By Prof Uche Uwaleke

Nigeria’s current fiscal realities demand not only an aggressive drive to increase government revenues but also a deliberate effort to reduce the cost of generating those revenues. In recent months, public discourse has focused largely on expanding the tax base, improving tax compliance, and diversifying government revenue sources.

This question has become increasingly significant because Nigeria currently operates one of the most generous cost-of-collection regimes among developing and emerging economies.

Although this arrangement was originally intended to provide stable funding for critical revenue institutions, it has evolved into a funding model that raises serious concerns regarding efficiency, accountability, and value for money. Unlike most Ministries, Departments and Agencies that receive annual appropriations based on demonstrated operational needs and are subjected to rigorous budget scrutiny by the National Assembly, these agencies enjoy an automatic funding mechanism tied directly to the volume of revenue collected. As collections increase, their operating budgets also increase, regardless of whether their actual expenditure requirements have grown proportionately.

The implications of this funding structure are becoming increasingly difficult to ignore. According to data published by Agora Policy, the three agencies retained a combined N78.30 billion as cost of collection in January 2024 alone. Of this amount, the then Federal Inland Revenue Service accounted for N43.35 billion. 

More strikingly, the combined cost of collection for these agencies exceeded the gross Federation Account Allocation Committee (FAAC) allocations received during the same month by four of Nigeria’s six geopolitical zones. The North-East received N56.60 billion, the North-Central N55.58 billion, the North-West N76.09 billion, and the South-East N47.75 billion. When the administrative cost of collecting revenue exceeds the monthly allocations received by entire geopolitical zones, it is evident that the issue deserves serious legislative and public attention.

The concern becomes even more compelling when Nigeria’s experience is compared with international practice. Revenue authorities across the world are expected to collect public revenue efficiently and at the lowest reasonable administrative cost. The United Kingdom’s HM Revenue and Customs operates at a cost-of-collection ratio of 0.51 percent. Across the thirty-eight member countries of the Organisation for Economic Co-operation and Development (OECD), the average cost is about 0.64 percent. Revenue authorities within the Inter-American Center of Tax Administrations (CIAT), which covers much of Latin America, average approximately one percent. Even Kenya, whose economy shares several structural characteristics with Nigeria, generally operates within a statutory range of one to two percent. Across developing and emerging economies, the average cost of collection is estimated at roughly one percent. Nigeria’s current range of four to seven percent therefore stands out as exceptionally high by global standards.

To be clear, the objective should not be to weaken the operational capacity of revenue-generating agencies. On the contrary, Nigeria requires strong, technologically advanced, and professionally managed institutions capable of maximizing revenue collection, combating tax evasion, curbing smuggling, and improving compliance. The issue is whether these objectives require a funding mechanism that automatically allocates between four and seven percent of all revenues collected, irrespective of demonstrated operational needs or measurable efficiency gains.

There is an important distinction between rewarding performance and institutionalizing inefficiency. A funding model based solely on a percentage of collections creates weak incentives for cost control because higher revenue collections automatically translate into larger operating budgets. It does not necessarily encourage expenditure discipline, prudent resource management, or continuous productivity improvements. Rather, it risks normalizing administrative expansion without corresponding gains in efficiency.

This concern is particularly relevant at a time when Nigeria has invested heavily in technology-driven reforms designed precisely to reduce the cost of tax administration and customs operations. Digital tax filing systems, electronic payment platforms, integrated customs management systems, automated risk assessment tools, data analytics, and improved taxpayer databases are intended to make revenue administration more efficient while lowering operational costs over time. If technological modernization is achieving its intended purpose, then the cost of collection should gradually decline rather than remain permanently fixed at comparatively high levels.

Equally important is the opportunity cost of the existing arrangement. Every naira retained by revenue-generating agencies as collection costs is a naira unavailable for distribution through the Federation Account. It represents resources that could otherwise support investments in education, healthcare, security, infrastructure, agriculture, social protection, and other development priorities. At a time when governments at all levels continue to grapple with fiscal constraints and rising debt obligations, improving the efficiency of revenue collection offers one of the few reforms capable of increasing available public resources without imposing additional taxes on citizens or businesses.

The current arrangement also raises broader questions of equity within public financial management. Virtually every government institution is expected to justify its expenditure through the annual budget process. Their funding is determined by assessed needs, available resources, and legislative appropriation. Revenue-collection agencies should not be exempt from the same principles of fiscal discipline merely because they collect rather than spend public resources. Indeed, institutions entrusted with collecting public revenue should exemplify the highest standards of efficiency, transparency, and accountability.

This is where the National Assembly has a particularly important constitutional and institutional responsibility. As the custodian of the country’s power of appropriation and oversight, the legislature is uniquely positioned to review whether the current statutory retention ratios continue to serve the national interest. Legislative oversight is not intended to undermine executive agencies but to ensure that public resources are managed in accordance with the principles of economy, efficiency, effectiveness, and accountability.

The National Assembly should therefore commence a comprehensive review of the statutory funding framework governing the Nigerian Revenue Service, the Nigerian Customs Service, and the Nigerian Upstream Petroleum Regulatory Commission. Such a review should include detailed examination of the actual operational costs of these agencies, their expenditure patterns, personnel costs, capital investments, technological infrastructure, and comparative international benchmarks. Public hearings would provide an opportunity for stakeholders, fiscal policy experts, civil society organizations, and the agencies themselves to present evidence on the appropriate cost of revenue administration in Nigeria.

The outcome of such a review should be legislative reforms that gradually reduce the current retention ratios by about fifty percent. A reduction from 4% to 2% for both the Nigerian Revenue Service and the Nigerian Upstream Petroleum Regulatory Commission, and from 7% to 3.5% for the Nigerian Customs Service, would still leave Nigeria above international averages while releasing substantial additional revenues to the Federation Account. Such reforms would strike a more appropriate balance between ensuring adequate operational funding and protecting public finances.

However, reducing the statutory percentages should not be viewed as an end in itself. It should form part of a broader reform agenda that promotes needs-based budgeting, periodic independent efficiency audits, greater transparency in the utilization of retained revenues, performance-based funding, and regular legislative reviews to ensure that operational costs continue to reflect changing technologies and international best practices. Funding should increasingly reward measurable improvements in efficiency, taxpayer services, customs clearance, compliance, and revenue administration rather than simply the volume of collections.

By and large, the debate is not about denying resources to critical government institutions. It is about ensuring that every naira spent on revenue administration delivers maximum value to the Nigerian people. Fiscal sustainability requires more than collecting higher revenues; it requires collecting those revenues as efficiently as possible. Countries that have successfully strengthened their public finances have done so not merely by raising more taxes but by improving the productivity and efficiency of their revenue institutions.

It goes without saying that Nigeria stands at a critical moment in its fiscal history. The demand for public investment has never been greater, yet available resources remain constrained. Rationalizing the cost of revenue collection represents a practical and achievable reform that can immediately increase funds available for national development without introducing new taxes or placing additional burdens on households and businesses. It is a reform that aligns with international best practices, promotes accountability, strengthens public financial management, and enhances confidence in government institutions.

The National Assembly now has an opportunity to lead this important conversation. By reviewing the statutory cost-of-collection framework and aligning it with the principles of efficiency, transparency, and fiscal responsibility, the legislature would not merely be reducing administrative costs; It would be reaffirming its constitutional duty to safeguard the public purse and ensuring that a greater proportion of Nigeria’s revenues is devoted to improving the lives and livelihoods of the people rather than the machinery of collection itself.

Uwaleke, a financial Economist, is former Commissioner for Finance in Imo State, and currently the Director of the Nasarawa State University Institute of Capital Market Studies.