Nigeria and other impoverished countries are urged by the IMF to explore the untapped potential of personal income tax

The International Monetary Fund has advised Nigeria and other developing nations to study the revenue potential of personal income tax and, if required, increase it.

This was uncovered in a new IMF study looking into the possibilities of expanding the use of fiscal instruments in developing countries with low wages.

Many governments seeking long-term economic recovery from the pandemic, according to the IMF, will need to raise significant quantities of money in the fairest manner feasible.

What the IMF has to say

"Low-Income Developing Countries (LIDCs) that improved their tax-to-GDP ratios relied on a broader set of tax instruments and not solely on the PIT," according to the IMF, "suggesting that a successful revenue mobilization strategy for developing countries requires a comprehensive approach covering a wider range of taxes."

Although some emerging economies have made gains, the Washington-based lender believes there is still an opportunity for development.

"Developing nations have made tremendous progress in implementing personal income taxes," according to the IMF.

"However, incremental adjustments have been taking place," the IMF stated. Income tax collection in low-income nations more than doubled in the two decades leading up to the pandemic, going from 1 percent of GDP to 2.1 percent, while emerging markets increased from 2.1 percent to 3.1 percent. These changes were reflected in the tax's share of overall tax receipts, which increased from 5% to 8% of total tax revenue in low-income nations and from 9% to 11% in developing markets."

According to the International Monetary Fund, the reduction in the size of the informal sector, as measured by the share of self-employed workers in the labor force and the share of agriculture in the economy, as well as increases in per capita income and the size of the public-sector wage bill, is driving the increase in personal income tax revenues.

Improvements in tax administration may also help boost revenue, although this is true of other taxes as well. Furthermore, the pandemic's accelerated transition to digitalized services may pave the way for greater income tax planning and enforcement.

According to the International Monetary Fund, taxes are vital for inclusive growth and should play a larger role in the economy. "If properly implemented and revenues judiciously spent," the IMF concluded, "income taxes can still be vital for inclusive growth." Our data, together with the history of the tax in mature economies, demonstrates that as countries progress, the personal income tax should become a more substantial source of revenue."

What you need to know

Nigeria collected N8.8 trillion in total taxes in 2020, resulting in a tax-to-GDP ratio of 6.1 percent.

In 2021, the Federal Inland Revenue Service (FIRS) earned N4.396 trillion in taxes from the non-oil industry, up from N2.507 trillion in 2017.

Due to the difficulty in obtaining dollars, Nigeria has permitted businesses with outstanding foreign currency tax bills to pay in Naira, allowing them to pay lower taxes.

In Nigeria, the Federal Inland Revenue Service (FIRS) has asked for a complete aggregate of revenues earned at the national and sub-national levels. The organization also examines the issues faced by Nigeria's "informal sector," which accounts for around 70% of all firms, as well as the reform alternatives available to bring them into the tax net.