Agora Policy, an Abuja-based policy think tank, has called for a comprehensive review of Nigeria’s revenue collection system.
In a report released Monday, the policy think tank criticized the current cost-of-collection approach, highlighting its inefficiencies and the disproportionate financial benefits enjoyed by some federal agencies.
The report shows that three key agencies benefit from the collection cost agreement: the Federal Inland Revenue Service (FIRS), which receives 4 percent of non-oil revenues; the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), which earns four percent of royalties, rentals and other revenues from the oil and gas sector; and the Nigeria Customs Service (NCS), which receives 7 percent of customs duties and levies.
These costs are deducted at monthly meetings of the Federation Accounts Allocation Committee (FAAC) before revenues collected at the federal level are distributed to the three levels of government and other legal recipients.
However, Agora Policy argued in its report that while centralizing tax and revenue collection is efficient, the current method of compensating federal agencies by giving them a percentage of collected revenue is problematic.
He said the cost of collection approach, although potentially useful in the past, has given rise to various problems such as abuses, distortions, distractions and unnecessary expenses.
In January, the policy think tank noted that the Federal Inland Revenue Service (FIRS) received N43.35 billion as collection costs, a sum that exceeds the allocations received by each of Nigeria’s 36 states.
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Delta State, which received the highest state allocation that month, received N39.59 billion, the report said, adding that the Nigerian Customs Service received N16.27 billion, more than 31 states received as gross allocation during the same period.
The report further noted that the three agencies benefiting from the collection cost system collectively received N78.30 billion in January 2024, exceeding the gross allocations of the FAAC to four of the six geopolitical zones in the country.
For example, he said the North East received N56.60 billion; North-Central N55.58 billion; North West N76.09 billion and South East N47.75 billion. Only the South-South and South-West zones received more, mainly due to the 13 per cent derivation for oil producing states and a net allocation to Lagos State for Value Added Tax (VAT).
Challenges
The think tank explained that the agreement on the cost of collection has led to significant disparities and inefficiencies, with revenue collection agencies now receiving a larger share of the funds than many states. This creates a perverse incentive structure that prioritizes revenue collection over other essential functions.
This shift, the think tank said, has also diverted scarce resources from critical development needs.
He said the collection cost approach for federal agencies in Nigeria presents a major challenge because agencies earn higher commissions due to currency depreciation rather than greater efficiency.
He said this diverts resources from states and regions by affecting essential services and incentivizes agencies to prioritize revenue collection over their core functions, such as border protection.
According to the report, many agencies now aspire to become revenue-generating entities, creating distractions from their core mandates and imposing significant costs on the public.
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“The cost-of-collection approach to rewarding and funding such agencies might have served a useful purpose at some point,” the report says.
“However, recent events show that this is a misconception. It allows abuses, distortions, distractions and unnecessary expenses.”
recommendations
Agora Policy recommended that the three agencies listed as beneficiaries of the collection cost system should be funded through direct allocations from the federal government rather than the current model.
This approach, he said, would ensure that their budgets are based on verifiable and justifiable needs and are linked to expected improvements in performance.
The report recommended that the federal government allocate a minimum percentage to revenue collection efforts and provide performance bonuses to agencies that exceed previously agreed upon targets.
The policy think tank posited that while the collection cost approach may have been well-intentioned, it has generated its own set of problems.