Cost of Collection: FIRS, Customs, NUPRC Getting More Revenues Than States, Says Agora Policy

•Advocates direct government funding

Emmanuel Addeh in Abuja

Agora Policy, a Nigeria-based non-profit think tank yesterday argued that current “cost of collection” approach to revenue collection, where some agencies of government receive a percentage of the revenues they collect on behalf of the federation, was no longer practicable.

In its latest policy paper titled: “Why Nigeria’s Cost-of-Collection Approach is no Longer Tenable”, the Waziri Adio-led organisation, maintained that some agencies were getting more funds than some states, an anomaly in a federation.

Specifically, these costs that are deducted at the monthly meetings of the Federation Accounts Allocation Committee (FAAC), Agora Policy pointed out, are now riddled with all sorts of problems.

At the moment, it said the cost of collection applies to three agencies: The Federal Inland Revenue Service (FIRS), which receives 4 per cent of non-oil revenues; the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), which gets 4 per cent of royalties, rents and other revenues from the oil and gas sector and the Nigeria Customs Service (NCS), which receives 7 per cent of custom duties and levies.

While the argument for centrally collecting taxes and revenues remains sound, as it allows for ease and efficiency of collection and administration, Agora stressed that the idea of turning federal agencies into commission agents of the federation remains problematic.

“The cost-of-collection approach to rewarding and funding such agencies might have served a useful purpose at some point. However, recent developments show that it is a flawed idea. It enables abuse, distortions, distractions and wasteful expenditures. The utility of the approach has been overtaken. It is thus no longer tenable.

“A review of the fully disaggregated data on FAAC disbursements, as published by the National Bureau of Statistics (NBS), highlights some of the incongruities that the arrangement has created. For example, in January 2024, FIRS received N43.35bn as cost of collection. None of the 36 states of the federation received up to this amount as federation allocation.

“The state with the highest gross allocation for the month, Delta State, got N39.59 billion, which means that FIRS not only received an amount more than what each of all the 36 states but also got 109.49 per cent of the allocation of the state with the highest gross allocation.

“It is interesting to note that Customs Service received N16.27 billion, the lowest cost of collection for the month. But what Customs got was higher than what each of the 31 states received as gross allocation for the month,” the report showed.

Agora Policy maintained that there was even a more incongruous dimension, with the three agencies receiving a total of N78.30 billion as the cost of collection for January 2024.

But the gross allocations to the six geo-political zones for the same month, it posited , were as follows: N56.60 billion for the North-east; N55.58 billion for the North-central; N76.09 billion for the North-west; N47.75 billion for the South-east; N141.85 billion for the South-south; and N86.60 billion for the South-west.

 “This shows that for the month, the cost of collection received by the three agencies (N78.30 billion) was higher than the gross FAAC allocations to each of four geo-political zones in the country: North-east (N56.60 billion), North-central (55.58 billion), North-west (N76.09 billion) and South-East (N47.75 billion).

“The South-south and South-west got more than what the three agencies received only on account of 13 per cent derivation for the oil producing states and the allocation of N21.28 billion as the net allocation to Lagos State for Value Added Tax (VAT),” it observed.

Arguing that it is doubtful that it was part of the plan for about 90 per cent of the states to get gross allocations lower than the agency with the least commission in any month, the organisation stressed that if the designers had thought about these possibilities and the unintended consequences, they probably would have installed circuit-breakers or sunset clauses.

While the agencies could contend that they are receiving more money now simply because they are also bringing in more money to the federation, the think tank noted that this was not necessarily so.

To check this claim, it said that it tracked the FAAC disbursements for a five-year period, from February 2019 to January 2024, with the data revealing how the revenue structure of the federation had changed within five years and in a way that gives an edge to the agencies against the three tiers of government on behalf of whom they collect the revenues.

In February 2019, the gross FAAC revenue, it said, was N619.86 billion and the total cost of collection was N13.58 billion, or 2.19 per cent of the gross allocation.

In January 2024, the gross revenue, it observed, was N2.07 trillion while the three agencies received N78.30 billion, or 3.79 per cent of it.

“On the face of it, the absolute value of the cost of collection is merely rising gross revenue. But this is not exactly so: while the gross revenues between February 2019 and January 2024 increased by 234 per cent, the cost of collection for the same period increased by 477 per cent. So, the cost of collection has increased in more than corresponding proportion than the gross revenue has.

“If the cost of collection had remained at the 2.19 per cent level of February 2019, the sum of N45.33 billion (instead of N78.30 billion) would have been due to the agencies as the cost of collection in January 2024. This means that the agencies would have received 42.11 per cent less than they did this January,” it added.

Explaining that the cost of collection approach is clearly defective, it said that this defectiveness will not be fixed simply by reducing the percentage charged, contrary to a recent proposal by the presidential committee of fiscal policy and tax reforms.

“Our position is that the three agencies should be funded, and well-funded, via appropriation by the federal government. They are providing important services and adequate provisions should be made for them.

“But their budgets should be based on verifiable, justifiable and reasonable needs. Increase in budgetary provisions for them should be tied expected improvements and returns, as opposed to the current practice where expenditure routinely rises to meet available money.

“It is also important to bear in mind that while the current approach may yield more money than the agencies need, it may produce less than needed at some other time. What government should aim for is adequate and predictable funding for these important agencies.

“This can be a first-line charge in federal government’s revenue. But this will be a better approach than having a few over-resourced and profligacy-prone agencies.

“The federal government should receive an extra but minimal percentage as allocation for collecting revenues on behalf of the federation. But this should go to the federal government and not directly to the agencies.

“The federal government can give performance bonus to these agencies to incentivise them but this should be when they surpass pre-agreed revenue targets.

“The cost-of-collection arrangement was probably designed based on good intentions and was clearly intended to solve some problems. But it has in turn spawned its own problems. It is time to jettison it for a more transparent, more prudent and more accountable approach,” the group argued.