NextierUsing technology to increase internally-generated revenues
By Patrick Okigbo III & Anthonia Momoh
How can Nigeria grow its tax base by leveraging technology?
In terms of revenue generation, Nigeria is a one-trick pony that depends on its petroleum sales proceeds for about 90 percent of her export earnings. It funds over 60 percent of her federal budget from the same revenue source. This fiscal structure makes Nigeria vulnerable to any shocks that affect oil and gas production, sale, or prices. The ongoing COVID-19 pandemic is one such incident that led to a 41.64 percent drop in projected revenues for Nigeria, with the 2020 Federal Budget shrinking by 3.02 percent. (These values are for the revised budget of N10.27 trillion, not the recently passed budget of N10.81 trillion). Such is the level of Nigeria’s dependence on crude oil and its attendant risks.
Indeed, when the Federal Government catches a financial cold, the sub-national governments develop a fever. Except for three states, Lagos, Rivers, and Akwa Ibom, all the other states in Nigeria depend on the Federal Government to finance their recurrent expenditure. Hardly is this a sustainable model, especially as the prospects of crude oil as a driver of economic growth continues to decline across the globe. Many countries are making significant advances in their search for alternatives to fossil fuels with firm commitments to a net-zero carbon future.
Evaluated by whatever criteria, Nigeria’s tax revenues are low. Her 2019 Tax-to-GDP ratio was 7 percent, according to the Federal Minister of Finance. According to a report by the Organisation for Economic Cooperation and Development, the average tax-to-GDP ratio for 26 African countries in the same period was 17.2 percent. World Bank data indicates an average of 18.9 percent for sub-Saharan Africa. Nigeria’s highest ratio was 9.6 percent in 2011, and the country aims for 15 percent in 2023.
Nigeria’s low tax-to-GDP ratio indicates that the country has room to increase its tax revenues. The ratio measures a country’s tax revenue relative to the size of her economy. Compared to other African countries, South Africa (29 percent), Ghana (18 percent), Kenya (18 percent), and Egypt (15 percent), Nigeria still has room to grow her revenue. This challenge is, in part, due to the country’s abysmal collection rates. In 2018, taxpayers in Nigeria constituted less than 30 percent of the country’s economically active population.[1]
Nigeria has a low tax rate, as well. The value-added tax (VAT) charged in the country is significantly lower than the West African sub-regional average of 18 percent. Nigeria recently increased her VAT rate from 5 percent to 7.5 percent. The increase was seen as a positive development by some analysts, while some others have pushed back in light of the country’s high poverty rate.[2]
Similarly, there are challenges with the tax administration process in Nigeria. These challenges include poor development of human capital and infrastructure, which spurs corruption, inconvenience, and inefficiency in the process. Furthermore, there is the issue of multiple taxation and the lack of harmony between different tax authorities.[3] Besides these, Nigeria has arduous manual processes, high tax evasion levels, and very little transparency and accountability. [4]
Scholars (such as Richard and Ekhator, 2019)show that technology can improve tax assessment, collection, and administration processes. It enhances collaboration between the Federal Inland Revenue Service (FIRS) and the state revenue boards, making it easier to develop a robust tax administration database to identify, monitor, and share information between tax administrators. [5] The paper proposes increased and sustained automation in the Nigerian tax administration system to align it with global tax administration trends. They also importantly recommend creating a comprehensive legislative framework for electronic taxation in the country.
Many countries around the world have transitioned from manual to automated tax systems. Both developed and developing countries have increased their tax compliance levels, collection rates, and achieved greater transparency and accountability by automating their tax administration systems.[6] In Africa, for instance, South Africa introduced her electronic tax system in 2001. The electronic filing process, which was initially limited to VAT payment and ‘pay as you earn,’ was expanded over time to cover individuals earning basic salaries and allowances and then further to include all taxpayers and the submission of their tax returns. An application, SARS MobiApp, was created, allowing mobile phones to be used in submitting tax returns. Similarly, in 2014, the Kenyan Revenue Authority (KRA) completed the automation of its tax administration system. It directed all taxpayers to use the online services as manual tax returns would cease to be accepted.
The automation of Nigeria’s tax systems has numerous advantages. It is more efficient, convenient, and saves time. It simplifies the compliance process, reduces the cost of collection, and increases the accessibility of tax services. The use of online services reduces any interface with corrupt officials who encourage tax avoidance and evasion. Automated systems also increase information access and lead to higher transparency.3
Electronic taxation in Nigeria has evolved. The Federal Inland Revenue Service (FIRS) automated the tax system to address the challenges with inconvenience and inefficiency. The improvements included using a unique tax identification number and introducing six new e-services: e-registration, e-stamp duty, e-tax payment, e-receipt, e-filing, and electronic tax clearance certificates.[7] These processes simplified and increased the efficiency of Nigeria’s tax system.
However, the tax authorities should upgrade their data-management systems. Online tax portals are not very reliable, contributing to the continued use of traditional paper filing. Tax authorities must upgrade their servers to accommodate traffic from online users, reduce downtime, and attract more taxpayers to take advantage of the services.
Technology can optimise tax revenues by monitoring compliance and reducing tax evasion. The lack of reliable data enables these challenges. However, technology allows the creation of a robust database management system for managing the details of all eligible taxpayers in the country. This database can be synchronised to include data collected by other federal and state government agencies in healthcare, immigration, customs, finance, and many others. By integrating the tax systems with those of the financial institutions, the government can effectively identify unreported earnings.
With technology, Nigeria can also improve access to real-time information. The FIRS, in line with this, recently introduced a VAT automation collection system, Vatrac. The platform enables the collection and remittance of VAT on relevant transactions and direct audit of transactions. This process will enhance compliance and improve the ease of doing business.
Nigeria also can leverage the bank verification number (BVN) to tax the informal sector. According to Arogie and Inyama (2020), the number of active BVNs in Nigeria exceeds the country’s number of registered taxpayers. The FIRS can improve compliance by using a lottery system to select members of the informal sector to audit every year. Severe penalties for non-payment of taxes should also lead to an increase in compliance levels.
Technology for tax management comes with some challenges. Setting up an electronic tax system is cost-intensive, dependent on internet connectivity and the operators’ computer literacy. These factors are a challenge in the country. A survey conducted by the ICTD on the adoption of the Integrated Tax Administration System by small businesses showed that only 40 percent of the small businesses surveyed had heard of the system, and only 14 percent of them used it for their tax filing. It also showed that two-thirds of those surveyed preferred the manual method. The government should dedicate efforts to educating and training individuals on the use of electronic taxation systems.[8]
Some of the tax offices at the state level still maintain manual processes, which hampers collaboration with the FIRS. Some of these offices, however, have started investing in automation. The Lagos State Internal Revenue Service, for instance, introduced individual taxpayer IDs generated using a self-service portal (LIRS e-Tax). Since 2019, LIRS has accepted Personal Income Tax returns through its online tax filing platform.[9] It is imperative to achieve 100 percent automation at the state level, although enforcement should be gradual and phased.
There is also a risk of electronic tax fraud. As such, the government needs to put in place strict cybercrime laws, data protection laws, and an effective system for preventing and managing cybercrime.
With comprehensive tax reforms, the International Monetary Fund projects that Nigeria will achieve an 8 percent increase in its tax-to-GDP ratio. Commitment to implementing the reforms could be an effective channel to realise the government’s target of a 15 percent tax-to-GDP ratio by 2023. Evidence from other countries indicates that a minimum tax-to-GDP ratio of 12.75 percent is associated with a significant acceleration in growth and development. This situation would be a welcome development.[10]
Nigeria cannot continue to rely on oil revenue, which continues on a downward trajectory as the world discovers alternatives to fossil fuels. It is imperative for Nigeria to leverage technology to automate its tax administration process, both at the federal and state levels, to increase tax revenue, which, in turn, should drive economic progress.
