In 2020, just before the COVID-19 pandemic, the Federal Government announced an increase in the Value Added Tax (VAT) from 5% to 7.5%. The VAT rate is one of the taxes that are paid in Nigeria.
Taxes are important to a country, just as water is important to life. It is a form of revenue for a country, one that the government can use to fund public services. Also, taxes help the government regulate economic services.
The ripple effects of the COVID-19 pandemic, the fluctuating oil prices, oil theft, Russia’s invasion of Ukraine, and the recent new Naira note issue, are some of the economic challenges the country is facing. These issues have impacted not just the county’s economy but also the purchasing power of its citizens.
Tax challenges and economic impact in Nigeria
In April 2023, President Muhammadu Buhari, as he winds down his 8-year tenure, announced the increase in some taxes. In a circular released, titled “Approval for the Implementation of the 2023 Fiscal Policy Measure and Tariff Amendment,” additional excise duty on alcoholic beverages, tobacco, and wines; ranging from 20 to 100 percent, was introduced.
Also, a tax on single-use plastic was introduced. The recent policies have no doubt generated reactions to the numerous taxes paid in the country, especially in the private sector.
For African countries, Nigeria’s tax-to-GDP ratio for 2022 was 5.5%. A figure much lower than the average of 16% for 31 African countries reviewed by the Organization for Economic Cooperation and Development (OECD).
In 2022, the FIRS announced that Nigeria earned N10 trillion ($22 billion) in revenue from taxes. Although the country has a population of 41 million taxpayers, the amount generated from Personal Income Tax (PIT) is lower compared to other African countries.
The country’s debt profile has continued to increase, and this is a worrying sign for analysts, and economists, among others. The rising debt could hit N77 trillion in June 2023. Despite this, the country has continued to borrow, even to finance the 2023 budget.
Pros and cons of tax increase
The planned increase in some taxes will take effect on June 1, 2023. The International Monetary Fund (IMF) has also advised the country to increase its PIT to 15% to get more revenue.
Increasing taxes will generate more revenue for the country to carry out some of its programs and also finance the budget, rather than resorting to borrowing, which accrues interest, among other terms.
However, increasing taxes will weaken the purchasing power of the country. The rising inflation in the country, especially food inflation, has seen Nigerians look for cheaper options that are not healthy, and sometimes substandard. Increasing taxes will further aggravate this issue and leave citizens battling inflation.
Presently, only a handful of Nigerians have had a salary increase in the last five years. Many are on the same salary, while prices of goods and foodstuffs, and transportation have skyrocketed.
The private sector has complained about the amount of taxes it is paying to the government. A tax increase rather than creating jobs might cause some organizations to downsize, leaving the country with more unemployed people, adding to the high unemployment rate.
The decision could also lead to foreign investors leaving the country and some avoiding investing in the country; with this, the country’s Foreign Direct Investment (FDI) will deplete.
Alternatives to Tax Increase
The country cannot afford to increase taxes at this point, amidst the economic challenges in the country. The FG should rather widen the tax net. Widening the tax net will see individuals who are qualified to pay tax, but are not, for some reason, now made to pay tax.
Increasing taxes will only add to the burden on individuals. On the other hand, widening the tax net will increase the number of taxpayers and therefore increase revenue.
Furthermore, the government has to go after tax evaders and ensure strict compliance with tax payments in the country. Tax evasion is a thing in the country where individuals, through some means, avoid paying taxes.
With compliance with tax payments, there will be an increase in revenue without having to increase taxes.
What you need to know
The government has a social contract with the people and must fulfill it. Transparency and efficiency are keys to achieving a nation with low tax payments. The government has to step in and take charge to ensure that taxes paid by the people are utilized effectively and that the people have a lot of trust in the system.
Source: Nairametrics
