Concerns as Nigeria loses N6 trillion to tax waivers yearly

There is growing concern over the huge revenue Nigeria gives up yearly in tax waivers, which experts estimate at N6 trillion yearly. Although some economists believe it is not lost revenue since it is meant to serve as an incentive to attract more investments, their worry stems from the fact that the country has not been able to measure the actual impact of the waivers.

The N6 trillion is more than 50 per cent of the N11.16 trillion tax revenue collected by the Federal Inland Revenue Service (FIRS) in 2023 and about the total amount it collected in 2021.

As at the first quarter of 2024, a total of 104 companies benefited from tax waivers under the Pioneer Status Incentive (PSI), an incentive offered by the Federal Government to exempt companies from paying income tax in full or part for a certain period.

Offered under the Industrial Development Income Tax Act with tax reliefs for three years, the incentive is generally regarded as a measure aimed at stimulating investment in the economy.

The Nigerian Investment Promotion Commission (NIPC) in its first quarter 2024 PSI report published recently, announced that in the first quarter of this year, it received 18 new PSI applications. While eight firms applied for an extension of their tax holiday, only two were granted extensions.

It also noted that a total of 213 fresh applications for the tax holiday are still pending as of Q1 2024. Chairman of the Presidential Fiscal Policy and Tax Reforms Committee, Taiwo Oyedele, speaking during a television interview, expressed concern over the huge sum, which appears to be just going down the drain at a time when the country is looking for funds to run governance.

“On the economic viability of the enormous tax waivers, the country has so far failed to measure their impact on the economy. This is the part that makes it painful because it would then appear like you just wasted the money you didn’t even have in the first place, and those numbers are huge compared to our revenue base,” he said.

He, however, said that the new reforms his committee is coming up with would not reverse the tax holiday being enjoyed by the companies as the committee’s intention to attract investments.

Tax incentives have been a contentious issue due to the high amount of revenue lost to waivers granted every year. During the budget defence last December, the Senate Committee on Appropriations asked the federal government to stop tax waivers because they reduce the revenue of the country. The committee urged the federal government to consider a rebate system as an alternative to tax waiver.

Economists believe tax waivers play a significant role in driving economic growth. However they question the transparency of the process and objectives of the Federal Government in granting tax waivers.

The Lead Director of the Centre for Social Justice (CSJ), Eze Onyekpere, said there is a need to put a cap on tax expenditure to regulate the indiscriminate waivers. He said the Federal Government cannot be massively borrowing while giving away a very huge percentage of its available revenues.

Quoting from the Fiscal Responsibility Act Section 28 (1), he said: “Any proposed tax relief shall be accompanied by an evaluation of its budgetary and financial implications in the year it becomes effective and in the three subsequent years, and shall only be approved by the minister, if it does not adversely impair the revenue estimates in the annual budget or if it is accompanied by countervailing measures during the period through revenue increasing measures such as tax rate raises and expansion of the tax base.”

He noted that the law says that tax expenditures in every financial year should not exceed 30 per cent or any sustainable percentage of projected retained revenue or as it may be determined by the National Assembly from time to time. For the Chief Executive Officer of the Centre for the Promotion of Private Enterprises (CPPE), Dr Muda Yusuf, it is a misnomer to describe tax waivers as losses.

Conceptually, he said: “Waivers are meant to drive economic development and economic diversification. That is why there are often sectors or geographical specificities.” He said if properly applied, waivers have significant economic and social benefits.

“It is, however, important to reckon with and estimate these benefits,” Yusuf noted, adding that the development of an economy is not only about revenue.
“It is about industrialisation, self-reliance, job creation, incentivising production, inclusion, dispersal of economic activities across the country, backward integration etc. These are some of the motivating factors for tax waivers. However there are valid concerns about inherent abuses and corruption. These are the critical issues to address. These are governance issues. Waivers must have a very transparent framework. It must also be equitable. The integrity of the process must be assured,” he said.

According to him, these are critical areas that the government needs to look at to ensure the country derives maximum benefits from tax holidays. Also reacting, Prof. Godwin Oyedokun of Lead City University said tax waiver is a double-edged sword. He noted that giving up N6 trillion yearly in tax waivers is, indeed, a significant concern given Nigeria’s revenue challenges. He suggested some measures, which he considers as alternative incentives that could be considered without compromising revenue.

“To ensure that tax waivers are targeted effectively, there should be precise qualifications for tax exemptions to prevent abuse,” Oyedokun said, adding that transparency and accountability in the tax waiver process are essential to reduce opportunities for abuse.

On her part, the President of the Association of Certified Fraud Examiners, Dr Titilayo Fowokan, said even amid revenue pressure, tax incentives have their relevance, which should be determined according to sectors that need to be encouraged to boost the economy by increasing productive capacity of the industries.

She, however, said there is a need for the NIPC to step up the game by critically assessing the achievement of the pioneer companies within the period of the tax holiday.

“The commission may have to conduct verification exercises to obtain convincing evidence that the economic objective of granting the tax waiver has been achieved. Though the Federal Inland Revenue Service conducts a Tax audit of pioneer companies, the objective of this is for revenue generation and not to assess the economic impact of the tax waiver,” she said.