VIEW: Reforming government revenue collection process: Functions of revenue agencies



Revenue refers to all receipts the government gets, including taxes, custom duties, revenue from state-owned enterprises, capital revenues and foreign aid.

Nigeria operates a federal political structure and has three tiers of government; Federal Government, State Governments and Local Governments.

The Nigerian federation comprises the Federal Government, 36 State Governments and 774 Local Governments.

Each tier of government has functions specified in the 1999 Constitution of the Federal Republic of Nigeria.

The Constitution also grants taxing powers to the various tier of government through which needed revenue can be raised to meet the assigned responsibilities.

Executives at various tier of government are expected to put in place appropriate legal and institutional framework to collect revenue in line with provision of 1999 Constitution as a result, at the Federal Level we have Federal Inland Revenue Service, Nigeria Custom Service, Nigeria Immigration Service, Nigeria Port Authority etc., the States have Boards of Internal Revenue and various Ministries, Departments and Agencies assigned with the responsibility of collecting revenue due to the State. Likewise, Local Governments collect rates and levies through suitable administrative structure.

Revenue Authority refers to Agency of Government at any of the tiers of government responsible for Assessing, Collecting and Accounting for revenue accruing to that tier of Government.

However, greater emphasis will be on Federal Inland Revenue Service (FIRS) and States Board of Internal Revenue. (SBIR)

Recent trend in revenue administration in Nigeria

Faced with fluctuating revenue from statutory allocations, governments across the three tiers are developing and implementing strategies to increase IGR in order to meet recurrent and capital expenditure, and rely less on borrowings at prohibited cost.

Most of the reform efforts are rightly targeted at the institutions responsible for collecting revenue. The principal reason for failure of most reform initiatives is usually over concentration on the quantum of revenue that could be raked in within the shortest period possible, instead of holistic evaluation of the RA’s external environment and Administrative structure.

The performance, complexity, resource requirements and strategy of the RA depends, to a considerable extent, on the economic environment in which it operates.

In other words, most of the reform efforts take care of the Cart (institutional framework) and ignore the Horse pulling the Cart (the external environment).

Domestic Revenue that could be mobilised depends on the Economy i.e. IGR is derived. Therefore, in order to understand the reasons for poor performance of the RA, we might first look ‘outside the box’, beyond the organizational boundaries of the RA, and analyse the impact of important environmental influences on its performance.

The economic environment

The amount of Domestic Revenue that could be mobilised in an economy varies according to changes in GDP, interest rates, exchange rates, consumer confidence and business cycles.

A high degree of openness of the economy raises knotty issues of international taxation, such as transfer pricing, tax arbitrage and origin or completion of taxable transactions in foreign jurisdictions.

High levels of inflation increase the propensity of taxpayers to delay payment of taxes.

Lack of formality in economic transactions, unreliability of business records and low levels of literacy make enforcement of tax laws difficult.

Assuming all other factors are constant, an economy with a GDP of $500 million will generate higher revenue than the same economy with GDP of $400 million.

Also, in a situation of drop in GDP, the amount of revenue that could be mobilised will also drop.

Furthermore, the degree of informality in an economy will determine the amount of Domestic Revenue that can be mobilized efficiently and effectively within the economy.

A case in point is VAT. One may ask to what extent will the FIRS be able to raise appropriate revenue from VAT on electronics products given the high level of informality within the electronics market in Nigeria.

How does FIRS trace the transactions of operators in Alaba International Market and Computer Village in Lagos for imposition of appropriate Taxes? Considering the degree of informality, can the Chairmen of Lagos State and Oyo State Internal Revenue Services collect appropriate Personal Income Tax from market women in Apongbon and New Gbagi Markets respectively?

Despite having higher GDP than South Africa, our Tax to GDP ratio is lower than that of South Africa; one of the principal reasons is the size of the informal sector in our economy. One way to enthrone sustainable IGR is to formalise the informal sector, which certainly is outside the purview of Revenue Authorities.

Fiscal policy and revenue forecast

Fiscal policy defines the agenda for the RA. The level of budgeted government spending, debt financing and fiscal deficit determine the amount of taxes the RA is expected to raise. Expansionary fiscal policies, high levels of national debt and debt servicing requirements, or fiscal crises create strong pressures on the RA to collect more taxes. They also create opportunities for mobilizing political support for efforts to modernize the RA.

Properly articulated revenue forecast which mirrors the key external factors provides a needed platform for reform and evaluation of the institution responsible for revenue collection.

In Nigeria, revenue forecasting is perhaps the weakest link in the chain between tax structure and revenue collected.

In some states, the forecasting exercise is done by a few individuals in the Ministry of Finance or Budget and Economic Planning, who simply increase last year’s forecast or actual tax collections by next year’s assumed growth rate.

In other instances, next year’s budget expenditures are estimated through call circulars to all the Ministries, Departments, and Agencies.

Expected borrowing and deficit financing are subtracted from total estimated budgetary expenditures, and the remaining amount is assigned to the Revenue Agency as next year’s revenue targets.

A revenue target without any basis or link to the state of the economy destroys the integrity of the tax system.

Revenue forecasts based on sound verifiable factors and data is a useful benchmark for monitoring collection, stimulating effort, and measuring the performance of RAs.

Public agencies

The RA is usually dependent on a number of public agencies, such as the Police, Customs, Immigration, the Attorney General and other MDAs for executing its functions.

The quality and timeliness of assistance provided by these agencies has a major impact on the RA’s performance.

Further, access to information about taxable transactions available with other government agencies is crucial for monitoring taxpayer behaviour and investigating tax evasion. Most of the MDAs render services that have a bearable influence on IGR.

Unfortunately, rather than cooperate with RA to raise the state’s IGR profile, they see the RA as irritating and meddlesome resulting in monumental loss of revenue to the state. Relevant data that could assist in profiling tax payers exist in different silos, not connected.

The legal framework

Tax laws make tax policy enforceable. Wrong translation of policy into law might result in complicated tax laws which become difficult to implement and create fertile ground for inventing interpretation that favours tax avoidance.

This might also lead to unending legal issues at huge cost to the Revenue Agency. Most of our revenue laws are simply archaic and outdated.

Tax Laws define the powers that revenue authority can exercise to enforce the laws. Weaknesses in the power to collect information about taxpayer transactions, take coercive action to gather evidence of tax evasion or collect tax arrears, and impose penalties for noncompliance have a telling effect on the overall effectiveness of Revenue Agencies.

For instance, no state can initiate and execute a criminal process against individuals that failed to pay Personal Income Tax unless the Attorney General of the Federation grants/ transfers such power to the state.

Current trend in technology and impact on revenue administration

Currently, certain technologies are all having a huge impact on tax administrations. Taken individually or together, these trends have the power to increase taxpayer satisfaction, empower tax agency employees, optimize operations and modernize services.

These trends include Big Data, Analytics, Artificial intelligence (AI), Machine learning, The Internet of Things (IoT), Mobility and cloud computing

Globalisation and digitisation

There is an increasing recognition that digitalization and the exploitation of digital data have the potential to revolutionize the operation of economies well beyond the minor disruption seen so far.

Digitalization is affecting not just how goods and services are produced and consumed but also the very goods and services that are required.

With the development of virtual and crypto currency technologies, new business models are blurring the distinctions between traditional forms, and challenging the fundamentals of taxation while they are at it. The digital economy is leading to a brave new future in which it is increasingly difficult to assess the point in the supply chain at which value creation actually happens.

Evaluating revenue agency

During the period of implementing new structure, process and procedures that are fundamental for sustainable IGR, the quantum of revenue collected might not increase exponentially.

Sustainable revenue is a marathon and not a short distance race. In order to properly evaluate RA’s institutional framework, the authors of World Bank Technical Paper No 472, A Diagnostic Framework For Revenue Administration, rightly suggest 5 years’ trend analysis of (i) Total revenue collected / Annual revenue collection target, (ii)Total revenue collected /GDP, (iii)Tax gap= 1- total revenue collected/ Potential revenue ,(iv) Number of tax declarations filed / Number of registered taxpayers,(v) Number of tax declarations received on time / Total number of tax declarations filed, (vi)Amount of taxes paid voluntarily by taxpayers / amount of taxes payable on the basis of the declarations,(vii) Additional taxes assessed after investigation and audit / tax liability declared,(viii) Amount of additional assessed taxes upheld in appeal / amount of additional assessed taxes in appeal,(ix) Amount of additional taxes collected / additional taxes assessed,(x) Amount of arrears recovered / total amount of tax arrears at the beginning of the year,(xi) Number of cases of taxes evasion, , (xii)Perception of taxpayer regarding, Risk of detection of non-compliance and severity of consequences,(xiii) Quality of assistance provided by the RA to enable taxpayers to comply with the obligations,( xiv)Effectiveness of the RA in resolving taxpayer problems ,(xv) Public perception regarding the degree of corruption in the RA(xvi), RA morale and self-image(xvii) Number of taxpayers/ number of RA employees and (xvii) Administrative costs/ Total revenue collected.


Given that over the years’ revenue administration in Nigeria has witnessed commendable reforms, however, the Tax to GDP ratio is low compared with similar economies. This is due majorly to incoherent approach to revenue generation by different agencies of government, restrictive legal framework for revenue generation, lack of robust and reliable taxpayer database, high level of tax evasion by a good number of taxpayers, low compliance by the informal sector, lack of effective revenue collection mechanism and enforcement.

It is incumbent therefore that while the reform efforts focus on Revenue Generating Agencies and processes through deployment of appropriate technology, harmonization of revenue, collaboration amongst various government agencies, data integration, right legal framework; the external environment must be given serious consideration and effects built into the reform programme. Failing which, the reform will not achieve the desired results.

. Alli, a former chairman of the Oyo,Osun States boards of internal revenue, writes from Lagos.