FG targets 18% tax-to-GDP ratio in three years

…Rakes in N1.75trn from corporate taxes in Q3, 2023

…As IMF recommends adoption of digital technologies to improve tax collection, compliance

The Federal Government has revealed its plans to increase tax-to-GDP ratio  from nine percent to 18 percent in three years.

The tax-to-GDP ratio measures a nation’s tax revenues to its gross domestic product. It indicates how much of a nation’s gross domestic product goes into government funding.

Minister of Finance and the Coordinating Minister of the Economy, Wale Edun on Monday said, “There is no plan for an increase in the tax rate as such. The plan is to increase the revenue from taxation. The plan is to increase taxation returns as a percentage of tax to GDP from around nine per cent as it is now to 18 per cent in three years. This is closer to the African average.”

Defending the 2024 budget proposal before the House of Representatives Committee on Appropriations, Edun emphasised that the government is not considering tax increments, but rather seeking to increase the tax bracket and capture more people and entities.

He said the government is even aiming to reduce tax rates when necessary in order to create incentives for private-sector investments.

“So, the emphasis is on collection not on increasing the rate. The emphasis is on collection efficiency, particularly collection. For a government that is dependent on private investments, foreign direct investment and domestic investment. The intention is to reduce taxes, not to increase it and to increase the money into creation of employment.

“The emphasis is on raising revenue. Government spending as a percentage of GDP is very low. When you compare it to the developed world where they spend over 50 percent, like the Scandinavian countries, even in Africa, it is too low. Which means the government is not spending enough on infrastructure and social services.

“About one percent of the GDP of this country is given out as tax incentive, import duty waivers and others.”

However, the International Monetary Fund (IMF) in a paper titled “Building tax capacities in developing countries” published in September recommends that to build tax capacity, governments will need to take a holistic and institution-based approach that focuses on leveraging core domestic tax policies.

The IMF recommended that developing countries “improve the design and administration of core domestic taxes—value-added taxes, excises, personal income taxes, and corporate income taxes. VAT revenue in low-income countries, for instance, could be doubled by limiting preferential treatments and improving compliance without increasing standard tax rates. And the widespread adoption of digital technologies would result in higher revenue collection and narrow compliance gaps.

“Implement bold reform plans and focus on tax base broadening through the rationalisation of tax expenditures, more neutral taxation of capital income, and better use of property taxes. Headline tax rates are generally not the main concern.

“Excise taxes—particularly fuel excises and forms of carbon pricing—can mitigate domestic health and climate-related costs. This multi-pronged approach, over the long term, can balance equity and efficiency considerations—the Achilles’ heel of managing the political economy of tax reforms.

“Improve the institutions that govern the tax system and manage tax reform. The political economy of tax reform has proven to be hard. Policymakers need evidence to convince the public of the gains and show progress in policy implementation over time.

“This requires adequate staffing to forecast and analyze the impact of tax policies on the economy, greater professionalization of public officials working on tax design and implementation, better use of digital technologies to strengthen compliance, and transparency and certainty in how policy and administration are translated into legislation.

“Carefully prioritise and coordinate reforms across government agencies, because the broader institutional context matters. This creates a virtuous circle by which enhanced institutions improve state capacity, which in turn increases the quality of tax design and its acceptance by citizens. This is in a nutshell the IMF’s approach to supporting countries in tax system reform and raising domestic revenue.”

On the other hand, revenue from companies continue to share the largest share of Nigeria’s tax revenue as companies paid N1.75 trillion as taxes in the third quarter of 2023.

The National Bureau of Statistics (NBS) declared in its Company Income Tax (CIT) Q3 2023 report released in Abuja on Monday.

On a year-on-year basis, the CIT collections in the third quarter of 2023 increased by 115.9 percent compared to what obtained in the corresponding period of 2022.

According to the report, the third quarter payment shows a growth rate of 14.27 percent on a quarter-on-quarter basis compared to the N1.53 trillion CIT paid in the second quarter of 2023.

The report explained that local payments received were N651.63 billion, while foreign CIT payment contributed N1.10 trillion in the third quarter of 2023.

It explained also that on a quarter-on-quarter basis, the Education sector recorded the highest growth rate at 59.6 percent, followed by public administration and defence, compulsory social security at 57.04 percent.

“On the other hand, activities of households as employers, undifferentiated goods-and-services-producing activities of households for own use had the lowest growth rate at minus 74.34 percent.

“This was followed by water supply, sewerage, waste management and remediation activities at minus 73.25 percent,” it stated.

In terms of sectoral contributions, the report showed that the largest shares in Q3, 2023 were ICT at 26.18 percent, manufacturing at 23.9 percent and mining and quarrying at 11.86 percent.

The NBS stated that on the other hand, activities of households as employers, undifferentiated goods-and services-producing activities of households for own use recorded the least share at 0.0 percent.

“This was followed by water supply, sewerage, waste management, and remediation activities at 0.04 percent and activities of extraterritorial organisations and bodies at 0.10 per cent,” it added.