Mind Your Tax Affairs: Tax Policy Mix and Design (3)

On September 22, 2019 the Nigeria Extractive Industry Transparency Initiative (NEITI), issued a report stating that Nigeria earned N28.6trn as total revenue from oil and other minerals resources, income taxes, Value Added Tax and others, between 2012 and 2016. This clearly depicts a nation that is struggling to make ends meet.

South African earned N26.9trn (US$88.2bn) from taxes alone in 2017/18, while Nigeria earned N7.7trn (US$25.3bn) in taxes comprising Personal Income Tax, Companies Income Tax, Value Added Tax, Customs Collections and Other Taxes and Levies.

Tax Policy Mix is the major reason for the disparity in revenue generation between Nigeria being the largest economy in Africa with a Gross Domestic Product (GDP) of US$397bn with a population of 195.8million and South Africa being the second largest economy in Africa with a Gross Domestic Product of US$366.3bn with a population of 57.7million as at 2018.

Tax Policy Mix refers to the aggregate of the tax types and their contributions to the total tax revenue of a nation. The appropriate tax mix or structure optimizes revenue generation and tax-to GDP ratio. The tax-to GDP ratio of South Africa is 24.5%, while Nigeria is 6.1% as at 2018. The table below captures the tax policy mix of Nigeria and South Africa.

  Nigeria

2018

South Africa

2017/18

Personal Income Tax 12.1% 38.1%
Value Added Tax 14.2% 24.5%
Company Income Tax 54.5% 18.1%
Customs Collections 15.5% 4.1%
Other Taxes and Levies 3.7% 15.2%
Total 100% 100%

Countries with a high tax-to GDP ratio focus more on high earn individuals rather than companies. The top 1% individuals pay more tax that the bottom 90% individuals in South Africa. To optimize revenue, the focus should be to promote mega companies that would employ a lot of people, who will pay their fair taxes in form of personal income tax and Value Added Tax.

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