Tax system in Nigeria: issues and challenges

Tax system in Nigeria: issues and challenges

Every adult Nigerian with a job probably knows about the Nigerian tax system. Many of them are also aware that it is far from perfect. Today, we will be talking about the tax system in Nigeria and its many faults. Find out about all that is wrong with the Nigerian tax policy.

Tax system in Nigeria: issues and challenges

Quick overview of tax in Nigeria

Before we jump right into the issues of the Nigerian system, it would be helpful to review it.

Tax is a mandatory financial charge that every taxpayer (be it a working individual or a company) has to pay. In Nigeria, the organisation that deals with tax administration and collection is the Federal Inland Revenue Service, often regarded as FIRS.

The tax legislation has been constantly amended and modified. According to the most recent legislation, here are the tax bases and their relevant taxes:

  • Individuals (Personal Income Tax; Development Levy);
  • Corporate entities (Companies Income Tax; Petroleum Profits Tax; Education Tax; Technology Levy);
  • Transactions (Value Added Tax; Capital Gains Tax; Stamp Duty; Excise Duty; Import Duty; Export Duty);
  • Assets (Property Tax, etc.).

As you can see, there are quite a lot of taxes, and most people/taxpayers are only aware of about half of them. This begs the question: why does the system have to be so complicated? What other issues does it have? Let’s talk about that.

Main issues and challenges of taxation in Nigeria

Tax system

READ ALSO: How to calculate Personal Income Tax in Nigeria

The current taxation system in Nigeria has achieved its modern form through various changes in the tax laws and policies. The main goal behind these changes was to create a more efficient and effective way of administering and collecting taxes.

Among such changes were the introduction of TIN, which stood for Taxpayer’s Identification Number, or the launch of an automated tax system that enhanced the ability to track the challenges and positions of every individual taxpayer. There was also the initiation of an e-payment system for paying taxes that made the payment procedures much smoother, creation of luxury taxes and many others.

Even after introduction of these changes, and because of the fact that tax laws in Nigeria are subject to constant revision, the tax system is still faulty. The attempts to simplify main provisions and revoke obsolete ones did not work out quite as expected.

Tax system issues and challenges

Here are the most pressing challenges that Nigerian tax system is currently facing:

1. Multiple taxes with similar tax bases

As we have mentioned before, there are a lot of taxes in Nigeria for both individuals and companies. This poses a big issue, as there are just too many taxes to deal with. Apart from that, companies also have to deal with multiple agencies apart from those required by the constitution.

What we have also mentioned is that many of the taxes have common tax bases. For instance, both Company Income Tax and the Education Tax are based on companies’ income. This means that it would be much easier to combine several taxes or remove some altogether.

In order to deal with this problem, the government should list, delineate and strictly adhere to an approved catalogue of taxes.


2. Improper tax administration

Many Nigerian MDAs (which stands for ministries, departments, and agencies) suffer from a lack of staff, funding, tools and facilities to provide proper services to the ever-growing taxpayer needs. Many of the tax collectors might seem unwilling to do their job properly because they are underpaid and overworked.

In addition to that, it has been said that most members of the staff often do not have the most recent and relevant information about any tax law changes. They do not receive necessary advancement training that would allow them to deal with taxpayers’ issues.

However, this problem can be easily remedied. The best way to go about it is to educate both the citizens and the government staff on the topic of taxation. When taxpayers understand what they have to do, they are more willing to pay taxes. Making the taxation rules much clearer, simple and more concise also helps to improve the situation with tax payments.

glasses and calculator

3. Tax refunds

Even though the tax laws have specific provisions (taking into account the 2017 FIRS Establishment Act on tax refunds), they are not exactly functional right now. FIRS (or the government) should have a separate fund compiled of collected taxes that will allow them to pay tax refunds.

The FIRS Act has a clause that obligates the authorities to repay the taxes during the 90-day period, but it says nothing about penalties for noncompliance. Tax authorities should be interested in repaying the taxpayers their tax returns. Otherwise, they should be penalised for not doing so.

4. Tax administering issues

Governments of different levels have trouble deciding on who is supposed to administer some taxes. For instance, the Federal Government and the government of Lagos State cannot choose which one of them is responsible for administering the Value Added Tax. This issue can be solved by introducing an appropriate and clear legislation that assigns the responsibility to one of the governments.

Tax system in Nigeria

5. Failure in prioritising tax efforts

The way the revenue allocation in the country works does not encourage tax efforts. It is fixated on such things as the states’ population, education, internally generated revenue, land mass and many others. This method of doing things does not encourage an active revenue drive. Instead, it makes all levels of government rely on the unstable revenue of oil and petroleum production.

In order to deal with this issue, there should be an incentive for states to get more revenue through taxation.

Even though the tax system in Nigeria has gone through many important and useful changes, there is still much to do. The way things are handled right now are unacceptable. Tax collection should be effective and fair. Taxes should be an instrument of development and growth and not a source of pain for the citizens. We hope that the taxation system in Nigeria can and will improve in the foreseeable future.

READ ALSO: How to calculate PAYE in Nigeria?


Mailfire view pixel