Taxes are mandatory levies levied on individuals or companies by the government, according to economists.
In Nigeria, tax is a critical component of the country’s revenue at federal, state and local government levels.
States are empowered to collect different taxes, especially personal income tax, road tax, tenement rate, among others.
This report looks at the readiness and ability of different Nigerian states to improve their tax earnings. It also examines what states are earning from taxation currently, and their possibility of having better tax revenue through reforms.
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What are states earning from tax?
Dataphyte reviewed the budget performance documents of different states to analyse what they earn as tax. A review of some selected states reveals disparities in their tax earnings.
Lagos
According to data, Lagos State is the country’s highest tax earner. Details show that in the 2021 financial year, the state earned N390.406 billion in tax as a component of its Internally Generated Revenue (IGR).
As of the second quarter of 2022, the state earned N256.130 billion in personal income tax.
A review of the details published by the Lagos State government in its Budget Performance Reports shows that personal income tax is a major component of its tax earnings. Of the total tax revenue in its IGR for 2021, personal income tax took N301.891 billion, while direct assessment stood at N35.172 billion.
Direct assessment tax is paid by self-employed persons such as traders, contractors, landlords, among others. At the same time, personal income tax is paid by persons employed or running small businesses under business names or partnerships. A chunk of Lagos State revenue for taxation comes from personal income taxes.
This means those who own small businesses or are employed pay most taxes in Lagos State. With 3.1 million persons employed in Lagos, informal micro businesses account for 23.8 percent (738,603) of its total employment.
Although Lagos leads the pack in terms of revenue earned through tax, investigations have revealed that the state could have even earned more tax revenue than it posted.
An investigation revealed that N123.078 is earned by touts or ‘agberos’ in transport tax in Lagos annually. But this is not accounted for, according to the report.
This would mean that Lagos could have earned N513,484 billion as tax revenue against the N390.406 billion it posted as tax revenue in 2021. This would have happened if loopholes fuelling corruption were blocked by the government.
Lagos, for instance, lost 31.5 percent of the revenue it earned as road tax to corruption in its transportation system in 2021, according to the report, which also noted that all the road taxes went into private pockets.
Of the number of persons employed in Lagos State, SMEDAN report shows that 738,603 are in the informal sector; that is, these persons’ incomes are not formally recorded.
A report noted that Lagos micro businesses pay at least N513 every day. However, the money is paid to touts, who mostly do not account for it.
Lagos has also failed to tax a plethora of properties in the state conformably, according to economists, who say countries earn substantial revenues in property tax.
Oyo
Oyo State generated N20.481 billion as personal taxes in 2021 and another N10.786 billion as of half-year 2022.
In 2022, the state reported N702.415 million as earnings from direct assessment.
Data comparison shows that Oyo State has a working age population of 4.802 million and a labour force of 3.315 million persons.
Of this number, 596,329 persons are unemployed, according to the National Bureau of Statistics (NBS) report. Despite having employed persons just 12.9 percent below Lagos, Oyo State’s revenue from personal income tax revenue is only 6.7 percent of Lagos’ earnings from the same item in 2021.
Data show that 42.92 percent of Oyo State’s workers are in the microenterprises sector which are largely informal. This means that they are not captured formally by the state and cannot be taxed.
The estimated 1.871 million micro enterprises in the state are also informal. This affects the state’s ability to harness their tax potential.
Efforts of the state government to keep a database of commercial vehicles operating in the state may also boost its potential to earn more from road taxes. This is given the state population put at over 5 million persons.
Kano
Kano State is located in the North-West region of the country. One of Nigeria’s most populous states, Kano is regarded as Nigeria’s centre of commerce. However, the figure posted by the state as revenue has been described by analysts as underwhelming.
The state recently released its 2021 budget performance reports for first and second quarters. The NBS states’ IGR report shows that the state recorded N24.064 billion as tax revenue for full year 2021. This is 6.16 percent of Lagos State tax revenue in the same period.
Kano State’s working age population stands at 7.2 million. However, only 2.8 million are in the workforce. Of the number in the workforce, 717,086 persons are unemployed.
Informal micro enterprises account for 36.9 percent of jobs in Kano State, and over 1.824 million micro enterprises are informal. That is, they are not incorporated nor are they registered for taxes.
Despite its large population, Kano may also need help to harness its potential for road taxes. This is because it has been reported that 50 percent of commercial vehicles in Nigeria are in Kano state.
Rivers State
Rivers recorded N108.69 billion as personal taxes in 2021 and 57.512 billion from personal taxes in the half year of 2022.
The state prides itself as the fifth most populous state in Nigeria and the second largest economy after Lagos, per information on its website.
The state earns a large chunk of its revenue from Pay As You Earn (PAYE), which is charged on employees’ incomes.
Based on the data review, Rivers may still need to harness tax from direct assessment (tax paid by self-employed persons who pay tax on their income), as it only recorded N307.414 million in direct assessment tax for half-year 2022. This may be attributed to the fact that 1.116 million of its micro enterprises are informal, usually owned by self-employed persons,.
Despite its touted population and economic largeness, it could only record N29.537 million as road tax in 2021 and N4.233 million as of the half-year 2022.
Infrastructure, data management crucial to tax – Experts
A policy analyst, Ronke Onadeko, noted that there was a need to provide infrastructure to encourage small businesses to pay taxes.
She said that SMEs were taxed indirectly through different means, leaving their profit margins low.
“You have a case of multiple taxations, where indirectly small businesses pay a different kind of tax. When they cannot benefit from the government, they may find every way to evade tax. No electricity or infrastructure, businesses source these things at their own cost. Every time a policeman arrests a driver and charges him, the driver adds it to the cost of his/her transportation, and small businesses have to bear the cost if they need the services of such a driver.”
According to her, until the government began to provide infrastructure and the basic needs of business people, tax mobilisation would be difficult to enforce.
“There is a need to help businesses grow their profitability. Also, there is a need to help companies pay taxes by reducing the tax rate, ensuring that these businesses pay minimal tax. The government should try to understand what the businesses need. A townhall meeting aimed at understanding their needs will go a long way in ensuring that what they are needed to do is not just to pay tax but also benefit from the government,” she stated.
Onadeko opined that in the case of Lagos, there was a system in place that helped small businesses more than other states in terms of patronage, and improvement of business profit margin. She said that states must make efforts to involve small businesses in policy-making, rather than go after them when there was a need for tax revenue.
An expert, Samuel Atiku, told Dataphyte that better data management and harmonisation of the database of taxpayers across levels of government could be the way to go. In his view, while many of those in the informal sector paid tax, some of which could be said to be personal income tax, there was inadequate legal structure to define many taxes paid by the informal sector.
The former Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Dr Muda Yusuf, advised all states to begin to tax properties, especially those at high-brow areas.
He said doing so would reduce the number of unoccupied buildings and provide tax earnings for states.