The Senate recently recommended that the Federal Government consider increasing taxes on luxury goods in a bid to boost revenues. It did so while approving the Federal Government’s medium term expenditure plans for 2019-2021. In the proposed expenditure plan for 2019, the Senate approved a total expenditure of ₦8.83 trillion (US$24.5 billion) which is in line with what is contained in the 2019 budget.
The expenditure is expected to be financed by ₦6.97 trillion (US$19.4 billion) of proposed revenue and assumes a deficit of ₦1.86 trillion (US$5.2 billion). Revenues are based on the assumption that the government will be able to sell 2.3 million b/d of crude oil at an average price of US$60 a barrel in 2019 as well as taxes on non-oil activities.
The government’s challenge is the very low tax base and resultant collection rate. Oil revenues or oil based taxes account for as much as 70% of revenues and whenever oil prices or production fall below the projected rate the government suffers disproportionally greatly. In 2018, the government was only able to collect about 55% of its projected revenues.
In the last three years, government revenues have always fallen significantly below its projections. The IMF recently noted that Nigeria’s tax-to-GDP ratio remains one of the world’s lowest at just about 6% of GDP. Finance Minister Zainab Ahmed has proposed an increase in Value Added Tax (VAT) on the consumption of goods and services but the Federal Inland Revenue Service (FIRS) issued a statement on 21 March denying any plans to increase VAT. Nigeria’s 5% VAT rate is one of the lowest globally: by contrast it is 12.5% in Ghana, 15% in South Africa and 16% in Kenya. The proposal to increase taxes on luxury goods is nothing new and has been around since the Goodluck Jonathan 2010-2015 administration when then finance minister, Ngozi Okonjo-Iweala, put forward a similar proposal. No move has been made on it since then.
Fear of a political backlash is preventing the government from making these difficult but necessary decisions even as it is obvious that its earnings need a significant boost from new sources of taxable income.