Cautions as Federal Tax Revenue Increases

In a recent interview, the Chairman of the Federal Inland Revenue Service, Tunde Fowler submitted that his administration with N5.3 trillion tax revenue in 2018, achieved the highest revenue collection in the history of Nigeria.

DATAPHYTE’s analysis has shown (see also the graph below) that the real value of federal tax revenue has consistently been lower than the nominal amount the government declared from 2011 till 2018.

After five years of successive decline in the real value of federal tax revenue from 2012 to 2016, the past two years have witnessed a steady rise in the real market worth of taxes collected. There are also indications from the tax collections so far in 2019, that the Federal Inland Revenue Service (FIRS) will realise higher tax collections this year, at least at the nominal value. 

The nominal value of tax collected is the amount the Federal Inland Revenue Service (FIRS) declares it received in a year on behalf of the government without regard for the level of inflation in that year.

However, a major problem with government revenues is generally unhealthy inflation. Inflation simply means higher prices of goods and services. It means if X million naira can purchase three dialysis machines for a local government hospital last year, it may now be able to buy only two of same machines for the next local government hospital this year.

When the two graphs above are compared, it is observed that the real tax revenue line (in fig. 1) always descends in any year where the inflation rate is higher than the rate of increase in nominal tax revenue (fig. 2). On the other hand, whenever the rate of increase in nominal tax revenue is higher than the inflation rate (fig. 2), the real tax revenue line always ascends, as seen in the years 2001, 2003, 2004, 2005, 2008, 2010, 2011, 2017 and 2018 (fig. 1).

Two options appear to solve the problem here. Either the inflation rate is checked or the rate of increase in tax revenue year in year out is targeted to exceed the rate of inflation. In fact, since the annual rate of inflation for the past 18 years, between 2001 and 2018 has never reached 20%, it is easy to imagine that all the FIRS needs to do is set a minimum target of 20% increase in their revenue year after year, and the Federal Government will be sure of having the true worth of the increased revenue the FIRS generates every year going forward. 

The latter option seems to have been the one adopted by the federal government. The FIRS was given a target to increase its 2016 revenue by 47.8% in 2017 and was subsequently required to increase its 2017 revenue by 67.5% in 2018. The agency eventually delivered 21.8% and 32.1% nominal revenue increases in 2017 and 2018 respectively. Driven by these targets, the FIRS expanded its tax base and generated the highest ever nominal revenue of N5.3 trillion in 2018.

Where the cautions lie

These recent huge successes in increased revenue generation, however, reveals a deeper problem. While The FIRS realised 41% of all its taxes from the petroleum profit tax (PPT), exceeding its given target for PPT by 27%, it could not muster enough revenue to even meet its specific target for any of the other taxes. 

The target of the government for the three years was that the petroleum profit tax (PPT) will only make 26% of the whole taxes, while the company income tax will lead with 33% and value added tax (VAT) will take second place with 30%, with other taxes making up the remaining 11%.

However, it turned out that the CIT dropped by 31% off target to generate 28% of the total tax revenue in the last three years, VAT had a shortfall of 42% to contribute 23% while other taxes fell by 42% to remit just 8% of all actual collections.

The question then is: why does the government desire CIT and VAT to lead its revenue base, and why did the FIRS fail woefully in this three-year period in these two taxes and others, except the PPT. We know the revenue agency’s efforts at increasing its tax receipts was channelled at the CIT, VAT and others because the majority of the additional taxpayers drawn into its tax net are in all these tax categories, except the PPT’s. What more could the FIRS have done to meet or exceed its target taxes from manufacturing, trade and services as it did with PPT?

To these, it seems logical for the government to expect its tax receipts mainly from the CIT and VAT because these two taxes reflect the general level of productivity and economic activity in a country. Conversely, to expect such fantastic revenue increases from these two key taxes at a period of low economic vitality, decline in production and investments, volatile internal and external prices amidst palpable anxiety due to the insecurity of lives and businesses, defies logic.

A peek into the VAT revenues in these last six years will reveal this lopsided growth in the country’s revenue profile. The 10 leading sector contributions to local non-import VAT between 2013 and 2018 contributed a total of N2.6 trillion which amounted to 88% of all local non-import VAT proceeds of the FIRS (see fig. 5). But further analysis revealed that taxes from these major local producers and providers of services increased at an average annual rate of only 0.34% throughout the six-year period.

Conversely, the least 10 sectors contributing to local non-import VAT proceeds between the same period yielded an average increase in VAT of 11.82% every year within the six-year period. Sadly, all these increases amounted to only 3% of the total local non-import VAT at the end of the six years, a sum of N90 billion (see fig.6). 

Of all the 10 least taxed industries, only mining showed a consistent decrease in tax returns of 12.6% annually on the average within the six-year period, apart from being the least taxed industry. The other industries showed consistent increase in productivity and value added, going by their consistent increase in VAT returns within the period.

A careful inspection of both the nominal tax collections, real growth in tax revenues, tax type and industrial contributions of the various taxes shows all is not well with the economy.

From the 6-year analysis of VAT returns, only medium, small and micro industries thrived in value added to their production. This shows that when government policy thrust is favourable, industries can thrive and remit taxes for government revenue more easily.

The reverse is the case with the big companies and government agencies. Though they are still delivering the huge volume of taxes, their capacity for higher productivity is dwindling. The government needs to rejig its macroeconomic policies to avert another recession.

The government must be wary of overambitious tax increase targets which are not consistent with market realities especially when this is directed at struggling industries and vulnerable economic agents, via the company income tax (CIT) and value added tax (VAT). Evidence from recent years has shown this move is largely unrealistic and often counterproductive.

The expansion of the FIRS tax base is laudable in that it captures those companies or trade entities who have not been paying taxes at all or who are defaulting in any way. Yet this must be perceived as a rather long term revenue asset. Further drive to force unrealistic tax increases on those already paying taxes in this present environment will only hurt the economy, lead to higher costs of production and general price increases.

Overall, the Federal government’s desperation, to replenish its naira vats and depleted foreign reserves, needs to be driven by prudent fiscal policy, moderate taxes, judicious use of hard-earned revenues and investments incentives. Yet, all these measures will never suffice until the government shuts down the flourishing armed conflict economy which fuels the country’s social and business insecurity.  

Oluseyi Olufemi