Government’s Aggressive Revenue Mobilisation and Its Implications for the Business Environment
Nigeria government has intensified efforts in recent years to generate more revenue for the country. Not long ago, government announced new taxes and levies on the citizens and business organizations. The government increased Value-Added Taxes (VAT) from 5% to 7.5%, companies with a turnover of N25 million or less were exempted from filing VAT returns and Company Income Tax (CIT). Other businesses above this threshold were not exempted. However, there are implications to this government aggressive revenue drive.
Economic experts recently argue that the government aggressive revenue drive, coupled with increased borrowings, could lead to the closure of many businesses.
According to the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), 80% of small businesses in Nigeria die before their 5th anniversary. Consequently, analysts have argued that businesses are already collapsing; while majority are struggling to meet up with high tax rates to ensure their businesses survive. Many companies in Nigeria are starved of capital as poor access to finance constitutes a significant constraint for businesses. Also, a slow-paced economy results to lower disposable income. Given these concerns, this week edition of ENGAGE NIGERIA critically analyses government aggressive revenue mobilization and its implications for the business environment.
Nigeria’s Revenue Outlook
Nigerian government revenues come from two sources: oil and non-oil. The former has historically been the most significant contributor. Data from the Central Bank of Nigeria (CBN) shows that 2016 was the only year since 1981, where non-oil revenues were more significant than oil revenues. Oil revenues hit N8 trillion in 2011 and have never been as high since. The considerable drop happened in 2015 when oil revenues fell from N6.8 trillion to N3.8 trillion following a plunge in oil prices and a subsequent decline in oil production due to insurgency activities in the Niger-Delta.
Oil prices were above $100 per barrel before the collapse; now, we have an assumed rate of $57 per barrel for the 2020 budget. Moreover, future projections are equally modest. The United States Energy Information Administration (EIA) expects oil prices to average $60 in 2020, and the World Bank Expects $70 in 2030. So, oil revenues will grow in the future, but probably not fast enough to solve Nigeria’s revenue problems. Furthermore, the price of oil is out of the government’s hands. Meanwhile, non-oil revenue is very much in their control. The government has already increased VAT, and other related service taxes have been implemented.
However, despite claims of improvements in revenue flows during the 2019 fiscal year, the Federal Government recorded hundreds of billions in budgetary shortfalls in all the quarters, with November alone logging N218.05 billion. Data from the nation’s quarterly economic report shows that the revenue crisis is not getting any better. It notes that in the three quarters ending September 30, 2019, the Federal Government recorded a deficit over N1trillion.
An analysis of the report of the Federal Government’s 2018 budget performance shows that the government spent N7.52 trillion based on total revenue of N3.86 trillion, creating a deficit of N3.64 trillion, an indication that all is yet to be well. The government is also spending more on debt servicing even as its profile skyrockets simultaneously. Recent economic forecast on the nation’s debt stock, currently at $83 billion, with massive debt service provision over N2.3 trillion in 2019, is set to rise in 2020 to $22 billion.
Implications of Revenue Mobilisation
Nigeria’s Employers Consultative Association (NECA) recently stated that the government’s aggressive revenue drive would lead to the closure of many businesses. The Director-General of NECA, Mr Timothy Olawale, noted that the timing of the increase in VAT rate was wrong, stressing that the government ought to support business in reducing the alarming unemployment rate in the country.
Recent data from the World Poverty Clock shows that Nigeria is the poverty capital of the world, with 47.7% living on less than $1.90 a day. These developments have raised several concerns for individuals and the business environment in the country. On the other hand, the Head and Corporate Advisory Services at PricewaterhouseCoopers, Taiwo Oyedele recently stated that the new VAT rate would shrink the GDP growth and disposable income of Nigerians. However, despite the unfavourable outcome of revenue mobilization as described above, the economy of Nigeria advanced 2.28 per cent year-on-year in the third quarter of 2019 compared to an upwardly revised 2.12 per cent rise in the previous period.
Conclusion and Recommendations
The need for the government to generate more revenue is understandable. However, the government needs to do it right in a manner that won’t affect Nigerians negatively. Therefore, there is need for fiscal discipline, effective fiscal and monetary policies to regulate government expenditure and maintain macroeconomic stability to ensure productive use of revenues in the form of an efficient investment of the proceeds into productive ventures and infrastructural development that would increase productivity in the economy.
Secondly, there is need for the economy to be able to save a reasonable portion of her Gross Domestic Product (GDP) and diversify investment to other sectors of the economy like agriculture, manufacturing, solid minerals and human capital development for higher output and employment. This would also make the country to generate more revenue, increase for export and improve customs and excise duties (CED) and foreign exchange rate as well as a balance of payment position of the country.
Thirdly, there is need to enhance the legal or regulatory environment for businesses by periodically reviewing and improving on the tax laws and the enforcement of the laws relating to taxation; strengthen the anti-corruption agencies, enhancing property rights and respect for the rule of law and due process as well as ensuring good governance. This will make people have more confidence in the government.
Finally, there is a need for the government to ensure effective utilization of revenues generated to better the lives of Nigerians. This can be done through effective monitoring of the revenue collected and projects embarked upon with such funds.