Some 80% of Nigerian SMEs do not pay their taxes, depriving the Treasury of billions of naira a year. What lies at the heart of the problem?
A 23-year-old entrepreneur sits on a white chair in her two-bedroom apartment-cum-salon in the Yaba suburb of Lagos as she unpacks bundles of hair to make wigs. The salon founder established her beauty and hair business in December 2019, but she has never paid taxes to the state government.
A 2017 national survey by the Nigeria Bureau of Statistics and the Small and Medium Enterprises Development Agency of Nigeria revealed there are about 41.5m small and medium enterprises (SMEs) in Nigeria.
According to PwC, SMEs in Nigeria account for 96% of businesses, 84% of employment and contribute 48% of the national GDP. However, a 2017 survey by BusinessDay found that 80% of small businesses are not paying regular taxes to the government.
While some SMEs pay taxes to local, state, and federal government agencies, many avoid paying structured taxes such as corporate and personal taxes. That is not for lack of obligations – many SMEs are expected to pay income tax, employment tax, sales tax, and self-employment tax. The result is a Treasury deprived of billions of naira per year in revenues.
The salon entrepreneur says she does not intentionally avoid paying tax, but would struggle to meet her obligations in the current climate.
Kenya’s minimum income tax hits startups
Improving efficiency to boost tax revenue
Boosting Africa’s tax revenues
“I don’t think my business can afford to pay tax now because the profit from my business is not even enough to reinvest into the business and cater for my daily needs, not to talk of paying tax. I can only pay tax when I realise a lot of profits from my business.”
The World Bank’s Doing Business 2020 index ranks Nigeria 131 out of 190 on overall ease of doing business, and a lowly 159 for paying taxes. Those who have survived a brutal business environment including the recession, Covid-19 lockdowns and government import bans often struggle to understand why they should contribute to an administration which appears to throw frequent obstacles in their way.
“It is difficult to do business in Nigeria and the government is not taking action to make it easier for small businesses,” says the salon owner.
“Government should provide an enabling environment for small businesses to thrive by providing grants and loans at little or no interest. If the government ensures this, small business owners will have it at the back of their minds to pay their taxes when due.”
Lack of transparency and accountability
Taiwo Oyedele, tax leader at consultancy PwC West Africa, believes that the low level of trust between business owners and the government and a byzantine bureaucracy both contribute to SMEs remaining outside the tax net.
“SMEs think once they pay any money to the government, it will be mismanaged or even stolen,” he says.
“Then we have the complex process of paying tax. Even for professionals, it is a headache to go through the process. We also have a low level of awareness and education. When you put all of these together, it is not surprising that the tax morale is low and that is why we do not have a lot of SMEs paying structured taxes. We also have large companies that are dodging taxes and it is not just SMEs’ problems.”
Bamgboye Emmanuel, managing partner of Empyrean Professional Services, an accountancy and tax firm in Lagos, says that as well as apathy among business owners who see tax as “extortion”, most SMEs are also deficient in record-keeping.
“Most businesses don’t keep proper records. A lot of them mingle their personal finances with their business finances. The only record they have is their bank statement.”
The need for tax education
Rather than asking how it can tax SMEs, Oyedele says the government should first focus on increasing economic activity and craft a stronger enabling environment for budding entrepreneurs.
“The government have to be very careful on how they stratify the SMEs and the informal sector. The NBS put out figures that SMEs are 99% micro. Some of them don’t have employees. Those are not the people to target for taxes. The government should design a policy to exclude those who are vulnerable and then focus on the 1% of that population and simplify the taxes,” says Oyedele.
There is an urgent need for tax simplification. Millions of taxpayers are currently expected to visit tax offices, fill out forms manually and submit them for approval in a time-consuming process. Digital tax infrastructure is lacking, and many small businesses lack internet access in order to submit tax returns quickly and effectively. A patchwork of tax legislation means that many entrepreneurs are unsure of what they are expected to pay.
“We are not doing well for a country that needs a lot of tax revenue,” says Oyedele. “Simplifying the economy also includes limiting the number of taxes, rewriting tax laws, harmonising the number of taxes to a few and making payment of taxes online.”
Many small business owners fear that plugging into government-run services will leave them vulnerable to fraud and extortion. A central, trusted payment portal would help to build confidence among enterpreneurs, says Oyedele.
“We need to develop a central point for SMEs. There should be a payment portal so that nobody will take advantage of them. Payment of taxes in cash should be stopped. This will stop those who are collecting extra cash for taxes. Simplifying the process will go a long way in having voluntary compliance.”
Developing trust in the system
At heart, the issue is one of trust and will depend on governments proving that tax revenues are spent on boosting the business environment, including by investing in infrastructure and removing barriers to trade.
Emmanuel says government bodies from the local level upwards should publish tax revenues every month to increase transparency and prove that taxes are being spent wisely.
“There should be a breakdown of the revenues collected and what the monies are used for,” he says. “By the time they start doing that, things will get better and SMEs will be encouraged to pay their taxes.
“The government should also create awareness about what they are using the money for. It will be more beneficial and other state governments can replicate what they are doing. It goes a long way in building trust.”
