Nigerians involved in the wholesale and retail trade, as well as the repair of motor vehicles and motorcycles, witnessed a staggering 98% increase in their total tax contributions to the nation’s coffers, with the total tax paid in 2023 hitting a record N253.07 billion.
This substantial rise is in sharp contrast to the N127.89 billion collected in 2022, reflecting significant economic activity or improvements in compliance within the sector.
Based on the data released by the National Bureau of Statistics (NBS), this leap in tax revenue is the result of hikes in both Value Added Tax (VAT) and Company Income Tax (CIT) receipts.
The Federal Inland Revenue Service (FIRS) clarifies that CIT, which is pegged at 30%, is levied on the profit of corporations, while VAT — set at a rate of 7.5% — is a consumption tax imposed at the point of sale on goods and services, ultimately shouldered by the end consumer.
Breakdown of the tax payments
- The year 2022 saw VAT revenues at approximately N67.82 billion, with CIT contributing about N60.06 billion.
- A marked uptick in 2023 pushed VAT revenues to roughly N138.10 billion, more than a 100% increase, while CIT collections surged to nearly N114.96 billion, almost doubling from the previous year.
This remarkable uptrend not only signals a buoyant phase for the industry but also underscores the potential impact of possible regulatory changes or enhanced enforcement of tax policies. The twin effect of expanding business activities and possibly more stringent tax administration could be the drivers behind this robust growth in tax inflow.
How Inflation may drive higher taxes
In 2023, Nigerians grappled with a rampant inflationary tide, with the headline inflation rate surging from a substantial 21.82% in January to an even more pronounced 28.92% by December. This sharp 7.1%-point climb within a single calendar year not only eroded the purchasing power of the naira but also had cascading effects on the tax landscape, particularly on VAT and CIT.
In an inflationary environment, the price tags on goods and services increase. VAT, being inherently tethered to the sale price as a consumption tax, witnesses a proportionate swell. For instance, a product that cost N1,000 in January and carried a VAT of N75 at 7.5%, would, with a price hike to N1,100 in December, yield a VAT of N82.50, notwithstanding a stagnant sale volume.
Moreover, the relentless climb of production expenses, including the likes of raw materials and labour, necessitates an upward revision in prices to preserve business profit margins. This inflation-induced escalation in sales prices amplifies the tax collected on each transaction.
Corporate ledgers, too, are not immune to the inflationary wave. As nominal prices soar, so does reported revenue. Assuming profitability scales in tandem and tax rates remain unaltered, the CIT, which skims a 30% slice off the profit pie, correspondingly increases.
However, it is imperative to underscore that the burgeon in nominal tax revenues is a double-edged sword. With the common man’s purchasing power diminishing under the weight of inflation, a contraction in overall consumption and investment is a likely scenario. This potential downturn in economic participation could decelerate economic momentum, possibly culminating in a reduced tax inflow should the economy teeter towards or tip into recession, underscoring the intricate interplay between inflationary dynamics and fiscal health.
What You Should Know
Nigerians pay over 60 official and 200 unofficial taxes, with small businesses across Nigeria struggling with multiple taxation either from different agencies of the federal government or similar kinds of taxes from different levels of government (federal, state, and local government).
The Chairman, Presidential Committee on Fiscal Policy and Tax Reforms., Mr Taiwo Oyedele, recently said that there are even more unauthorised taxes all disproportionately affecting small businesses including petty traders, hawkers, artisans, truckers, cart pushers, okada riders and other transporters. He said:
- “The associated costs are inevitably passed on to consumers, mostly low-income earners. The payers also have to contend with the unorthodox means of collection and harassment from untrained “revenue collectors” on highways, markets, streets, etc., while there is very little to show for the revenues collected.
- “We propose to repeal many of these burdensome taxes, harmonize the few that are justifiable, and digitize the collection process with multiple channels including USSD to drive efficiency, reduce leakages, and promote accountability.”
The Manufacturers Association of Nigeria (MAN) recently asked both federal and state authorities to unify the various taxes imposed on its members, citing these levies as detrimental to business expansion.
In July 2023, the FIRS announced the VAT Direct Initiative, a scheme that would enable FG to collect VAT from the informal sector. This scheme was introduced in an effort to curb the issue of multiple taxations that has plagued the informal economy.
Clarifying further, Oyedele, stated that market traders under the VAT Direct Initiative will have exemptions if their business does a turnover of less than N25 million. He said:
- “MSMEs and traders are more than 90% of businesses in micro space, so they won’t have to charge VAT, and there are also exemptions for basic food items, for example, a trader selling rice, beans, and notebooks for primary school would not have to be charged VAT. The sweet aspect is why the FIRS agreed to it, is because the traders are paying all manners of taxes in the informal sector, who extort them every time.”
He added that the FIRS was leveraging the federal might to ward off tax collections by non-state actors and stop them from extortion and pay VAT where applicable.
- “This is good for traders so they pay less, and this can help federal and state with economic data for planning and ultimately have the informal sector become more formalized into the economic system.”
By December 2023, the FIRS introduced the Integrated Market Revenue Management System (IMRMS), a digital platform designed to integrate the informal sector, particularly market traders, into the federal government’s tax framework. This move aligns with the VAT Direct Initiative (VDI) aimed at promoting VAT collection and remittance awareness in the informal sector.
So far, the Federal Government plans to cut down official taxes to not more than 10 and has recommended that state and local governments across the country to suspend “nuisance taxes” that don’t add value to the state’s coffers.
It is hoped that a new tax regulation will be introduced soon to amend existing laws and curb multiple taxation frustrating business owners in the country.
