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Nigeria’s revenue challenge and tax expenditures

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In the last couple of weeks, the #EndSARS campaign and its issues have taken public attention away from Nigeria’s economy and economic governance challenges. Some of the economic issues that have arisen since then are so grave that they demand urgent attention and engagement by citizens for the security and welfare of Nigerians to have any meaning as anticipated by the Constitution of the Federal Republic of Nigeria 1999 (as amended). This discourse intends to engage the revenue challenge of the three tiers of government against the background of the disclosure of the current status of tax expenditures. The disclosure which fleshed out the President, Major General Muhammadu Buhari (retd.)’s 2021 budget speech was made by the Minister for Finance, Budget and National Planning on the occasion of the 2021 budget explanations and breakdown to the media, private sector and civil society. It is available on the website of the Budget Office of the Federation.

In the President’s speech, he indicated that the executive would for the first time prepare a Tax Expenditure Statement which will accompany the budget estimates to the National Assembly. This is a welcome development that seeks to comply with Section 29 (1) of the Fiscal Responsibility Act. It will increase transparency and accountability in public revenue and opens this rather opaque area of economic governance to public scrutiny.The section states that: “Any proposed tax expenditure 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 mentioned in this subsection through revenue increasing measures such as tax rate raises and expansion of the tax base”. But what is a tax expenditure?

Tax expenditures are equivalents of appropriating public revenue for the specific use of particular individuals or class of taxpayers. Experts from the International Budget Partnership have defined tax expenditure as: “Tax expenditures are usually defined as a government’s estimated revenue loss that results from giving tax concessions or preferences to a particular class of taxpayer or activity. The revenue loss, or “expenditure,” is calculated as the difference between whatever tax would have been paid under a defined benchmark tax law (which identifies what tax structure should normally apply to taxpayers) and the lower amount that was actually paid after the tax break. Tax expenditures are used instead of direct spending to deliver a government subsidy to a class of taxpayer or encourage a desired activity. They can take many forms, including tax exemptions; tax deductions; tax offsets (or credits); and concessional tax rates or timing rules, such as accelerated depreciation of capital assets, that either reduce or defer a taxpayer’s tax liability”.

From the foregoing, tax expenditures are as good as appropriating money in a budget and allocating it to certain named natural or artificial persons. These are public revenues that should have accrued for the use of all Nigerians but foregone by government to serve certain supposedly higher public ends. These higher ends include promotion of economic growth and welfare – manufacturing and value addition, employment, diversification of the economy, etc. The expectation is that these entities need to be supported when they start as pioneers or engage in economic activities very critical to national development and in future, the economy will immensely benefit from the tax breaks, concessions, waivers, etc., they got.

Tax expenditures are currently estimated as follows: Companies income tax at N1.18tn; value added tax at N3.1tn; customs duties at N347bn and VAT on imports N64bn bringing the total to N4.691tn. With the huge deficit incurred by the Federal Government and the states over the years and the level of public debt, it is imperative that tax expenditures be reviewed in the nearest future. Indeed, if possible, the review should be done by the 2021 Finance Act. The justification is as follows: Actual CIT available to the Federation Account (before deductions) for sharing by the three tiers of government was N1.517tn in 2019 and N1.429tn in 2018. Incurring a CIT tax expenditure of N1.18tn means retaining 56.2% and giving away 43.8% of due CIT in 2019. The tax expenditure as a percentage of the accrued CIT is 78%. Actual VAT available to the Federation Account (before deductions) for sharing by the three tiers of government was N1.141tn in 2019 and N1.046tn in 2018. Incurring a VAT tax expenditure of N3.1tn in 2019 meant retaining only 26.9% of due VAT while giving away 73.1%. The tax expenditure is 353% of the accrued VAT. Furthermore, actual Customs duties available to the Federation Account (before deductions) for sharing by the three tiers of government were N792.06bn in 2019 and N657.88bn in 2018. Incurring a VAT tax expenditure of N347bn in 2019 meant retaining only 69.5% of due customs duties while giving away 31.5%. The tax expenditure is 43.8% of the accrued customs duties.

The foregoing raises the poser; is it reasonable and prudent to give away N4.691tn as tax expenditure at a time the 2021 budget estimates have a deficit of N5.196tn which exceeds the three per cent of the GDP rule in the FRA while we propose to borrow N4.2tn in new debt? The answer to this poser is overwhelmingly in the negative as it is a very unreasonable path to follow. This development throws up another issue. If these entities have been benefitting from tax expenditures over the years, where is the cost benefit analysis of the foregone taxation and benefits to these entities vis a vis the expected benefits to the nation in terms of economic development and expansion, new jobs and increased tax revenue after the expiration of previous tax expenditures. Since our revenues have been stagnated over the years and we are still singing the mantra of economic diversification, on the face of it, it appears we have been foregoing public revenue without the intended benefits accruing over time,

It is therefore time to start the process of reviewing these tax expenditures. The National Assembly and the Ministry of Finance are therefore called upon to amend the requisite laws and policies and take action to reduce the tax expenditures. There is a need to reduce the tax expenditures to not more than 20% of total estimated value of each tax category. Again, it is pertinent to compel entities that have benefitted from these tax breaks to keep their own side of the bargain by taking appropriate steps that will benefit the economy. Future tax expenditures must be accompanied by detailed deliverables with benchmarks and indicators of progress by the entities to the economy as a condition for them to benefit from public revenues.

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