Nigeria needs to ditch tax incentives and support true economic development

The International  Monetary Fund (IMF), recently said that Nigeria’s tax exemption/incentives are not needed for the economy now. This was made known in a press release summarizing the views of the executive board as expressed during its March 27, 2019 consideration of staff report that concluded the Article IV consultation in Nigeria.

“New tax exemptions—such as the recently introduced exemption on airlines—narrow the tax base and should be avoided,” said the IMF.

The warning comes a year after Catherine Pattillo, assistant director, fiscal affairs department of the International Monetary Fund (IMF), advised Nigeria to remove tax exemptions because the economy was still at risk. Nigeria loses billions of Naira every year due to exemptions/incentives given to companies in Nigeria. In 2018 alone, Nigeria lost about N89.5 billion ($248 million) from Dangote Cement only due to the tax incentive given to Dangote Group.

Why Nigeria took such decision

According to Nigeria’s Minister of Industry, Trade and Investment, Okechukwu Enelamah, the government put tax incentives in place to attract and encourage investments into the critical sectors of the economy with hopes that this will significantly impact development and deliver key benefits to the country.

One of the incentives in Nigeria, the Pioneer status incentive, is a tax holiday which grants qualifying industries and products relief from the payment of corporate income tax for an initial period of three years, extendable for one or two additional years.

So far, about 99 industries and products have been listed as being eligible to getting this tax holiday and they include mining and processing of coal; production, processing and preservation of meat/poultry and tanning and dressing of leather.

In the manufacturing sector, starches and starch products; processing of cocoa; animal feeds; leather footwear, luggage and handbags; household and personal hygiene paper products and paints, varnishes and printing ink; plastic products (builders’ plastic ware) and moulds are eligible to getting tax holidays.

Others included in manufacturing are batteries and accumulators; steam generators; railway locomotives, wagons and rolling stock; metal-forming machinery and machine tools, machinery for metallurgy, machinery for food and beverage processing; machinery for textile, apparel and leather production; and machinery for paper paperboard production.

Since 2017, A total of 45 companies have benefited from this tax holiday including Dangote Cement  Plc, Egbin Power Plc, Sumo Steel Limited, Indorama Eleme Fertilizer Chemical Limited and Stallion Motor Limited.

It is strange that a country like Nigeria is giving tax holidays to companies as big as Dangote Cement when it is in need of more money to grow its economy.

Although, tax incentives can help build economic value, but it is best targeted at research and development or to encourage the reallocation of capital to new industries, such as renewable energy, that have broad benefits. But what new economic value is created when tax incentive is simply to entice a large firm to start a new product line or invest an existing industry?

Tax incentives are not the only means to attract investors. When investors look out for countries where it is easy to run their businesses, tax incentive, while desirable, is never a top consideration.

Address Nigeria’s infrastructural challenges, bureaucratic bottlenecks and corruption, and Nigeria would easily be one of the best destinations for investment. Apart from having the largest population in Africa, it is also blessed with abundant natural resources such as oil, gold, bitumen, copper, among others. The country also boasts of having large fertile arable land for agriculture. If these resources are harnessed, it would help bring required growth.

According to a PWC analysis, Nigeria could be the fastest growing economy by 2050 if it can diversify its economy away from oil and strengthen its institutions and infrastructures.

Rather than giving these incentives to lure investors into the country, Nigeria needs to focus on resolving major issues anathema to investment and plugging revenue leakages.

According to the IMF, Nigeria needs comprehensive tax reform and a high political commitment in order to help reduce the revenue leakages in the country. This can be done through tax policy which will include an increased compliance monitoring of tax incentives, broad-based use of excise, a comprehensive Value Added Tax (VAT) reform in line with technical assistance and aggressive removal of tax exemptions/incentives, which instead should be rule-based.