Taxation is a crucial part of any country’s economy, acting as the primary source of government revenue used for public goods and services. In Nigeria, the federal government faces significant challenges in tax collection, limiting its ability to harness the country’s full potential.

As Africa’s largest economy, Nigeria can generate substantial revenue from its vast population, diverse industries and natural resources. Yet the country’s tax-to-GDP ratio remains one of the lowest in the world. This article explores the reasons for the federal government’s difficulties in collecting taxes, examining structural, institutional, economic and social factors.

First, tax evasion and evasion: One of the most significant challenges to effective tax collection in Nigeria is tax evasion and evasion, both by individuals and businesses. Significant levels of tax evasion are prevalent in many sectors of the Nigerian economy, particularly in the informal sector, which accounts for a substantial share of the country’s economic activity. The informal economy, which accounts for about 60 percent of Nigeria’s GDP, often escapes fiscal scrutiny due to its unregulated nature.

Businesses operating in the informal sector are generally not registered with tax authorities and are difficult to trace, thus avoiding any formal tax obligations. In addition to the informal sector, large companies and wealthy individuals also engage in tax avoidance schemes. Through complex accounting techniques and offshore tax havens, these entities reduce their tax obligations, depriving the government of significant revenue. The Nigerian government has struggled to close loopholes in tax law that allow these practices, further complicating its ability to collect taxes effectively.
Second, weak enforcement and compliance mechanisms: A major problem hampering tax collection is weak enforcement of tax laws and low compliance rates. The Nigerian tax administration system, managed primarily by the Federal Inland Revenue Service (FIRS), suffers from inefficiencies in tax enforcement. Tax officials often lack the resources, capacity and technological tools to adequately track income, profits and transactions, leading to under-reporting and outright non-compliance on the part of tax officials. taxpayers. This weakness is aggravated by the beliefs imposed by tax laws. Many individuals and businesses do not fear punitive consequences for non-payment of taxes because the government has historically had a poor record of holding defaulters accountable. Additionally, corruption within the tax administration can sometimes lead to collusion of tax officials with taxpayers, further reducing the likelihood of fair and transparent enforcement.

Third, Multiplicity of taxes and complexity of the tax system: The complexity of Nigeria’s tax system is another significant obstacle to effective tax collection. The Nigerian federal government, alongside state and local governments, imposes a wide range of taxes, fees and levies. This multiplicity of taxes creates confusion among taxpayers, especially small businesses and individuals who may not fully understand their obligations.

The overwhelming number of taxes – some of which overlap – adds administrative burden to compliance and makes the process more cumbersome. Besides the number of taxes, tax codes are often complex and difficult for the average taxpayer to understand. The lack of clarity in tax laws and regulations gives rise to misinterpretations and abuse, whether intentional or not. This complexity also discourages voluntary compliance, as do many potential taxpayers who are discouraged by the difficulty of understanding and navigating the system.

Fourth, Corruption and lack of transparency: Corruption remains a pervasive problem in the Nigerian public sector, and the tax administration is no exception. The presence of corruption affects tax collection at several levels, including the assessment, collection and enforcement processes. Tax officials may exploit their position for personal gain by accepting bribes in exchange for reduced tax contributions or by ignoring non-compliance. This not only leads to revenue losses for the government, but also undermines public confidence in the tax system. The lack of transparency in tax administration processes further aggravates the problem of corruption. When taxpayers cannot easily access information about their tax obligations, how their taxes are calculated or how revenue is used, it leads to a sense of unfairness and fuels non-compliance. In such an environment, taxpayers are less likely to voluntarily pay taxes because they do not believe the system is fair or accountable.

Fifth, low taxpayer education and awareness: Taxpayer education and awareness plays a vital role in ensuring compliance and improving tax collection. In Nigeria, there is a significant lack of public knowledge regarding tax obligations and the importance of taxation to national development. Many Nigerians, especially those in rural areas and the informal sector, are either unaware of their tax obligations or do not fully understand the purpose of paying taxes.

This lack of awareness is partly due to the government’s insufficient efforts to educate citizens about taxes. Although the FIRS and other tax authorities have undertaken some awareness programs, these efforts have not been comprehensive or widespread enough to reach the entire population. As a result, many people remain unaware of the tax system, leading to lower compliance rates and lower tax revenues.

Sixth, Dependence on Oil Revenue: Historically, Nigeria has been heavily dependent on oil revenue to finance its public expenditure. The country is one of the world’s leading oil producers, and oil has accounted for a significant portion of government revenue for decades. However, this dependence on oil has created a budgetary imbalance, as the government has neglected to build a solid and diversified tax base.

Instead of prioritizing tax collection from other sectors of the economy, the government has relied on volatile oil revenues to finance its activities. In recent years, falling global oil prices and fluctuating Nigeria’s oil production have highlighted the risks of this over-reliance. With oil revenues dwindling, the government has been forced to turn its attention to non-oil revenue sources, including taxation.

However, the underdevelopment of the tax system, combined with the structural challenges mentioned above, has made it difficult for the federal government to quickly expand its tax base and increase revenues from other sectors.

Seventh, Insufficient Infrastructure and Technology: Effective tax collection requires well-developed infrastructure and the use of modern technologies to monitor economic activities and collect taxes effectively. In Nigeria, the tax administration system lacks adequate technological infrastructure, hampering the ability of tax authorities to track transactions, revenues and profits. Many tax processes remain manual and paper-based, leading to inefficiencies and errors in tax assessments and collections. The adoption of digital technologies and data analytics in tax administration has been slow, leaving Nigeria behind other countries that have modernized their tax systems. For example, the lack of a comprehensive and up-to-date tax database makes it difficult for the government to accurately assess the taxable base.

Additionally, limited use of electronic payment systems and online tax filing options makes it more difficult for taxpayers, especially in an increasingly digital world.

Eight, Political interference and policy inconsistencies: Political interference is another factor that complicates tax collection in Nigeria. Sometimes political considerations influence the administration of tax policies, with certain influential individuals or groups receiving tax exemptions or relief based on their political affiliations or connections.

This practice creates inequalities in the tax system and reduces overall revenue collection. Additionally, inconsistencies in tax policies and frequent changes in tax laws contribute to confusion and uncertainty among taxpayers. The lack of a stable and predictable tax environment makes it difficult for businesses to plan for the long term and meet their tax obligations.

Additionally, frequent policy changes can undermine efforts to improve tax compliance, as taxpayers may perceive the system as unpredictable and unfair.
Nine, Economic Challenges and Poverty: The broader economic challenges facing Nigeria also contribute to tax collection difficulties. The country has a large population living in poverty, with unemployment rates and income inequality remaining high. In such an environment, many people struggle to meet their basic needs and may not have the financial capacity to pay taxes. Attempts by the federal government to broaden the tax base and collect more revenue are often met with resistance from a population that feels overwhelmed by the economic challenges it faces. Furthermore, Nigeria’s economy has been hit hard by various crises, including oil price fluctuations, inflation and currency devaluation. These economic conditions reduce the tax revenue potential of businesses and individuals, as profitability declines and disposable income declines.

In conclusion, the Nigerian Federal Government faces significant challenges in tax collection due to a combination of structural, institutional and socio-economic factors. Tax evasion and evasion, weak enforcement, a complex tax system, corruption, insufficient taxpayer education, and over-reliance on oil revenues all contribute to these challenges. To overcome these obstacles, Nigeria must prioritize tax system reforms that improve transparency, efficiency and equity, while investing in the infrastructure and technology needed to support effective tax collection. Strengthening the tax base, improving enforcement and promoting a culture of compliance will be essential steps to increase government revenue and ensure sustainable national development.
Stephen wrote via (email protected)