Personal Income Tax (PIT) revenue in Nigeria has remained low and is very insignificant when compared to the country’s Gross Domestic Product (GDP). The PIT-to-GDP ratio of the country, over the last decade, has been less than one percent.
Personal Income Tax became a source of revenue for governments before World War II. It has, over the years, contributed a sizable share to the GDP of advanced countries, contributing approximately nine percent of the GDP of advanced countries.
However, in most developing countries, PIT collection has been low and considered in their developing stage. Overall contribution of PIT of developing countries is less than 2.5% of the GDP. This is due mainly to the narrow tax base adopted by these countries.
Generally, tax revenue collection in developing countries is low. Across Sub-Saharan African countries, Nigeria’s tax revenue-to-GDP is the lowest. While the region has an average of 16.6%, Nigeria’s ratio is 6% at the bottom, while Tunisia has a 34.3% average, leading the region.
Analysis shows that tax revenue focuses predominantly on Value Added Tax (VAT). The African region had the highest average among other regions globally, generating VAT of 29.7% of total tax revenue collected compared to other regions.
In Nigeria, tax revenue collection is tilted more towards VAT and Company Income Tax (CIT). Data on tax revenue collection in the country over the last five years shows low PIT collection compared to other types of tax. The difference between Nigeria’s PIT, VAT, and CIT revenue is pronounced. CIT makes up most of the country’s tax revenue in terms of hierarchy. The total collection only dropped below VAT in 2020. VAT follows, and PIT takes up the rear with a difference of not less than N320 billion.
The performance of PIT contributions in developing countries shows that there is much more room for improvement as its contribution has improved over the last years. Its contribution to GDP in developing countries has increased above 3% in the last few years.
In Nigeria, the amount generated has increased from N294.56 billion in 2015 to N669.22 billion in 2018. Though it dropped to N202.89 billion in 2019, it increased in 2020 to N851.73 billion, the highest generated within the last decade.
There exists a great potential for Nigeria to increase its PIT collectibles. The prevailing characteristics of the economy and PIT coverage in the country mean there is room for PIT to grow.
The informal sector is significant in the Nigerian economy accounting for 65% of the country’s economy. A survey shows that the sector accounts for about 90% of new jobs in the country, about 80% of all non-agricultural employment, and about 60% of urban jobs created.
However, the people that make up this sector are mostly not captured in the PIT system, and generally, tax collection from this sector is low.
As reported by the tax office in the country, there are only 41 million taxpayers in the country, which is just a small fraction of the country’s population, estimated at 234 million. Only 17.5% of the Nigerian population are taxpayers.
Reports show that 98% of the informal sector pays some kind of tax. However, this tax is paid to non-state actors and, as such, does not reflect in the country’s revenue collection.
The International Monetary Fund (IMF) recognizes Nigeria’s comprehensive tax design but notes that its narrow coverage is the limit to improving PIT collection. It, therefore, recommends an expansion in PIT coverage to increase its total collection across the country.
Increasing PIT base by incorporating the informal sector and capturing the entire formal sector into both PIT and general tax systems will increase Nigeria’s tax generation and income, although things that amount to double taxation, such as tax payments to non-state actors, have to be dealt with to discourage tax evasion.