How can the government increase tax revenue?

Aug 23, 2022|Gbemisola Alonge

Did you know that 12 out of 33 Nigerian states have a monthly per capita income above ₦30,000? So, if you're selling something that isn't a mass-market product, few Nigerian states would qualify as an attractive market because the residents don't earn enough.

Key takeaways:

Nigerian states currently struggle to earn taxes internally. The average income in at least 21 Nigerian states is below the income tax liability threshold, making them heavily reliant on the federal government for revenue.
To improve its non-oil revenue, the federal government has increased tax rates on corporate and consumption taxes. However, increasing tax rates does not always equate to increased tax revenue; sometimes, it even reduces tax revenue.
Therefore, the government must attempt to implement efficient tax administration by setting up a reliable tax structure and implementing fiscal discipline (transparency and accountability) in how taxes are spent.

This data point is not just bad news for companies that want to expand across Nigeria; it is not favourable for the governments of these states too. One of the critical ways governments earn money is through taxes generated from the incomes of the people living in the states. If a state is filled with rich people, governments can generate substantial tax revenues, but if a state is filled with people struggling to make ends meet, the government will generate very little in taxes.

Even worse, the liability threshold for income tax administration is ₦30,000. That is, states can only tax incomes higher than ₦30,000. So, anyone whose basic income is ₦30,000 or less won’t be taxed. This threshold allows people to set aside a portion of their income for consumption and exempts people earning a minimum wage from being taxed.

Personal income tax is the major source of internally generated revenue for most Nigerian states. This means the ability to extract revenue from their population is low, leaving many states to rely on federal government revenue allocation—mainly taxes from crude oil sales, consumption and trade taxes.

However, if you have been keeping