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IMF recommends 5% Tax/GDP ratio

By Emeka Anaeto and Babajide Komolafe

Still pushing for an improvement in Nigeria government’s performance in fiscal policy, the International Monetary Fund (IMF), yesterday, recommended a Tax-to-GDP ratio of 15 per cent for the country. Presently Nigeria is at about six per cent, considered one of the lowest in the world.

IMF, Nigeria
IMF

The IMF is focusing more on collection capacity rather than the tax rate, though the federal government has recently jerked up the rate for Value Added Tax, VAT, by 50 percentage points to 7.5 per cent from 5.0 per cent.

This was coming as the revenue pressure and the World Bank/ IMF pressure concerns over worsening debt service-to-revenue ratio, appears to have forced the federal government to announce further measures to boost non-oil revenue, by imposing exercise duty on carbonated drinks (soft drinks) as well as impose VAT on some categories of imported goods.

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Managing Director of IMF, Kristalina Georgieva, who made the recommendation while addressing a press conference at the ongoing annual meetings of the World Bank and IMF in Washington DC said that boosting tax collection to achieve 15 per cent tax-to-GDP ratio is one of the three major measures to fast-tracking the nation’s economic recovery.

She stated: “The economic recovery remains too slow to reduce vulnerabilities and most importantly to reduce poverty in the country. What we experience is some good thoughts about shaking up economic policy now that a government has been constituted in Nigeria. We have been consistent to talk about three issues in Nigeria that needs to be tackled.

“One is the question of fiscal capacity. As you know the tax collection level in Nigeria leaves quite a lot of room for improvements and without strengthening the fiscal position of the government, the expenditure side will suffer. So the recommendation that we always give is that countries should strive for 15 per cent of GDP in terms of collection to fund the responsibilities of the government and in Nigeria, this is still quite far. If I am not wrong, we are still in the single-digit territory.

Secondly, we have been recommending that the country diversify its economy because reliance on oil doesn’t serve very well.

“Last but not the least to fight corruption and to make sure that the riches of Nigeria serves Nigerians inside the country and in that regard, as you know last year the Fund adopted very strong policies on anti-corruption and we worked with governments to build their capacity to make serving citizens of the country with the money of the country is possible.”

More tax underway – Ahmed

In apparent response to these positions of the IMF and World Bank for further measures to boost Nigeria’s non-oil revenue, Minister of Finance, Mrs. Zainab Ahmed, while speaking at the Governors Talk Session, at the ongoing annual meetings of the World Bank and IMF, said that the federal government is well aware of the urgency to boost non oil revenue and hence is set to introduce more measures in this regard, including introducing exercise duty on carbonated drinks and VAT on some categories of imports.

Speaking on the topic of the session, “Strengthening Domestic Revenue Mobilisation”, she said: “We are also looking at introducing excise duties on some categories of products especially carbonated drinks and VAT on some categories of imports into the country. But it is not all taxes increases, there is also a proposal to build tax rates for SMEs we also increase the minimum tax level to make it easy for people to plan their taxes.”

Acknowledging Nigeria’s revenue challenge and the factors undermining efforts to boost non oil revenue, especially low tax morale among the populace, Ahmed said: “We currently have a pervasive revenue generation problem that must change to successfully finance our development plans. Speaking to the facts, our current revenue to GDP of eight per cent is sub-optimal and a comparison of oil revenue to oil GDP and non-oil revenue to non-oil GDP performance reveals the significant area that requires immediate and dire intervention as the non-oil sector. This performance attests to the realities of our inability to efficiently and to a reasonable degree, completely collect taxes from our non-oil economic activities.

“Nigeria, when compared with peers, shows that we are lagging on most revenue streams including VAT and excise revenues as we not only by far have, one of the lowest VAT rates in the world but weak collection efficiencies. So also, do we have a lot of incentives and deductions that further constrain the fiscal space that is given in hope of stimulating the growth of our industries and to reduce hardship for the poor and vulnerable.’’

Speaking on the country’s challenges with respect to tax revenue, she said: “In Nigeria, we don’t have an adequate social contract. The government was not asking for or enforcing tax collection and therefore taxpayers also were not taking up their civic responsibilities. This is because we are largely dependent on oil revenue and people are not used to paying taxes.

“Very recently at the Nigeria economic summit they shared a citizens survey and 75 per cent of people that were surveyed said ‘we don’t think there is anything wrong in not paying taxes and it is not a problem’ and there a few that said ‘I don’t see what the taxes are used for so why should I pay tax’. We have very low tax morale we are planning a strong strategic communications process to educate people on why they need to pay taxes. Because we rely heavily on oil and it is not going to be there forever. So, we have to boost domestic revenue generation and use tax revenue to develop their economies and Nigeria should not be an exception.’’

Highlighting ongoing efforts to address legal challenges to boosting revenue, Ahmed said the government is working with the National Assembly to review its Production Sharing Contract of 1989 “which had a position that once the oil price goes beyond $20 there is opportunity to renegotiate and increase the royalties that come to the government so that in the future we have incremental revenue coming from the crude oil.”

Asides this she said: “in tune with the fourth industrial revolution, we want a technological led reform. For example, in a bid to leverage available big data in our public sector domain, Project Light House was launched last year and driven centrally at the Ministry of Finance to provide intelligence to the FIRS, state tax authorities and other revenue collecting agencies. On the Customs front, we are in the process of developing our national single window and Customs is using blockchain technology to improve revenue.”

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