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Taxation: A Two-way Social Contract

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2 years ago

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Dapo Okubanjo

It is the norm in every society, for the authorities and the people to have what is loosely referred to as a social contract or an implicit agreement.

It is a theory that is as old as humanity itself and it presupposes that a people’s moral and political obligation depends on an agreement among them.

Taxation is seen as one of those obligations that the citizenry in every country is expected to abide by, but in Nigeria this is one social contract that has for years been difficult to keep.

We are a country with the largest economy in Africa in terms of Gross Domestic Product (GDP) and at the last count, the size of Nigeria’s economy is way ahead of South Africa and even Egypt.

But in terms of GDP to tax revenue, the country is not among the performing countries of the world and does not even compare with the two African countries mentioned above. In fact the International Monetary Fund (IMF) has been concerned to the extent that it recently urged Nigeria to improve on its tax revenue which stood at 6% of its GDP as at 2022.

That has been the highest the country has done in recent years but the Federal Inland Revenue Service (FIRS) on the watch of Muhammad Nami, the Executive Chairman, said it plans to raise the tax revenue to GDP ratio to 17% this year.

On paper, this looks ambitious but the FIRS has in the last few years consistently surpassed old records and broken new grounds, so it may not be ideal to bet against the FIRS achieving a quantum increase in the country’s tax revenue.

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*Chicken or egg dilemma*

Paying tax is a chicken and egg situation in many parts of Nigeria. It is usual to hear arguments among Nigerians revolving around inadequate infrastructure or outright lack of it in their immediate communities.

But the truth is funds need to be in public coffers before these things could be done so the question of what comes first between citizens paying the necessary taxes as at when due or government putting up infrastructure and providing social amenities does not even arise.

An aspect of the argument that vexed citizens make against payment of taxes is that not much is visible in terms of social amenities and infrastructure after citizens have done their side of the social contract.

This may be true considering the President Muhammadu Buhari administration had in the past raised posers on what previous administrations had done with public funds based on what it met on ground.

But this is not enough to kick against tax payment especially at a time of dwindling revenue from crude oil. It is ideal for the chicken to be well fed before it could lay eggs.

And to put the issue in proper perspective, it is at a time of a global oil slump that the Buhari administration has been able to depend on other revenue sources and chief amongst these is tax revenue, to deliver so much.

It is through these taxes that government is able to fund road construction, bridges including but not limited to the Loko – Oweto Bridge and Second Niger Bridge, provide medical care (Primary Health Care Centres across the country), build schools and equip them with the necessary infrastructure.

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It is pertinent to me to also note that the interventionist fund TETFUND was able to disburse over N2 trillion in about 10 years to several tertiary institutions and this was made possible from the Tertiary Education Tax, which is 2.5% of the assessable profit of companies operating in Nigeria,

When the FIRS made its record breaking tax collection of N10.1 trillion in 2022, it attributed the feat to its internal revamp, its data-centric reforms, and its improved collaboration with all stakeholders including tax payers—emphasising that it recognizes the role that the citizenry plays in achieving its set goal.

And now that the agency has raised the bar in tax collection, the good job that the President Buhari administration is doing in ensuring that Nigerians see where their tax is going would be a further boost to FIRS target for 2023.

So it is absolutely necessary that Nigerians continue to keep their side of the social contract which taxation represents and government, whether the incumbent or the incoming, will have little or no reason to ensure that the people reap the necessary benefits in terms of provision of social amenities.

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Double-digit GDP growth necessary to achieve $1trn goal – UBA GMD

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6 hours ago

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April 15, 2025

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Group Managing Director, United Bank for Africa (UBA), Mr Oliver Alawuba, has said Nigeria requires a double-digit Gross Domestic Product (GDP) growth to achieve the projected one-trillion dollar economy target by 2030.

Alawuba made this remark on Monday in Abuja, at the ongoing 36th Edition of the Finance Correspondents and Business Editors Association of Nigeria Seminar, organised by the Central Bank of Nigeria (CBN).

The theme of the seminar is, “Playing the Global Game: Banking Recapitalisation Towards a One- Trillion Dollar Economy”.

He emphasised the necessity of institutional frameworks and government support for banks to invest in critical infrastructure that would foster accelerated growth of the Nigerian economy.

“We need to grow at double digits to get to one-trillion dollar in 2030. We need 10 per cent growth, which is achievable,” he said.

He noted that only 12 per cent of Nigeria’s GDP is represented by the total assets of banks, while other economies have over 70 per cent to 100 per cent.

According to him, this indicates a significant gap where banks can intervene and help mobilise deposits, resources, and capital, ensuring that other sectors benefit from the banking system.

“The plan so far is highly beneficial for the economy. Strong banks require strong profits. Strong banks are crucial for building the strong economy we desire.

“It’s important that banks remain profitable so they can build a very robust reserve to support the economy and the banks themselves.

“The opportunities in Nigeria are immense. Therefore, sustainability will not be a problem.

“This is because banks will now be able to raise, even with the capitalisation we have undertaken, sufficient capital to truly elevate this economy to the next level,” the managing director added.

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Alawuba also said the 50 per cent Cash Reserve Ratio (CRR) might be unsustainable for economic growth and urged its reduction, just as inflation rate was managed.

He highlighted the importance of security, financial inclusion and addressing infrastructure deficits in roads, ports and power.

He further stressed the need for tax incentives and a transition from a primary to a secondary economy to drive growth.

“We need an institutional framework and government support to invest in infrastructure and other areas to support the economy.

“A 50 per cent CRR is not sustainable if we are going to talk about the growth of the economy.

“I am happy that inflation is responding to the actions of the CBN.

“So, as the inflation rate comes down, we expect the CRR to come down,” he said. (NAN)

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GenCos Ask FG, Stakeholders To Pay N4trn Electricity Debt

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7 hours ago

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April 15, 2025

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The electricity power generation companies (GenCos) have warned that the over N4 trillion unpaid invoices owed by the federal government and stakeholders for electricity generated threatens their operations.

In a statement on Monday, signed by Sani Bello, chairman of board of trustees, Association of Power Generation Companies (APGC), the GenCos asked the federal government and key stakeholders to urgently address the issue.

According to the association, the issue is currently threatening the continued operation of their power generation plants.

“It is no more news that the power generation companies (GenCos) have continued to bear the brunt of the liquidity crisis in the Nigerian Electric Supply Industry (NESI),” the statement reads.

The association said they have made large-scale investments and have continued to demonstrate commitment by increasing capacities that align with their contract, spanning over 10 years.

The GenCos said expectations of being settled through external support such as “the World Bank PSRO has also been dampened due to other market participants’ inability to meet their respective distribution linked indicators (DLI), enshrined in the Power Sector Recovery Program (PSRP)”.

Moreso, they said the 2024 payment collection rate dropped below 30 percent, and “2025 is not any better, severely affecting GenCo’s ability to meet financial obligations”.

“Tax and Regulatory Challenges: High corporate income tax, concession fees, royalty charges, and new FRC compliance obligations are further straining GenCos’ revenue,” the GenCos said.

“Outstanding Payments: GenCos are currently owed about N4 trillion (N2 trillion for 2024 and N1.9 trillion in legacy debts). No possible solutions, including cash payments, financial instruments, and debt swaps, are in sight.

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“Budget Allocation Concerns: The 2025 government budget allocates only N900 billion, raising concerns about its adequacy to cover arrears and future payments.”

Furthermore, the group said that liquidity challenges are further worsened by the various policies introduced.

As a result of the policies, the association said “no one is under pressure to ensure GenCos invoices are fully settled”.

“The implication of this is that GenCos only get paid a portion of their invoices (9%, 11%) from whatever amount is left,” the association said.

The GenCos demanded immediate implementation of payment plans to settle all outstanding GenCos invoices.

“Reprioritization of payments under the waterfall arrangement to give full priority to a hundred percent payment of GenCos’ invoices as at when due. A clear financing plan to backstop the exposures in the NERC’s Supplementary Order to the MYTO and the DRO 2024,” the association said.

They also requested the provision of payment security backed by the World Bank and the African Development Bank (AfDB) to guarantee full payment to GenCos to enable them to meet their critical needs, ensuring adequate generation and expansion.

The GenCos urged the federal government to liberalise the market to create confidence and ensure the viability and creditworthiness of the power sector.

Also, the association demanded “full effectiveness of all market agreements, firm monitoring, and enforcement of the rules by the regulator on all market participants”.

In light of the severity of the issues, the GenCos requested that immediate action be taken to prevent national security challenges due to their failure to sustain Nigerians’ steady electricity generation.

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OPEC Cuts Global Oil Demand Forecast Over US Tariff Hike

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21 hours ago

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April 14, 2025

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On Monday, OPEC announced a slight reduction in its oil demand growth forecast, attributing the change to the effects of U.S. tariffs on the global economy.

In its monthly report, the Saudi-led organization now anticipates an increase in demand of 1.3 million barrels per day (bpd) for 2025, a decrease from the previously estimated 1.4 million bpd.

This “minor adjustment” was primarily influenced by data from the first quarter and the anticipated repercussions on oil demand stemming from the recently imposed U.S. tariffs.

OPEC projects that global oil demand will reach a total of 105.05 million bpd this year. Additionally, the organization has slightly revised its global economic growth forecast down to three percent.

The report noted, “While the global economy exhibited a consistent growth pattern at the start of the year, the short-term outlook is now faced with increased uncertainty due to the recent tariff-related developments.”

Last week, oil prices fell to a four-year low, dropping below $60 per barrel amidst concerns regarding the implications of President Donald Trump’s tariffs. However, prices saw a rebound on Monday, with Brent North Sea crude, the international benchmark, rising by 1.3% to $65.62 per barrel.

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