Why Nigeria Spends So Much to Collect So Little: A Tax Reform Wake-Up Call
When the President of the Chartered Institute of Taxation of Nigeria (CITN), Mr. Samuel Agbeluyi, recently declared that prudent deployment of tax revenue would significantly slash the cost of tax collection in Nigeria, his words didn’t just land in the accounting rooms of ministries or at tax forums. They cut deep into the heart of Nigeria’s economic paradox—a country chasing more revenue without addressing the systemic leaks and governance issues that deter voluntary compliance and inflate the cost of collection.
In an era where Nigeria’s debt servicing is projected to consume over 90% of government revenue (according to the 2024 Budget Implementation Report), and states are under pressure to increase Internally Generated Revenue (IGR), Agbeluyi’s call isn’t just timely—it’s fundamental to national survival.
The Irony of Taxation: A System Overburdened by Its Own Inefficiency
The cost of tax collection in Nigeria remains disproportionately high compared to global standards. According to the Federal Inland Revenue Service (FIRS) 2023 performance report, over ₦11.2 trillion was collected in taxes, yet the agency’s overhead and administrative costs have drawn criticism for not aligning with best international practices. For context, the Organization for Economic Co-operation and Development (OECD) recommends that tax collection costs should not exceed 1% of total revenue. Nigeria still hovers above that benchmark.
Agbeluyi argued that visible and impactful spending of collected tax revenue would reduce the need for aggressive enforcement. If infrastructure projects, public schools, health centers, and community services were efficiently executed, citizens would have greater faith in government and willingly comply.
Legal Instruments: What the Law Says and Where It Falls Short
Nigeria’s tax structure is governed by multiple laws: the Personal Income Tax Act (PITA), Companies Income Tax Act (CITA), Value Added Tax Act (VATA), and others consolidated in recent Finance Acts (2019–2023). The Finance Act 2023, for example, introduced provisions to expand the tax net and improve compliance—such as mandating digital service companies (like Netflix, Amazon) to remit VAT and setting clearer thresholds for taxation of small businesses.
However, despite these efforts, the legal architecture remains fragmented. The overlapping powers between the FIRS and State Internal Revenue Services (SIRSs) have not been fully harmonized. Section 8 of the FIRS Establishment Act gives the federal agency wide powers to assess and collect taxes, but this often clashes with state-level laws—particularly over consumption taxes and withholding tax on contracts.
This lack of synergy fuels inefficiencies and multiple taxation—raising collection costs and litigation cases. A notable 2023 ruling by the Supreme Court in Attorney General of Lagos State v. Eko Hotels & Anor reaffirmed that states could collect consumption taxes, creating further layers of complexity for businesses operating across multiple jurisdictions.
The Informal Sector Dilemma: Between the Law and Survival
Over 50% of Nigeria’s workforce operates within the informal sector. They trade in markets, operate one-man businesses, provide services, and exist outside traditional banking systems. The National Tax Policy (NTP) 2017 (revised) recognizes this group but offers few enforceable tools for engagement.
Efforts to formalize the informal economy—such as through Tax Identification Number (TIN) requirements and Bank Verification Number (BVN) integration—have met mixed results. The Finance Act 2022 empowered banks to request TINs before opening corporate accounts, but enforcement remains lax.
While some states like Kaduna and Ogun have launched digital tax platforms to capture market traders and artisans, many Nigerians still view taxation as extortion, especially when local government agents harass roadside traders or demand unofficial levies.
Agbeluyi’s point becomes even clearer in this light: if these taxpayers saw tangible benefits—solar streetlights, working water systems, waste management—they might volunteer themselves into the tax net rather than flee from it.
Can Digitalization Lower Collection Costs?
In 2021, the FIRS introduced TaxPro Max, an integrated e-tax platform meant to automate filing, assessment, and payment of taxes. While the platform recorded success in reducing paperwork and improving data security, technical hitches have persisted. Many taxpayers—especially SMEs—complain about poor user experience, system downtimes, and inadequate support.
Yet, digitalization remains Nigeria’s best shot at reducing the human interface that drives up costs and fosters corruption. According to a joint report by the World Bank and the Nigerian Economic Summit Group in 2023, automation alone could save Nigeria over ₦150 billion annually in tax administration costs—if implemented nationwide.
The legal framework must evolve to accommodate digital taxation realities. While the Cybercrimes Act 2015 and Nigerian Data Protection Act 2023 now provide the legal backbone for digital records and privacy, what remains lacking is harmonized integration across agencies—NIMC, CAC, FIRS, Customs, and CBN.
Governance and the Trust Deficit: The Unspoken Barrier
Perhaps the most crucial, yet intangible, factor influencing Nigeria’s high cost of tax collection is public trust. In most economies with high tax compliance, there’s a perceived value-for-money relationship. Scandinavian countries, often cited for their tax transparency, spend heavily on healthcare, education, and welfare—and citizens see it.
In Nigeria, corruption scandals—from misappropriated COVID-19 funds to inflated budget line items—erode public trust. The Fiscal Responsibility Act (FRA) 2007 demands prudent, transparent, and accountable management of public resources, but its implementation is weak.
State governments must go beyond compliance and adopt participatory budgeting—where communities help decide how public funds are used. Lagos and Ekiti have experimented with this model, though not without challenges.
The Office of the Accountant-General, in conjunction with the Budget Office, must also accelerate the rollout of Open Treasury Portals that clearly link tax revenue to spending outcomes in real-time. If citizens can “see” their tax money working, collection costs will fall organically.
Conclusion: Time to Rethink the Fundamentals
Samuel Agbeluyi’s message is simple, but it reverberates through layers of law, policy, and public sentiment: how we spend taxes influences how easily we can collect more. As Nigeria tightens its belt amid fiscal constraints, it must reimagine taxation not just as a tool for revenue, but as a test of government integrity.
The way forward demands political will, technological investment, and above all, a culture of transparency. From harmonized tax codes to inclusive governance, the tax system must shift from being a battleground to a bridge between government and governed.
For Nigeria, this is not just a fiscal necessity—it is a democratic imperative.
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