Rethinking Nigeria’s Income Tax Model

Dear State Governors,

Between N852 billion and N1.41 trillion, which would you prefer? This is a multi-billion dollars question.

In 2020, while the State Governments hit an all-time high of N852 billion in personal income tax revenue, the Federal Government was hit by a 13.4% decline in corporate tax income to N1.41 trillion. As you would expect (and rightly so), Lagos State had c.35% of the States’ personal income tax revenue.

As you may know, States can’t legislate on personal income tax nor on corporate tax. States hardly hustle for more immigrants. But every State is in competition to attract more companies. While governors will be willing to make certain concessions to have multinationals set up in their States, the States are hardly well compensated for attracting those big entities. Instead, the juice of the fruit is gulped by the Federal Government.

This is not to say that there are no benefits that accrue to the States as these corporates employ residents of the States (reduce unemployment rate and social vices) who in turn pay personal income taxes. The argument here is that historically, the bigger juice is often in the corporate tax which is a federal tax. Can the States benefit from corporate tax? Well, not until the laws are amended. While such could be encouraging to the States if for instance, they get 5-10% of the corporate tax generated from their States (as complex as it may be, but not impossible), I would ordinarily subscribe to something different.

What if the Federal (FG) and State Governments switch roles on who collects what with regards to personal and corporate income taxes? What if it becomes the domain of State Governments to register companies in their States? Already, natural persons are granted citizenship by the country (this case, FG). As such, it is logical to have natural persons taxed by the FG who confers citizenship to them, moreover, the most States don’t even have data of their citizens. In the same vein, it becomes more rewarding for States who struggle to make their states competitive and are better at ease of doing business. Unfortunately, weak States will struggle. But that should be a clarion call for governors to work hard to improve their States so as to attract corporates.

This argument appears to have aligned to the detriment of the Federal Government who it appears will be losing revenue to the States. But I have a different view with a different news. Beyond low compliance rate and data paucity, one reason why States lose a lot of tax revenue is the issue of residency. The complexities of place of resident and principal place of residence and its practical realities are often a crazy discussion, with States such as Ogun and Lagos always at loggerheads on that subject. What if this friction is extinguished where it no more matters where an individual lives since all personal taxes are collected by one institution? The claim by some individuals that they paid taxes in one State and therefore need not pay further tax despite earning income spending significant period in 2 or more states will no longer hold.

With a single personal tax gateway, this means that I should be able to account for my consolidated inflows and the taxes paid thereon. This also means that tax compliance officers who have smart gadgets could be deployed anywhere to sensitize and gradually modify behaviours towards compliance, and over time, it becomes the basis for certain kinds of transactions, e.g., to have your kids in any school, to buy property of any kind, with the property sellers required to report on who such properties were sold to and proof of income and tax on such income, to acquire a vehicle/jets, etc.

Beyond these considerations, I make bold to say that the Federal Government is better placed to increase tax revenue through this model. In fact, based on my model, the personal income tax revenue is sufficient to fund the 2023 budget, and I’m not blabbing. If we can rely on available data from the Nigeria Bureau of Statistics (NBS), the Q4-2020 unemployment report (which is the most recent data) puts the labour force at c.69.7 million (this may probably be more now considering that in Q2-2020, this number was over 80 million), and reported unemployment rate was 33.3%. Multiple searches I have done over the past few months indicate that the average monthly salary in Nigeria is N339,000.

Those in this income band have c.11% effective tax rate. In effect, their monthly tax is c.N38K. In effect, Nigeria can generate as much as c.N21 trillion from personal income tax alone. And you don’t need consultants to do this, but if you so desire to have one, compensate the non-salaried tax payer who provides cause for use of a consultant by offering c.2% of the tax paid. By extension, the consultant’s details are provided and of course, torch-lighted periodically. Individuals could be required to provide all their account information in the course of filing. In fact, every layer of perceived complexity can be broken down for improved compliance and increased personal tax collection.

As I have noted on many media, accurate data is required to drive increased revenue. A redesign of our tax model can offer the respite we have dreamed of. I struggle to understand how our country can’t fund a N21 trillion budget; worse still, we can’t even find means to fund 50% of the budget, and as a result we break our guiding laws on fiscal responsibility.

I can’t fail to mention that we need honest people who work in strong institutions to raise our tax revenue. I must emphasize that tax collection is not a means to settle cronies.

So dear federal government, would you prefer N1.41 trillion or N21 trillion of income tax revenue? I implore you to have this conversation with the states and the legislators. The search for an optimal income tax model will remain, and we must explore all possibilities as in our search, we may find a jewel.