Nigeria: IMF questions Nigeria’s high tax expenditure, VAT collection efficiency

The International Monetary Fund (IMF) has raised concerns about Nigeria’s huge tax expenditure, estimated at four per cent of the country’s gross domestic product (DGP) or N6.8 trillion in 2021, saying the country could only achieve fiscal stability with aggressive reform of the tax system.

With the country occupying the third position among countries with the highest tax expenditure to GDP ratio, coming behind South Africa and Central Africa, the Fund said the country would need to curb inefficiency in its tax mobilization to free up resources for funding of key growth sectors such as education and health.

Tax expenditure is the value forfeited through tax incentives such as allowances and holidays extended to economic agents during a fiscal cycle. Over the years, the Federal Government has come under scrutiny over its tax incentive management and transparency around the scheme.

It also noted a huge gap between the actual tax collected and its potential. It places the country at the bottom of the value added tax (VAT) collection efficiency ratio in sub-Saharan Africa (SSA). While the VAT collection efficiency ratios of countries like South Africa, Equatorial Guinea and Zambia are tending towards 70 per cent, Nigeria is about 20 per cent, the lowest in the region.

In its just-released country report, IMF says Nigeria would need to take a cue from countries that have achieved reasonable tax reforms to raise its fiscal stability quotient.

“Nigeria offers large amounts of tax incentives (tax expenditures) – including tax holidays, generous allowances, and exemptions – which has eroded the revenue base. According to the 2021 Tax Expenditure Statement (TES), the revenue foregone by tax expenditures was estimated at around four per cent of GDP (N6.8 trillion) in 2021, which made Nigeria one of the costliest tax expenditure countries in SSA,” the report states.

It also observed the impacts low tax rates have on the country’s revenue, saying: “Nigeria’s indirect taxes (VAT and excise) have the lowest rates –around half of the average of ECOWAS countries – with their narrow bases, which significantly undermine tax revenues.”

It expects Nigeria to understudy case studies of reforms executed by Rwanda, Uganda, Mauritania and The Gambia, which have helped the countries to address revenue shocks and achieve modest stability in the public finances.

“The identified cases conducted both tax administration and tax policy reforms as a package. All four identified countries implemented several tax administrations measures and tax policy reforms (that is, tax rate increase, base broadening and tax incentive rationalizations) in parallel.

“The literature also supports that a package reform tended to be more successful in revenue mobilization,” the report states while quoting other research publications.

The report argues that Nigeria has the potential to increase revenue if priority tax reforms are executed, noting that “there is there is a tipping point between tax capacity and growth” and that the minimum revenue-to-GDP ratio associated with a significant acceleration in growth/development is 12½ to 13 per cent.

According to the study, some literature has put Nigeria’s tax capacity (tax frontier) at about eight to 11 percent of GDP. As at 2021, Nigeria’s revenue was below its capacity and tipping point identified by the IMF. Then, the revenue-to-GDP ratio was 4.5 per cent.