An unengaged government that is not reflective of the citizens’ choices, does not pay heed to the pressing concerns of its citizens, represses any form of dissent and is difficult to live with. The Nigerian government has been checking these boxes for a while and civic participation through voting, protests or tax payments is needed to correct these imbalances.
All over the world, from the UK to South Africa to Nigeria, each government is tackling with the health and economic impact of the coronavirus pandemic. In dealing with the crisis a lack of funds has existed due to multiple reasons, with one of the causes being poor tax collection. Tax collection in the country flounders for a variety of reasons, but mostly because Nigerians pay little to no taxes.
Tax resistance has always been a key aspect of the country’s history, all across its diverse ethnicities. Take the Igbos as an example. Eze-builo, a popular Igbo surname literally means ‘a king is an enemy’, a reminder of an entire tribe’s distaste for despots and the levies they come with. When colonial forces attempted to tax the region, the communities famously mentioned ‘you are demanding tax from the dead’. After it fell on deaf ears, the famous Aba women riot of 1929 forced the colonial authorities to reconsider.
Up north, the Fulani’s revolt centuries ago gained success in part due to the writings and pamphlets of Othman Dan Fodio. These works denouncing the Habe’s tax practices in the Kitab al-farq galvanized his fellow Fulani’s and even some non-Muslim Hausas. Even down west, Yoruba labourers arranged to form the Agbekoya-Parapo revolt of 1968-69, to seek a reduction of taxes in the region.
One thing that can count as a similarity across Nigeria’s varied peoples is that we are not too friendly to anyone dipping their fingers in our coffers. It is brightly portrayed in our history, culture and conduct. As one looks into modern times, this aspect of history is ever-present in our modern society, our people and accepted norms.
With the responsibilities of modern-day governments expanding beyond security and provision of infrastructure to include financing investments in human capital, providing social infrastructure to poor citizens, and intervening to support the private sector, taxes are all the more necessary. This makes the country’s traditional outlook to tax dated by modern requirements.
How Little Does Nigeria Collect in Tax?
Despite being Africa’s largest economy, Nigeria is one of the poorest economies. As of 2017, Nigeria was saddled with one of the lowest tax-to-GDP ratios in the world, at 6 per cent of GDP. This has led to the fact that Nigeria’s public debt—at 20 per cent of Nigeria’s GDP—accounts for over 62 per cent of the revenues retained by the central government after it distributes funds to the state.
Even amongst its own regional peers, Nigeria trails below the minimum threshold of taxation set by the World Bank for 15 per cent of GDP—needed for economic growth and poverty reduction—and regional average at approximately 17 per cent of GDP. The poor levels of tax-to-GDP ratios are highlighted in the chart below (Exhibit 1), showing the below-average performance of the country in terms of revenue collection.
There are three key reasons driving this low tax-to-GDP ratio across the country in the form of low compliance, poor state revenue collection and an inefficient tax administration system.
Low levels of compliance among businesses and companies
Across Nigeria, the overall size of both businesses and individual taxpayers that are not paying any form of tax is staggering. From the latest data provided by the Federal Inland Revenue Service, as of 2018, over 62 per cent of the 120,000 registered businesses do not pay any form of tax at all. The number of uncompliant taxpayers, in both public and private sector, is much higher at 72 per cent of the 69.5 million overall employed, with the tax net covering only 19 million taxpayers.
In a 2019 survey about tax perceptions by the Nigeria Economic Support Group (NESG), low tax morale drives poor tax compliance. As much as a fifth of Nigerians believe it is not wrong to evade tax, and over half the participants were of the belief that while it is wrong, it is understandable to avoid tax payment. How does the government raise funds when its citizens are so averse to tax collection?
Poor revenue collection across states
Across Nigeria, states are generating only approximately 20 per cent of their overall budget needs on average. The breakdown across regions shows that in 2019 17 states did not generate enough funds to meet their recurring expenses, i.e. they did not make enough money to keep the state running.
Heavy reliance on Federal Accounts Allocation Committee (FAAC) allocations from the federal government, has led to the de-prioritization of most state internal revenue services, with the exception of a few states like Lagos, Rivers, Akwa Ibom and Kano. In a dated questionnaire of citizens in Taraba, more than 80 per cent of respondents were of the opinion that their tax collecting agencies neither met revenue targets over the last thirteen years nor were given adequate machinery to support collection efforts. This system has ensured rampant tax evasion, and difficulty for the few citizens willing to pay tax.
Inefficient and complicated tax administration system
Understanding what taxes are to be paid, when to pay, where to pay and how to pay is one of the largest quagmires of the Nigerian tax administration system. Only 12 per cent of participants of the 2019 NESG survey had received information from the government about taxation. With such low rate of dispersing information, tax collection in the country continues to remain a difficult enterprise.
In Nigeria, the three arms of governments are empowered to raise taxes—federal, state and local. Across all three of them, the sheer number of taxes and levies have made the process tedious. It is clear that each arm is acting independently rather than in accordance. As a result, some members of the populace have resulted in bribing ‘area-boys’ or tax officials in order to avoid the incoherent tax and levies. Additionally, most Nigerian taxes at the state and local level end up costing more to collect than they generate, making the entire system remarkably inefficient.
These problems are not new to the government, the tax authorities or the citizens at large. They are multi-faceted showing that both parties—government and citizens—are clearly responsible for the challenge. The question becomes; why has this clearly inefficient system been allowed to exist for so long?
Modification to the Social Contract Has Led To Low Tax Mobilization
The social contract theory posits that individuals surrender some of their personal freedoms to an authority in exchange for the maintenance of the social order. These freedoms and the maintenance of social order vary across each country and centuries.
Across Nigeria, discontent with the government has been present among citizens for a long time. Ethnic and religious differences are trumped up in getting to and staying in power. While in power, bad governance, injustice, corruption and embezzlement serves as the mainstay of the ruling parties. Few can argue with Fela’s trademark line in the 1981 song, ‘dem leave sorrow, tears and blood dem regular trademark’. In line with the social contract being broken by the government, Nigerians have, in turn, been allowed to carry out business outside the confines of the government.
This conduct on both sides has led to a reinforcing cycle of apathy. On one side, the government fails to perform its duties leading to high default rate amongst citizens in fulfilling civic duties (including paying taxes) and engaging its leaders on their responsibilities. The absence of political and civic engagement ensures individuals selected for government are not fully reflective of the interest of the populace. In short, the cycle continues to feed itself.
At first glance, it seems that both parties get something out of the equation; citizenry pays less taxes and the government faces little checks in its selected way of governance. However, the opportunity cost of the taxes saved from limited civic participation by citizens is enormous. An unengaged or at least a government that is not reflective of the citizens’ choices, does not pay heed to the pressing concerns of its citizens, represses any form of dissent and is difficult to live with. The Nigerian government has been checking these boxes for a while and civic participation through voting, protests or tax payments is needed to correct these imbalances.
Evidence of the presence of this reinforcing system of apathy from the public can easily be found in viewing the low local participation in Presidential elections for the President sustained over the last 20 years. It is also evident in the historic levels of low tax participation across the country for the last ten years (Exhibit 2).
The portrait the chart shows is one that is not news to Nigerians. Regardless of our ethnicity and religion, we have become inured to bad governance. Election participation has always shown the level of apathy. Large swathes of the population continue to remain unregistered in terms of personal income, as much as approximately 65 million individual taxpayers.
In line with this low level of civic engagement, we have also been very vocal against any form of government taxation. The current Lagos state governor has endured Twitter memes in response to his plans to increase taxation and government fees on some services, such as the bus rapid transit system. In addition, ride-hailing entities paying no tax have seen public support when talks of levying taxes on them have come to the fore. Put simply, tax is a political taboo.
Given this multi-layered problem where low tax mobilization has been ingrained into our culture, history and way of life, where do we go from here?
Solutions Can Only Arise After Fixing the Terms of the Social Contract
Depressed oil prices, a drying FAAC account and high debt servicing charges has created a very unique predicament where domestic tax mobilization is absolutely critical. In order to do this, there is the obvious case for tax reform, digitization and innovative practices to simplify the process. For the past four years, varying levels of this have been done with mediocre results. Take, for example, the government’s tax amnesty program which captured only an eight per cent allocation of its intended target despite generous terms.
Such measures would fail to be effective as the social contract between taxpayers and the government resides firmly in the area of apathy. Restoring trust in the system and improving engagement is paramount to any solution’s success. This can be done by two broad measures: improving tax transparency and creating a connection between public service and tax compliance.
In the Nigerian context, the government must take the lead in restoring this trust. Transparency on how taxes are collected and utilized allows citizens to see the government’s use of tax receipts. Positive perception of the government’s use of taxes would improve compliance rates amongst individuals and businesses alike. The OECD has frequently referred to tax transparency as a solution to tax evasion. This measure not only restores the public’s faith to pay taxes but ensures higher accountability for those in power.
Creating a strong connection between usage of public services and tax payment further bolsters tax transparency. Increasing the visibility of tax burdens and connections to public spending improves overall relations amongst parties. This aids compliance, and it has led to success in improving perceptions about taxes. Kenya’s National Taxpayers’ Association found in engagements across cities and towns around the country that clearer understanding of tax payments and its effects motivated public engagement in general. Lagos state has adopted this measure with the ‘Pay Your Tax’ stamp affixed to public infrastructure to improve tax morale.
Other countries have been in similar situations, and focusing on attempts to improve citizen’s perception has paved the way for success. A notable example is Georgia, which saw a radical transformation of its tax-to-GDP ratio from 12 per cent in 2004 to 25 per cent in 2012, due to improved tax resource mobilization. It rectified its social contract by implementing sweeping reforms, such as creating a statewide revenue service that consolidated customs and tax administration to eliminate corruption on a mainstream and wide level in 2004. This purged its government administration of corrupt public officers in every level and instituted electronic information sharing on taxes between its tax authority and taxpayers. After these efforts, structured tax reforms and innovative efforts led to it doubling its tax-to-GDP ratio in less than ten years.
Nigerians have historically revolted against taxes for cultural reasons and due to public perceptions about the mismanagement of public funds and poor governance. Before implementing any targeted initiatives to improve tax collection, it is necessary to fix the social contract and overall perception of how taxes are used by the government. This is an essential requirement for improving domestic resource mobilization. The social contract has and will always, be the bedrock of modern revenue mobilization turnarounds⎈
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