PAYE Tax Accounts for 62% of States’ IGR – Investigation

Gov. Kayode Fayemi
Gov. Kayode Fayemi

BEVERLY HILLS, June 06, (THEWILL) – Over 60 percent of internally generated revenue (IGR) of the 36 states and the Federal Capital Territory constitutes deductions from employee emoluments under the PAYE (Pay-As-You-Earn) tax system, THEWILL investigation has revealed. PAYE is a tax paid on employee earnings. It is taken directly from the employee’s income and paid to the government through the Inland Revenue office as a category of personal income tax.

PAYE tax also accounts for over 70 percent of total taxes realised by the states, according to data from the National Bureau of Statistics (NBS). This is against the widely held thinking that the states (or sub-nationals) have grown their IGR through more creative efforts. The report further revealed that the exponential growth in the states’ IGR in recent years did not occur from the sub-nationals becoming ingenious in finding alternative revenue channels beside federal allocations.

The states have been under pressure to diversify their IGR since the 2014 oil price shock in the international market, which caught Nigeria unawares. The development created a huge revenue shortage for the Federal Government, leading to lower revenue allocations to the three tiers of government. While there is a marginal increase in other revenue sub-sectors, investigation reveals that the states’ IGR has grown exponentially on the back of PAYE tax deductions.

In the past five years, the 36 states’ IGR increased remarkably –from a total of N823 billion in 2016 to N1.306 trillion in 2020, an increase of 58.7 percent. Further analysis of the reports showed that the states’ PAYE tax revenue rose in the same trend from N403.87 billion in 2016 to N851.73 billion in 2020, or 110.8 percent increase. This excludes 2017 without available PAYE information.  Total PAYE tax realised in 2018 was N669.21 billion, hitting N809.3 billion in 2019. The tax deductions from workers’ income also boosted the states’ IGR in 2018 and 2019 from N1.168 to N1.334 trillion respectively.

The exponential growth of PAYE tax dwarfed the other revenue sub-sectors. These include ‘Direct Assessment,’ which is a form of personal income tax used to assess tax for self-employed individuals. It also relates to taxes imposed on businesses, especially informal, by the tax authorities based on the size of the business activities.

There are also ‘Road Taxes’ – daily levies paid by commercial transport vehicles operating within the state and ‘Other Taxes’ which include various taxes, such as levies on market traders, land registration and other related fees, development levies on individuals, pool betting/lottery/gaming fees, stamp duties among others. The states also earn IGR from services rendered by Ministries, Departments and Agencies (MDAs), classified as MDAs Revenue.

The total IGR from Direct Assessment in 2020 was N37.1 billion as against N47.67 billion and N44.26 billion in 2019 and 2018, respectively. The COVID-19 pandemic negatively impacted 2020 Direct Assessment IGR as a result of the lockdown and effects of the land border closure. The scenario also impacted on Road Taxes, which dropped to N28.4 billion in 2020 from N30.27 billion in 2019. The 2018 figure was N23.95 billion.

Other Taxes IGR showed a total of N171 billion in 2020 compared to N221.55 billion in 2019 and N165.71 billion in 2018. MDA revenues for 2020 was N218.4 billion in 2020 as against N221.55 billion and N265.78 billion realised in 2019 and 2018 respectively. In percentage expression, PAYE tax constitutes 62 percent of total IGR in 2020 as against 60.66 percent in 2019.

Industry experts attribute the exponential growth in the states’ IGR to their close monitoring of employers’ tax deductions from their employees’ salaries as some employers default in remitting the PAYE taxes deducted from their employees’ earnings. Other employers have been accused of short-paying the government by designing their payrolls to create tax exemptions for their employees. “Government now imposes tax on every income earned without exemption,” says Mike Ojewale, a tax consultant.

The high PAYE revenue also shows that a large population of workers is in paid employment and in the formal sector as against the self-employed in the informal sector. The newly enacted 2020 Finance Act has expanded the scope of PAYE tax which will increase workers’ tax burden effective January 2021.

“PAYE tax is deducted at source. So there is no way a worker can escape it. This is why it is growing instead of dwindling,” Doris Nwaka, a legal practitioner and tax consultant told THEWILL.

Taiwo Oyedele, Fiscal Policy Partner and Africa Tax Leader at PwC observed that virtually all tax heads are under-performing in Nigeria and that PAYE and other taxes would increase if the states embark on an aggressive tax drive. He said in a note to THEWILL that personal income tax (including PAYE tax) is the number one source of tax revenue in many countries and that it is not unusual if 60 percent of states’ tax revenue in Nigeria constitute of employee income tax.

By geo-political zone, the South-West tops with a total PAYE tax of N360 billion in 2020, followed by the South-South with N198.36 billion and FCT N83.7 billion.  North-West recorded a total PAYE tax of N63.84 billion during the period, while North-Central had N47 billion followed by South-East and North-East with N50 billion and N40 billion respectively.

The South-West, with a total IGR of N552.51 billion tops the list, followed by South-South N263.46 billion.  North-West achieved a total IGR tax of N139.94 billion followed by FCT with N92.10 billion. North Central recordedN86 billion IGR, while the North-East and South-East achieved N55 billion and N52 billion respectively.

The total domestic debts of the 36 states and the FCT as of 31 December, 2020 stands at N4.19 trillion while the external date is $4.78 billion. At the CBN I&E official exchange rate of N410.22/US$1, the states’ total external debt ($4.78 billion) amounts to N1.95 trillion, bringing the total (external and domestic) debts to N5.5 trillion as of December 31, 2020. This suggests that the states have to generate more than four times their current IGR level to offset their total debts.