Taxation is a crucial part of any nation’s economy, acting as a primary source of government revenue used for public goods and services. In Nigeria, the federal government faces significant challenges in tax collection, which limit its ability to harness the country’s full potential.
As Africa’s largest economy, Nigeria can generate substantial revenue from its vast population, diverse industries, and natural resources. Yet, the country’s tax-to-GDP ratio is still one of the lowest in the world. This article explores the reasons behind the federal government’s difficulties in collecting taxes, examining structural, institutional, economic, and social factors.
One, Tax evasion and avoidance: One of the most significant challenges to effective tax collection in Nigeria is tax evasion and avoidance, both by individuals and businesses. Important levels of tax evasion are prevalent across many sectors of the Nigerian economy, particularly in the informal sector, which forms a substantial part of the country’s economic activity. The informal economy, estimated to make up around 60 per cent of Nigeria’s GDP, often escapes tax scrutiny due to its unregulated nature.
Businesses running in the informal sector do not typically register with tax authorities and are difficult to trace, thus avoiding any formal tax obligations. In addition to the informal sector, larger corporations and wealthy individuals also engage in tax avoidance schemes. With complex accounting techniques and offshore tax havens, these entities reduce their tax liabilities, depriving the government of significant revenue. The Nigerian government has struggled to close loopholes in tax laws that enable these practices, which further complicates its ability to collect taxes effectively.
Two, Weak enforcement and compliance mechanisms: A major issue hindering tax collection is the weak enforcement of tax laws and low compliance rates. The Nigerian tax administration system, managed primarily by the Federal Inland Revenue Service (FIRS), suffers from inefficiencies in tax enforcement. Tax officials often lack the resources, ability, and technological tools to adequately track income, profits, and transactions, leading to underreporting and outright non-compliance by taxpayers. This weakness is worsened by the beliefs that tax laws imposed. Many individuals and businesses do not fear punitive consequences for not paying taxes, as the government has historically had a poor record of accomplishments of holding defaulters accountable. Moreover, corruption within the tax administration can sometimes lead to the collusion of tax officials with taxpayers, further reducing the likelihood of fair and transparent enforcement.
Three, Multiplicity of taxes and complexity of the tax system: The complexity of Nigeria’s tax system is another significant barrier to effective tax collection. The Nigerian federal government, alongside state and local governments, imposes a wide array of taxes, fees, and levies. This multiplicity of taxes creates confusion among taxpayers, particularly smaller businesses and individuals who may not fully understand their obligations.
The overwhelming number of taxes—some of which overlap—adds to the administrative burden of compliance and makes the process cumbersome. In addition to the number of taxes, the tax codes are often complex and difficult for the average taxpayer to understand. The lack of clarity in tax laws and regulations creates opportunities for misinterpretation and abuse, whether intentionally or unintentionally. This complexity also discourages voluntary compliance, as many potential taxpayers discouraged by the difficulty of understanding and navigating the system.
Four, Corruption and lack of transparency: Corruption stays a pervasive issue within Nigeria’s public sector, and the tax administration is no exception. The presence of corruption affects tax collection at multiple levels, including the assessment, collection, and enforcement processes. Tax officials may exploit their positions for personal gain by accepting bribes in exchange for reducing tax assessments or ignoring noncompliance. This not only results in revenue losses for the government but also undermines public trust in the tax system. The lack of transparency in tax administration processes further worsens the problem of corruption. When taxpayers cannot easily access information about their tax obligations, how their taxes are calculated, or how revenue is used, it leads to a perception of unfairness and fuels non-compliance. In such an environment, taxpayers are less likely to willingly pay taxes, as they do not trust the system to be fair or accountable.
Five, Low taxpayer education and awareness: Taxpayer education and awareness play a critical role in ensuring compliance and enhancing tax collection. In Nigeria, there is a significant gap in public knowledge regarding tax obligations and the importance of taxation for national development. Many Nigerians, particularly those in rural areas and within the informal sector, are either unaware of their tax obligations or do not fully understand the purpose of paying taxes.
This lack of awareness is partly due to insufficient efforts by the government to educate citizens about taxation. While the FIRS and other tax authorities have undertaken some outreach programmes, these efforts have not been comprehensive or widespread enough to reach the entire population. As a result, many individuals are still uninformed about the tax system, leading to lower compliance rates and reduced tax revenue
Six, Dependence on oil revenues: Historically, Nigeria has been heavily dependent on oil revenues to fund its government expenditure. The country is one of the world’s leading oil producers, and oil has accounted for a significant portion of government revenue for decades. However, this reliance on oil has created a fiscal imbalance, as the government has neglected to build a robust and diversified tax base.
Instead of prioritising tax collection from other sectors of the economy, the government has relied on volatile oil revenues to finance its activities. In recent years, the decline in global oil prices and Nigeria’s fluctuating oil production have highlighted the risks of this over-dependence. With diminishing oil revenues, the government has been forced to turn its attention to non-oil sources of revenue, including taxation.
However, the underdevelopment of the tax system, combined with the structural challenges mentioned above, has made it difficult for the federal government to quickly expand its tax base and increase revenue from other sectors.
Seven, Insufficient infrastructure and Technology: Effective tax collection requires a well-developed infrastructure and the use of modern technology to monitor economic activities and collect taxes efficiently. In Nigeria, the tax administration system lacks adequate technological infrastructure, which hinders the ability of tax authorities to track transactions, income, and profits. Many tax processes remain manual and paper-based, leading to inefficiencies and errors in tax assessments and collections. The adoption of digital technologies and data analytics in tax administration has been slow, leaving Nigeria behind other countries that have modernised their tax systems. For example, the lack of a comprehensive and up-to-date tax database makes it difficult for the government to accurately assess the taxable base.
Furthermore, the limited use of electronic payment systems and online tax filing options makes it more cumbersome for taxpayers to comply, particularly in an increasingly digital world.
Eight, Political interference and policy inconsistencies: Political interference is another factor that complicates tax collection in Nigeria. At times, political considerations influence the administration of tax policies, with certain influential individuals or groups being granted tax exemptions or reliefs based on their political affiliations or connections.
This practice creates inequities in the tax system and reduces overall revenue collection. Additionally, inconsistencies in tax policies and frequent changes in tax laws contribute to confusion and uncertainty among taxpayers. The lack of a stable and predictable tax environment makes it difficult for businesses to plan for the long term and comply with their tax obligations.
Moreover, frequent policy shifts can undermine efforts to improve tax compliance, as taxpayers may perceive the system as unpredictable and unfair.
Nine, Economic challenges and poverty: The broader economic challenges facing Nigeria also contribute to the difficulties in tax collection. The country has a large population living in poverty, with unemployment rates and income inequality remaining high. In such an environment, many individuals struggle to meet basic needs and may not have the financial capacity to pay taxes. The federal government’s attempts to broaden the tax base and collect more revenue are often met with resistance from a population that feels overburdened by the economic challenges they face. Furthermore, Nigeria’s economy has been hit hard by various crises, including fluctuations in oil prices, inflation, and currency devaluation. These economic conditions reduce the tax revenue potential of businesses and individuals, as profitability declines and disposable incomes shrink.
In conclusion, the Nigerian federal government faces significant difficulties in collecting taxes due to a combination of structural, institutional, and socio-economic factors. Tax evasion and avoidance, weak enforcement, a complex tax system, corruption, insufficient taxpayer education, and over-reliance on oil revenues all contribute to the challenges. In order to overcome these obstacles, Nigeria must prioritise tax system reforms that enhance transparency, efficiency, and fairness, while also investing in the necessary infrastructure and technology to support effective tax collection. Strengthening the tax base, improving enforcement, and fostering a culture of compliance will be essential steps toward increasing government revenue and ensuring sustainable national development.
Stephen wrote via [email protected]
