From Uche Usim, Abuja
The Federal Inland Revenue Service (FIRS), on Wednesday, disclosed that the nation’s tax-to-GDP ratio which, in the last 12 years, hovered between 5% to 6%, rose to 10.86% by the end of 2021.
The tax-to-GDP ratio is the ratio of the tax revenue of a country compared to the country’s gross domestic product (GDP). This ratio is used as a measure of how well the government controls a country’s economic resources. Tax-to-GDP ratio is calculated by dividing the tax revenue of a specific time period by the GDP.
The FIRS in a statement said the new ratio was communicated to the FIRS via a letter signed by the Statistician-General of the Federation, Adeyemi Adeniran, on May 25, 2023, following a joint review by the Nigerian Bureau of Statistics (NBS), in collaboration with the Federal Ministry of Finance and the FIRS, using data from 2010 to 2021.
According to the statement, the revision took into account revenue items hitherto not previously included in the computations; particularly, relevant revenue collected by other agencies of government.
“Tax-to-GDP ratio is a useful tool for assessing the “health” of a country’s tax system, and highlighting its tax potentials relative to the size of the economy. It is the ultimate measure of the effectiveness of a nation’s tax system compared to other countries.
The statement further quoted the FIRS Chairman, Mr Muhammad Nami, as saying that sources which previously put the country’s Tax-to-GDP ratio at between 5% and 6% did not consider tax revenue accruing to other government agencies in their computation.
“Particularly, revenues collected by agencies other than the FIRS, Customs and States Internal Revenue Service were excluded. This situation was peculiar to Nigeria as most other countries operate a harmonised tax system (all or most tax revenues are collected by one agency of government) with single-point tax revenue reporting. As such, all relevant tax revenues are included in the computation of the Tax-to-GDP ratio.
“In order to correctly state the Tax-to-GDP ratio, the FIRS initiated a review and re-computation of the ratio for 2010 to 2021. In recomputing the ratio, key indicators that were previously left out were taken into account. This resulted in a revised Tax-to-GDP ratio of 10.86% for 2021 as against 6% hitherto reported,” the statement noted.
It further stated that Nigeria’s Tax-to-GDP ratio should ordinarily be higher than 10.86% but for certain economic and fiscal policy factors, including tax waivers and leakages occasioned by the country’s fragmented tax system.
“It is important to note that the Tax-to-GDP ratio for Nigeria should be higher but for the impact of tax waivers contained in our various tax laws (including exemptions to Micro, Small and Medium Enterprises brought in by the Finance Act, 2019), low tax morale, leakages occasioned by the country’s fragmented tax system and the impact of the rebasing of the GDP in 2014”, the statement added.