As Nigeria inches closer to January 1, 2026, for the commencement of the new tax regime, it is imperative to draw attention to a few missing links in the fiscal reform process. These range from the absence of a campaign programme on the imminent takeoff of the new measures, to the need for continued the reform of both the processes and institutions. Clearly, there is more work to be done.
Few government policies in recent times have stirred the kind of controversy that the tax reforms have in the country. Having overcome the initial resistance, the government now has to show further commitment to the programme by ensuring its effective implementation. This explains the surprise that not enough publicity is being given to the move.
Nigeria indeed had found itself at a critical juncture in the fiscal space, but it went for a practical solution, the type suggested by Benitez, Juan Carlos, Mansour, Mario in their 2023 work, “Building Tax Capacity in Developing Countries”: “Inclusive politics and a stable leadership are essential to avoid policy capture by interest groups and to address political economy hindrances to reform.”
According to them, tax capacity, which comprises policy, institutional, and technical capabilities to collect tax revenue, constitutes part of a deeper process of state building that is essential for achieving the Sustainable Development Goals. “Tax capacity must continue to rest primarily on improving the design and administration of the core domestic taxes,” they declare.
They argue further that revenue collection enables the state to fund public spending and improve the quality of market-supporting institutions. In this sense, tax capacity is the cornerstone of state capacity. There are also indirect means through which tax capacity contributes to strengthening state capacity.
For example, a simple and fair tax system can support improvements in public finance management and help build credibility among citizens that taxation is necessary to fund reasonably efficient and transparent programmes that private markets, left to their own devices, could not deliver. And a modern revenue administration can spur wider innovation in other government agencies and policy areas, strengthening the social contract between the state and citizens.
Tax-to-GDP ratio in Nigeria and Africa generally has been low. This is the major problem that tax reforms are designed to tackle. Figures from the Organisation for Economic Co-operation and Development put Africa’s tax-to-GDP ratio for 2021 — the unweighted average for 33 African nations — at 15.6 per cent, compared to 19.8 per cent for Asia and the Pacific, 21.7 per cent for Latin America and the Caribbean, and 34 per cent for the OECD itself.
The above figures reflect a broader challenge facing governments in low-income developing countries (LIDCs). Tax revenue has since progressed in these countries, with the average tax-to-GDP ratios rising by about 3.5 percentage points in the early 1990s, to 13.8 per cent in 2020, say Benitez, Juan Carlos, Mansour, Mario, et al. (2023).
On their part, Gaspar, Mansour, and Vellutini, also writing in 2023, declare that increases in tax revenues have varied across countries. They, however, raise a point that is of interest to Nigeria: resource-rich countries have typically generated less tax revenue. They blame this on the fact that “some governments reduced taxes as a result of higher revenue from natural resources”.
There is hope, however, for Nigeria and others. According to them, low-income countries have the potential to raise their tax-to-GDP ratio by as much as 6.7 percentage points. There is also a possibility of adding another 2.3 percentage points’ increase through improving public institutions (including reducing corruption to the level in emerging market economies. This gives a potential 9 percentage points’ increase in tax revenue available to the low-income countries.
In their 2022 work, Okunogbe and Santoro provide insights into the composition of tax regimes in African countries, including Nigeria, with consumption taxes (sales tax, VAT, and excise taxes) constituting 49 per cent. On their part, Gaspar, Mansour, and Vellutini support this assertion, declaring that consumption taxes, such as VAT, have been the drivers of between 3.5 percentage points and five percentage points’ increase in the tax-to-GDP ratios of many emerging market and developing economies since the early 1990s.
They recommend reforms in four key areas. First, countries should improve the design and administration of core domestic taxes, ranging from value-added taxes, excises, personal income taxes, to corporate income taxes. They note, for example, that low-income countries could double VAT revenue by limiting preferential treatments and improving compliance without increasing standard tax rates.
Secondly, countries should also embark on “bold reform plans” with a focus on tax base broadening through the rationalisation of tax expenditures, more neutral taxation of capital income, and better use of property taxes.
Countries can also improve the institutions that govern the tax system and manage tax reform. “The political economy of tax reform has proven to be hard. Policymakers need evidence to convince the public of the gains and show progress in policy implementation over time,” they note.
