Nigeria’s quest for a tax driven economy – Is safety assured?
The shift to non-oil revenue must be a properly managed paradigm shift and not the exchange of one extreme dependence for another
The need to diversify Nigeria’s economy (with its consequential implication for expanding the nation’s foreign exchange earning base) has been a clear, present and recurrent theme for many years. However, it has taken a sustained slump in crude oil prices to trigger a frantic and desperate rethink of Nigeria’s economic and fiscal planning approach. Diverse reasons can be adduced for the continuing slump in crude oil prices. These would include but not limited to growth in the global supply of crude oil and the resulting glut due to:
• shale oil production from the US notably;
• fall in Chinese’s growth projections;
• lifting of economic sanctions against Iran; and
• the continued flooding of the market by the Middle Eastern members of Organisation of Petroleum Exporting Countries (OPEC) to stifle production assets under terrorist control
In the end, the buck for poor forward thinking or planning to mitigate the country’s exposure to harsh economic realities must definitely rest somewhere. Presently, the price of crude oil is down by about 50% from $115 per barrel (pb) in June 2014 to $50.54 pb in November 2015. According to the Q2 report issued by the National Bureau of Statistic (NBS), there was reduction in oil production by 7.3% (at 2.05 million barrels per day (mbpd)) in 2015 when compared with corresponding quarter in 2014 (2.21mbpd). Consequently, oil and gas sector’s contribution to the country’s gross domestic product (GDP) dropped by 0.96% to 9.80% (2014:10.76%).
The determination of the present administration to be transparent on the state of Nigeria’s treasury is therefore understandable and probably has compelled the admission that Nigeria is broke. Indicative evidence of response by the Federal Government is the introduction of some monetary and structural policy measures such as recovery of misappropriated funds, implementation of treasury single account (TSA) for receiving all monies accruable to the Federation and control of foreign currency denominated transactions in the economy, among others. These measures are geared towards ensuring that the Federal Government becomes more liquid.
The urgency in the shift to non-oil revenue sources is clear. Revenue from taxation is a critical component of this shift and this places the Federal Inland Revenue Service (FIRS) and the various State Internal Revenue Services in the bull’s eye. Nigeria’s challenge is not necessarily the decline in oil prices but rather that the high oil prices in the past had masked Nigeria’s over-dependence on oil to drive the economy and the relatively small tax base outside the oil and gas industry.
In view of the country’s dire situation, the cooperation of all Nigeria’s citizens, both corporate and individuals, are required in the discharge of their civic responsibility with regard to tax compliance. This is not a big ask given that taxes paid by citizens of most of the developed countries are used by governments to run their economies, and this confers on the citizenry a legitimate stake in public governance. Nigeria cannot and should not be an exception in this regard, as this can only be achieved if citizens pay their taxes and live up to their civic responsibilities and expectations.
It is undeniable that Nigeria has typically posted a low tax to GDP ratio as well as to the total revenue earned by the Federation. This is due to low tax compliance levels by individuals and corporate taxpayers. This low level of tax compliance has been attributed to a plethora of reasons, which include:
• lack of accountability and transparency in government spending
• low quality of infrastructures in return for taxes paid
• low civic literacy level
The current emphatic tone of intolerance to economic and financial crimes, which leak away or divert tax payers’ money to personal pockets from the top across all the tiers of government, may assist to address the trust deficit that exists between government and the citizenry at all levels on the issue of appropriate use of taxpayer’s funds. Enforcing penal consequences of economic and financial crimes at an accelerated pace can only serve to reinforce confidence in the system.
Consequently, the following elements become relevant:
• Effective enforcement of compliance with tax laws and institution of a virile tax culture to enforce the laws governing taxation to the letter
• Evaluation of strategies implemented thus far by tax authorities at all levels in order to identify gaps and thereafter plug all loopholes in processes and enforcement
• Need for the government to ensure utmost prudence in the utilization of revenues from various sources in order to instill confidence in the system and its citizenry
The shift to non-oil revenue must be a properly managed paradigm shift and not the exchange of one extreme dependence for another. As a matter of strategic national interest, it is only prudent and pragmatic for the Federation to continue on a path of a well-diversified economic base which will ensure that the economy is strong and stable enough to respond, adapt or adjust to vagaries and dynamics of international trade relations triggered by political and economic forces at play in the international market.