One of the major impacts of the COVID–19 pandemic on the global economy is the drop in crude oil prices and the slowdown in economic growth and international trade1 . For Nigeria, this has translated into a drastic drop in government revenue, the onset of a second economic recession in five years and other negative effects on the economy2. In response to this challenge, the Federal Government has attempted to expand potential sources of revenue by creating new taxes or levies. Thus in the Finance Act 2020, an Electronic Money Transfer Levy was introduced along with an Unclaimed Funds Trust Fund3. Previously, the Police Special Trust Fund had been created in 2019 and a presidential directive was recently issued for the implementation of the National Agency for Science and Engineering Infrastructure (NASENI) levy. These steps taken by the government were in line with the prescriptions in the Strategic Revenue Growth Initiative to identify and introduce new taxes / sources of revenue. They have however, raised concerns amongst stakeholders and the public about the possibility of the government adopting more aggressive revenue generation options, including the likelihood of an increasing recourse to earmarked taxes.4

This article discusses the meaning and types of earmarked taxes, it also examines the issues that are likely to arise if the government makes recourse to such an option and the implication of such a move on businesses and the Nigerian economy.

Meaning and Types of Earmarked Taxes in Nigeria

Earmarked taxes refer to any dedicated taxes that are introduced by the government to generate revenue for a specific programme, project or sector of the economy5 . Generally, earmarked taxes are introduced in situations where a particular sector of the economy needs special funding to address a challenge or for developmental purposes. Some examples of earmarked taxes under Nigerian law are as follows –

  1. Police Special Trust Fund Tax levy, which is imposed at 0.005% of the net profit of companies operating in Nigeria;
  2. Education Tax, (now the Tertiary Education Trust Fund Tax), which is imposed at 2% of a company's assessable profits;
  3. Niger-Delta Development Commission (NDDC) levy created by the NDDC (Establishment) Act and imposed at 3% of the total annual budget of any oil producing company operating onshore and offshore in the Niger Delta area, including gas processing companies;
  4. National Information Technology Development levy created by the NITDA Act and the applicable rate is 1% of the profit before tax of relevant qualifying company;
  5. Nigerian Social Insurance Trust Fund (NSITF) levy, imposed by the Employee Compensation Act 2010 and computed at 1% of total emoluments cost of employees (basic salary, housing and transport);
  6. Industrial Training Fund Levy created by the Industrial Training Fund Act and which is computed as at 1% of employee payroll;
  7. National Housing Fund levy, which is 2.5% of monthly basic salary of all Nigerian employees;
  8. Nigerian Content Development levy assessed at 1% of the contracts awarded to any company involved in any project, operation or transaction in the upstream sector of the Nigerian oil and gas industry;
  9. Cabotage levy, which is is imposed by the Coastal and Inland Shipping (Cabotage) Act at 2% of the contract sums earned by vessels engaged in coastal trade in Nigeria and is administered by the Nigerian Maritime Administration and Safety Agency (NIMASA); and
  10. National Agency for Science and Engineering Infrastructure (NASENI) levy is imposed at 0.25% of the turnover of companies having a turnover of ₦4m (which has now been increased to ₦100m);

Given the large number of earmarked taxes and levies collected by government agencies, there is a viewpoint that government should be circumspect in introducing any such taxes or levies. On the other hand, these taxes are viewed as an easy or quick means by which government can fund relevant agencies or projects, without creating a burden on the general revenue purse of government.

Concerns associated with Earmarked Taxes

Excessive Burden on Same Set of Taxpayers

Tax authorities in Nigeria have consistently focused their tax collection and enforcement efforts on key taxpayers in the formal sector. This leaves out most players in the informal sector and large sections of the formal sector remain outside the tax net or are undertaxed.6 The implication of this is that the same set of taxpayers that are visible within the tax net are required to bear most of the tax burden. Hence, when the government introduces new tax types to increase its revenue, it effectively places an additional burden on the same set of taxpayers.

A more business friendly revenue collection strategy would be to expand the tax net by relying on technology and processes that will compel non – compliant persons to comply fully with their tax obligations. This issue of excessive tax burden is a major challenge for Nigerian businesses particularly, because they have to grapple with infrastructural challenges7, excessive and sometimes intrusive regulation by government agencies and the general concerns about the ease of doing business in Nigeria. These issues are usually blamed for making Nigerian businesses being less competitive when compared to their peers. Yet, when commentators mention that the Nigerian tax to GDP ratio is low and there is the need to improve tax collection, they do not factor in these issues.

There is therefore the need for policymakers, tax administrators and other relevant stakeholders to re-assess the overall strategy in dealing with the revenue shortfall, so that the tax burden is not put on already existing taxpayers by way of new taxes, while a large number of eligible taxpayers are outside the tax net.

Poor Accountability by the Relevant Collection or Administering Public Institution

The Constitution of the Federal Republic of Nigeria 1999 (as altered) (Constitution) requires that all revenue accruing to the Federation should be paid into the Consolidated Revenue Fund, however, an exception is created for special funds, which Section 80(1) of the Constitution provides as follows – effectively means that they are not to be paid into the Consolidated Revenue Fund8 . In this respect,

''All revenues or other moneys raised or received by the Federation (not being revenues or other moneys payable under this Constitution or any Act of the National Assembly into any other public fund of the Federation established for a specific purpose) shall be paid into and form one Consolidated Revenue Fund of the Federation.''

The implication of the above exemption is that the relevant public institutions become in some way self-accounting, which in turn sometimes creates room for less scrutiny and possible misuse or mismanagement of the funds as has been reported for some of the institutions. This may inhibit the ability of the usually well-funded institutions to discharge their statutory mandates, despite the huge funding available to them. When this happens, the tax paying public not only bears the burden of paying these taxes, but in turn do not get the benefits of the services that should be rendered by the institution.

"Dealing with revenue deficit is always a major challenge for any country, hence, key stakeholders must apply fiscal and monetary policy measures to achieve positive results. The fiscal policy side will require creative thought, policy formulation and smart legislation. It also requires superb execution and implementation of the policies and laws. In this regard, government must get it right on both sides, i.e., formulation and execution."

To address this, government may need to re-assess the basis for creating such taxes and also put in place a strict oversight mechanism by the National Assembly and other relevant agencies such as the Offices of the Accountant General and Auditor General of the Federation to monitor the use of such earmarked taxes and levies.

Loss of Revenue for States and Local Governments

One major implication of earmarked taxes that is usually not obvious, is that it effectively increases the special collection of the Federal Government but reduces payments that will be made into the Consolidated Revenue Fund which will ultimately be distributed amongst all the Federating Units. In fact some of the earmarked taxes are also tax deductible, which means that the final tax to be paid by companies will be effectively reduced, hence, the revenue that will be available for distribution is further reduced.

Thus increasing reliance on such special category of taxes should be discouraged by State and Local Governments because it may not ultimately be to their benefit.

Ease of Doing Business Ranking

Nigeria currently ranks at 159 out of 190 in the ease of paying taxes under the World Bank Ranking on Ease of Doing Business.9 The parameters adopted by the World Bank focuses on the "total number of taxes and contribution paid, the method of payment, the frequency of payment, the frequency of filing and the number of agencies involved for the standardized case study".10

This parameter and methodology means that Nigeria is likely to continue to underperform if it continues to increase the earmarked taxes that are to be paid by taxpayers. It is important to note that the Ease of Doing Business ranking and most importantly, the Ease of Paying Taxes ranking is a major consideration by investors in deciding an investment destination, hence, the attractiveness of the Nigerian market is largely dependent on reduction in the multiple tax burden imposed on businesses.

The Way Forward

Dealing with revenue deficit is always a major challenge for any country, hence, key stakeholders must apply fiscal and monetary policy measures to achieve positive results. The fiscal policy side will require creative thought, policy formulation and smart legislation. It also requires superb execution and implementation of the policies and laws. In this regard, government must get it right on both sides, i.e., formulation and execution.

In our view, rather than continue to introduce specific taxes or even revive previously uncollected ones, the relevant fiscal and tax authorities in Nigeria should consider expanding the tax net as against increasing the number of taxes in our tax regime. We must also adopt the widespread use of technology in compelling both natural persons and corporate bodies to pay their fair share of taxes as this aids ease of compliance and also blocks leakages in the tax value chain. In addition to this, government may make access to certain essential and non-essential services conditional on proof of payment of due taxes. Government should also work on increasing the ease of payment of taxes by reducing the cumbersome processes and steps required as tax compliance at all levels in Nigeria is still very difficult. Another issue that must be tackled is the opacity, lack of transparency and accountability in the collection and use of taxes and other revenue items as this impacts taxpayer confidence in the tax system and reduces their willingness to voluntarily comply with their tax obligations. All government agencies, especially those which are funded by special taxes and levies, should be mandated to publish regular accounts and breakdown of revenue which have accrued to them and its usage.

In conclusion, the Executive and Legislative arms of government should avoid the temptation of adopting new taxes as an option of increasing Government revenue, but should rather focus on maximizing the existing sources, which are generally underutilized.


1. Catherine Anderson and Rebecca Engebretsen, 'The impact of coronavirus (COVID-19) and the global oil price shock on the fiscal position of oil-exporting developing countries' (2020) OECD Policy Response to Coronavirus COVID – 19 < the-impact-of-coronavirus-covid-19-and-the-global-oil-price-shock-on-the-fiscal-position-of-oil- exporting-developing-countries-8bafbd95/ > accessed on 17 April 2021.

2. Ozili Peterson, 'Covid-19 pandemic and economic crisis: The Nigerian Experience and Structural Causes' (2020) Munich Personal RePEc Archive

3. Finance Act 2020, sections 75 and 89.

4. Nkiruka Nnorom, 'Unclaimed Dividend: Controversy over Transfer to Federation Account' Vanguard (Lagos, 22 November, 2020)

5. Joel Michael, 'Earmarking State Tax Revenue' (2015) Minnesota House of Representative Policy Brief. Olufunso Ola-Ojo and Oladejo Adeyemi, 'Effective Taxation of the Nigerian Informal Sector' (2018)

6. Andersen Tax Digest.

7. Ibid

8. Constitution of the Federal Republic of Nigeria 1999, s 80(1).

9. World Bank, 'Doing Business – Measuring Business Regulations' < data/exploreeconomies/nigeria#DB_tax > accessed on 17 April 2021.

10. . World Bank, 'Paying Taxes Methodology' < taxes > accessed on 17 April 2021.

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