The challenge of taxing the informal economy – FBNQuest Capital Research

While the data on gross non-oil revenue collection for fourth-quarter (Q4) 2017 show some positive momentum on a year-on-year (y/y) basis, the authorities have far to go.

They will again be looking to oil taxes to cover a shortfall from the rest of the economy. For now, official figures indicate that just 214 people pay personal income tax (PIT) above N20million annually.

From a casual look at company financials and without making assumptions for what is due from the informal/unbanked economy, the local media has estimated that the figure should be several thousand.

A leading accountancy firm in Lagos has said that Value Added Tax (VAT) at the current 5percent standard rate should be yielding N2.5trillion per year, rather than the N970billion collected (gross) last year. Its figure assumes that consumption accounts for 80percent of GDP and that 50percent of consumption is subject to VAT.

The FGN is considering several initiatives to boost its take. These include making the sale of lottery tickets subject to VAT and capping the cash reimbursement of expenses at N50,000 per transaction.

The category for others covers the FGN’s independent revenue, the education tax, and customs levies at the port and on goods such as sugar and cement.

It is unclear where domestic recoveries and fines are captured in the CBN data. The local media has quoted the Economic and Financial Crimes Commission as telling the House of Representatives that its domestic recoveries in the 2017 fiscal year totaled N867billion.

The 2018-2020 Medium Term Expenditure Framework projects the FGN’s share of domestic recoveries at N374billion in 2018, and of other FGN recoveries at N138billion.