Infosource Newsletter January 2020 Edition
IGR: WHERE IS THE REVENUE?
Every state in Nigeria is as rich as its people and exploited resources. States are preoccupied with generating income to provide basic amenities, improve business environment, and create wealth for current and future generations. To achieve all these obligations, states are saddled with identifying income-generating sources outside the traditional statutory allocation they receive from the federal government. States generally rely on taxes and revenue from their ministries, departments and agencies as a critical source of Internally Generated Revenue. However, to increase IGR, states have to shift the narrative towards providing enabling business environment and improving efficiency in the public sector. Driving states’ revenue generation should therefore be based on IGR Plans, which are linked to improving the business environment, with resultant effect on micro, small and medium enterprises’ growth. Evidence in literature shows that as business performance of MSMEs’ improve, their ability to contribute to states’ revenue pool through payment of taxes improves.
Access to credit is fundamental to business survival. And as such, states should develop strategies to improve access to credit for MSMEs as a priority. With more funds channeled to financing operations, MSMEs can scale, generate income and employment, and resultantly earn more profits to pay taxes.
Unfortunately, the current landscape shows that less than one-third of Nigerian MSMEs have successfully obtained loans from financial institutions (World Bank, 2017), with most using personal savings or reinvested profits, which restricts their growth. States can adopt the Lagos State Government’s “LSETF Model”, which has since inception in 2016, provided affordable credits to the tune of Ngn 7.3 billion to over 11,000 MSMEs that have created over 100,000 jobs.
Ease of doing business, with respect to business registration (registering cooperatives), property registration, obtaining construction permits, getting electricity, etc., is another area for states to focus on. For instance, power contributes a huge chunk to costs of MSMEs which means government intervention through IPPs will ensure increased power generation, translating to reduced cost of production for MSMEs.
Furthermore, to address the internal challenges MSMEs face such as poor financial management, poor access to market, poor governance/operations, etc., states can host regusSlar MSME Clinics. Through government-funded business development support programmes, MSMEs can improve, making them economically-viable and sustainable thereby increasing their contribution to GDP. Another challenge faced by MSMEs which states have to address is the dearth of semi-skilled and skilled labours.
For states to improve revenue generation from the MSME sector, priority should be given to the top IGR contributors. Nigeria’s informal sector contributes an estimated 65% to GDP (IMF, 2017) however taxes generated for states through direct assessment account for between 1% and 17% of PAYE (NBS, 2019).
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