Nigeria is using a system of tax credits to encourage private companies to share the cost of infrastructure projects as part of a drive to diversify Africa’s biggest economy away from its reliance on oil sales, the country’s tax chief said.
Tunde Fowler, executive chairman of the Federal Inland Revenue Service (FIRS), said in an interview on Wednesday that more than 10 local companies had applied for the scheme to receive 50% of expenditure in tax credits.
He also said Nigeria had a target to nearly double tax revenues this year from 2018 due to a surge of new payers following the end of an amnesty and the introduction of a new database that uses biometric data.
Africa’s biggest oil producing country has sought to diversify its economy away from crude sales, but has struggled to improve non-oil revenues as debt servicing costs rise.
And after Nigeria signed up to a new continent-wide free trade agreement in July, manufacturers have called for improvements to road, rail and power networks to compete with firms from across Africa.
Fowler said two companies had successfully applied to receive tax credits for infrastructure projects so far. One was part of the Dangote Group conglomerate, owned by the continent’s richest man Aliko Dangote, which will build a road under the scheme. He did not name the other company.
“It may reduce the amount of my collections initially, but … as I expand my tax net, I would make up for that reduction,” said Fowler. “We believe we would generate more revenues from the additional infrastructure that would be created.”
The tax credit scheme was signed into law, under an executive order, by President Muhammadu Buhari in January.
Buhari was elected for a second term in February, in part due to his vow to develop the country’s poor infrastructure that has stymied development for decades.
But he faces a challenge amid rising debt servicing costs. Nigeria spent 35% of government revenues servicing debt in 2016, when its economy entered a recession that it left the following year. Since then, it has taken on more local and foreign debt.
Economic growth slowed to an annual rate of 1.94% in the second quarter of this year, the statistics office said on Tuesday. The non-oil sector grew 1.64% and the oil sector 5.15%, though crude prices have fallen since then.
Fowler said 5.32 trillion naira ($17.39 billion) was collected in taxes in 2018 and his office was targeting 8.9 trillion naira this year.
He said the increase was possible because the number of tax payers was expected to jump to around 45 million this year from 20 million in 2018. That was largely due to the inclusion of people identified in a tax amnesty that ended this year.
Fowler said that change, coupled with a new database drawing on biometric data tied to bank accounts, had led to an improvement in compliance and collections in the first eight months of this year.
But Fowler’s targets, which he described as “ambitious”, may be hard to meet in a country of 190 million people where around 80% of the workforce is employed in the informal sector. That has hindered tax collection in the past.
Fowler, speaking at his office in the capital, Abuja, said a move to include value added tax (VAT) on all online transactions was expected to come into force in January 2020. He said e-commerce was, at present, a tax loophole.
“There are a lot of areas that are not yet captured,” he said.
Fowler added the current VAT rate of 5%, one of the lowest in the world, should be raised.
“I believe that Nigeria should review the VAT rate to 7.5%,” he said, though any such change would have to be implemented by the government.
$1 = 305.90 naira