robust policy alternatives. While trying to explore tax as an alternative source of government revenue, devolving powers to the subnational governments to manage or control CIT may just be what we need for national development, employment and prosperity. Subnational governments are closer to the people and are more suited to drive massive private and foreign investment (in areas of comparative advantage) in their respective states if the right incentives are present. So, why not make them present?