Sewing hair extensions to the plaits on a middle-aged woman’s head, Nigerian hairdresser Bridget Okoidegun is not sure how much tax she pays — something the government plans to change.
The owner of a small salon in Lagos could soon find herself on the hitlist of officials who have started cracking down on the small traders who account for almost half of Africa’s biggest economy but don’t pay taxes.
President Muhammadu Buhari wants to squeeze the sector to boost tax revenues by 33% this year to offset a slump in oil revenues that has plunged Africa’s top crude producer into its worst crisis for decades.
Authorities in Lagos, a city of 21-million where one-room businesses are everywhere, are sending officers out on street patrols to register entrepreneurs and make them pay tax for the first time.
But the case of Ms Okoidegun, who employs four stylists and charges customers up to 5,000 naira ($25) a time, shows the challenge they face. As few Nigerians benefit from the country’s oil wealth, most entrepreneurs spend what they earn in order to survive and do not keep accounts.
“I don’t really know how much I make,” the 46-year-old said, raising her voice above the noise of the generator that keeps the fan turning overhead.
“Any money I make, either I use for school fees or usually to take care of one thing or another,” said the mother-of-four.
As for taxes, she said they were supposed to be part of the 800,000 naira ($4,000) she pays her landlord every year.
To hammer home the message of change, Lagos state — which generates a third of Nigeria’s $500bn GDP — has set up a special court to try those chased down by a new “Rapid Tax Prosecution Unit”.
Large firms have begun receiving phone calls from officials demanding tax returns. The Federal Inland Revenue Service (FIRS) has used full-page newspaper adverts to warn that companies that fail to file will be punished after April 1.
“Prosecution and jail term for defaulting tax payers will be a tool that we will be actively using,” Lagos state attorney general Adeniji Kazeem said. “Tax officers … will be very aggressive.” As a result, Lagos state tax collections rose by 12% in January, officials say. For 2016, the government has set the FIRS a tough target of raising 4.95 trillion naira ($25bn) in taxes, up from 3.73 trillion last year.
“Really, there is no room for failure. Please ensure you deliver,” Finance Minister Kemi Adeosun told tax officers in February. “The nation will depend on FIRS to fund the budget.”
GPS to track firms
Mr Buhari appointed Babatunde Fowler head of FIRS after he proved an effective tax chief in Lagos, where in the four years to December 2012 monthly tax revenues surged by 70%. But tracking down small businesses is hard. Ms Okoidegun’s salon is a converted living room with three chairs placed in front of mirrors and walls adorned with synthetic and human hair for sale.
The streets outside, in the upmarket Victoria Island district, are filled with similarly makeshift enterprises beyond government control, from roadside eateries and fruit stalls to motorcycle taxis weaving through traffic.
In 2015, Nigeria had 37-million informal sector businesses which employed 60-million people or 84% of the workforce, said Yemi Kale of the National Bureau of Statistics.
His officers use GPS technology to map shops and other small firms street by street to help direct tax officers. But stricter rules may not be enough to increase tax revenues.
“Formalising the sector requires offering incentives to them to enter the formal system and pay taxes,” said Kale, citing the example of farmers being given fertiliser and other subsidies if they register their business and pay taxes.
To encourage cooperation, Mr Buhari’s government plans an “enlightenment” campaign to persuade small-scale entrepreneurs of the importance of paying tax.
The tax problem is not new. Under Mr Buhari’s military administration in the 1980s a poster in a government office urging people to “Join the good Nigerians, pay your taxes” was defaced by somebody who had crossed out the “s” in Nigerians.
For the future, Nigeria must get a grip on tax and the informal economy to avoid jeopardising its credit rating.
In 2014, Nigeria overtook South Africa as the continent’s biggest economy. But two years on parts of the economy are drifting off the official books.
A dollar shortage has forced firms onto the black market to find hard currency to fund imports, pushing transactions outside the banking system and beyond the reach of tax authorities.
Mr Buhari has resisted calls to devalue the naira, which might attract investment and bring in dollars.
“The sooner Nigeria puts in place reforms aimed at safeguarding its formal economy — through the adoption perhaps of meaningful business climate and FX market reforms — the more it is likely to reassure on its long-term creditworthiness,” Razia Khan, Standard Chartered Bank’s chief Africa economist, said in a note.
Source: Business Day