Don’t let the Nigerian oil crisis go to waste

03/02/2016

by Charles Laurnce and Oke Millett

Only $50m in tax was collected by the Kaduna State in 2014; the state’s GDP was $10bn. Low tax payments are the result of decades of relying on the federal allocation of oil revenue to meet its outgoings. Now that oil prices have dropped by 60% in the last three years, Kaduna and other states across Nigeria are in the red – a legacy of dependence on Nigeria’s black gold is finally catching up. Not only is it time to get the tax system working, but it’s a chance to use technology and data to track and grow Nigeria’s future.

Formerly a bustling commercial centre, Kaduna has faded in recent decades with cheap smuggled textile imports dominating industry and, more recently, bloody insurgencies by extremist groups have left the state tired. The price of oil exacerbates the greyness. In Kaduna’s quiet revenue registration office, a handful of traders and other small business owners wait patiently to register and receive their tax IDs. The link between them and the state’s huge deficit may seem distant, but on their handwritten registration cards is information that, in the long-run, provides a more transparent income.

Moving out of manual

Tax as state income is nothing new, but the systems to ensure this income is efficiently collected can be radical. Moving governments from manual to automated systems requires simple “off the shelf” tax automation tools – software installation and development, upgrading of IT infrastructure and training IT-savvy staff. These tools can streamline the application process and make it possible to register and pay taxes within just 48 hours. A drastic improvement from multiple lengthy trips to the revenue office.

Without the incentive to register as tax payers, patterns of unregistered businesses staying outside the formal economy have skewed growth projections. In Papua New Guinea, around 4,000 new taxpayers were registered from 2012-2013. Small software installations and policy changes, which created client-facing and friendlier services, enabled the government to collect data and cross-check tax registrations with other financial regulators. The Central Bank of Papua New Guinea has worked with regulators to ensure all new business accounts opened at any commercial bank require tax registration documents.

The results speak for themselves – now nearly 3,000 taxpayers a month are being registered and this influx of new taxpayers gives the state the opportunity to engage taxpayers as they begin to conduct business. Interactions between the state and citizen are transparent and they are now accountable to each other.

The state and citizen relationship

The oil crisis has forced the Kaduna state to look for alternative sources of income and the impetus to improve the tax system has revealed itself. High oil revenues have left both the state and citizen separated by a curtain as opaque as oil. Those waiting in line are helping forge a new relationship between the state and citizen to make the government more accountable for its performance in reducing poverty and providing the key welfare services that a higher state income can provide. In a country where 33% of the population live below the poverty line, salaries are going unpaid and the limited services that were provided are being cut – we are now in a state of emergency.

Both taxpayers and government officials benefit from the reduced cost of compliance, reduced inaccuracies and the cut in lengthy delays and in time, it may help to build citizens’ trust in their government’s ability to provide services and improve the social contract between the state and its people.

The quiet revolution

From handwritten to digital, tax IDs can become more than a system for traders to log and pay taxes, it is a footprint of transactions fundamental to projecting state income and budgets, patterns of employment and the possibly of creating and growth with better accuracy and less oversight.

Those in line are unknowingly the first wave of a quiet revolution. According to the now familiar saying, one should ‘never let a crisis go to waste’; administrations across Nigeria need to seize the opportunity that the current crisis presents.

Adam Smith International has worked with the governments of Afghanistan, Burundi, Liberia, Nigeria, Papua New Guinea, Sierra Leone, Somaliland and Zambia to help automate their tax administration systems