Many people in Nigeria do not pay tax due to a complex interplay of systemic challenges, a pervasive informal economy, and issues surrounding public trust and governance. A significant underlying reason is the inefficiency of the tax system itself in identifying and managing taxpayers. For any tax system to be effective, it must possess the capability to accurately locate potential taxpayers, precisely determine their income and subsequent tax liabilities, and provide convenient, straightforward mechanisms for them to make their payments. Nigeria's system often struggles with these fundamental aspects, leading to a substantial portion of the population remaining outside the formal tax net.
Key Reasons for Low Tax Compliance
Several factors contribute to the low tax compliance rates observed in Nigeria:
1. Systemic Weaknesses and Identification Gaps
As highlighted, the Nigerian tax system faces considerable challenges in efficiently identifying and tracking elusive taxpayers. This includes:
- Difficulty in Locating Taxpayers: A lack of comprehensive databases and integrated national identification systems makes it hard to pinpoint all eligible individuals and businesses.
- Challenges in Income Assessment: Verifying income, especially for those in the informal sector or self-employed, is difficult, leading to under-reporting or complete evasion.
- Cumbersome Payment Processes: For a long time, payment methods were not always convenient or user-friendly, although digitization is slowly addressing this.
2. Dominance of the Informal Economy
Nigeria has a very large and vibrant informal economy, where a significant portion of economic activities occurs outside official registration and regulation.
- Unregistered Businesses: Many small businesses, traders, artisans, and service providers operate informally, making it difficult for tax authorities to monitor their activities and assess their income.
- Cash-Based Transactions: A high reliance on cash transactions further complicates tracking income and enforcing tax obligations.
3. Low Public Trust and Accountability Concerns
A substantial number of Nigerians perceive a disconnect between their tax contributions and tangible public service delivery.
- Lack of Visible Development: Citizens often do not see taxes translate into improved infrastructure, healthcare, education, or other essential public services.
- Perception of Corruption: Widespread concerns about corruption within government institutions erode public confidence and willingness to pay taxes, as people fear their money may be embezzled rather than used for public good.
- Lack of Transparency: Insufficient transparency in how tax revenues are collected, managed, and utilized by the government contributes to cynicism and disincentives compliance.
4. Complexity of the Tax System and Low Awareness
The intricacies of Nigeria's tax laws and procedures can be daunting for the average citizen and even small business owners.
- Confusing Regulations: The tax codes can be complex, making it difficult for individuals to understand their obligations, available deductions, and filing requirements.
- Limited Tax Education: There is often a lack of widespread tax education and awareness campaigns, leaving many uninformed about the importance of taxation, their duties, and the process of compliance.
5. Socio-economic Factors
Economic hardship and high poverty rates also play a role.
- Prioritizing Basic Needs: For many struggling to meet basic needs, paying taxes might seem like an additional burden they cannot afford or prioritize.
- High Unemployment: A significant portion of the population is unemployed or underemployed, limiting their ability to contribute to the tax base.
Addressing the Challenges: Pathways to Improved Tax Compliance
Improving tax compliance in Nigeria requires a multi-faceted approach focusing on reforms and public engagement:
- Digitalization and Automation: Implementing robust digital platforms for taxpayer registration, assessment, and payment can significantly enhance efficiency and transparency. Initiatives like integrating national identity numbers (NIN) with tax identification numbers (TIN) are crucial for better taxpayer identification.
- Simplification of Tax Laws: Streamlining tax laws and procedures, especially for small and medium-sized enterprises (SMEs) and the informal sector, can make compliance easier and more accessible.
- Targeted Outreach and Education: Launching comprehensive public awareness campaigns can educate citizens on the importance of taxation, how taxes contribute to national development, and simplify compliance procedures.
- Strengthening Accountability and Transparency: Governments must demonstrate greater accountability in the use of public funds, showing tangible results from tax revenues and prosecuting cases of corruption to build public trust.
- Formalizing the Informal Sector: Developing simplified, tailored tax regimes and incentives for businesses in the informal sector can encourage their formalization and integration into the tax system. For instance, presumptive tax schemes can be effective.
- Enhanced Enforcement: While focusing on ease of compliance, there must also be credible enforcement mechanisms for those who deliberately evade taxes, ensuring fairness across the board.
By addressing these systemic, economic, and social factors, Nigeria can work towards a more effective and equitable tax system, fostering greater compliance and mobilizing domestic resources for sustainable development.
