Sources of Local Government revenue in Nigeria

The lowest level of governance in Nigeria is the local government. Being the level of government closest to the people, the local government is sometimes referred to as “the government at the grassroots level.” 

Growth in every federation depends on fair progress at the level of subnational administration. This indicates governments at all levels need income from one source or the other to grow. In light of this fact, it is crucial for all governments to access tax revenue from a wide variety of sources.

Other income streams are available to local governments outside the yearly budget from which the federal or state government typically distributes among the levels of government annually.

This article will take a high-level look at how local governments raise funds. 

How Local Governments generate revenue in Nigeria

Taxes and Rates

In many low-income nations, like Nigeria, the local government rely heavily on rate collections to fund basic services. Property rates, market tolls, poll tax, and other special charges are all examples of the types of rates imposed by the local government.

Property tax payments support a significant portion of the budgets of Nigeria’s local governments.

Income from established enterprises

These are the funds raised by local governments as a result of their financial investments in commercial enterprises. Real estate, rental properties, transportation, commerce, agribusiness, and other lawful businesses are all examples of appropriate investments.

Investment is one of the most reliable methods to increase the local government’s income. Since the government may choose to invest in whatever area of the economy it considers lucrative, this is also one of the sources of income for local governments.

It may also choose to form alliances with other commercial entities with the purpose of increasing its profit margins.

Service Fee

Funds earned through service charges are intrinsically related to income from company activity. For financial reasons, a local government area may go above and beyond to provide special services to its inhabitants. Places like public restrooms and showers are great examples of this trend.

Permits

In addition, most Nigerian local governments generate revenue via user fees and licensing. Examples are construction permits, business licenses, and licenses to operate a motor vehicle or motorbike.

Fines

Another stable source of income accessible to local governments is the collection of fines. These funds come from fines assessed to those who break certain regulations enacted by the local government. The rules enforcing the penalties might have to do with cleanliness or traffic safety.

Rental of land

The term “ground rent” is used to describe the payment made by a property owner to a governmental entity (e.g., the Lands Commission in Nigeria). The money is subsequently given to the traditional owners of the property’s land.

Therefore, if permitted by law, local governments may get a portion of the ground rent. The process of obtaining ground rent from commercial and private developers has proved challenging. Still, in many nations, it is a recognized and necessary source of income for local governments.

Income from royalties

Another locally generated source of money for local governments on this list is royalties. Royalty income is often earned via fees associated with the extraction of raw materials.

For example, companies in the mining and logging industries pay royalties to local governments in exchange for the right to use local resources.

State and federal grants

For instance, each of Nigeria’s 774 local governments is entitled by law to a share of the country’s yearly gross domestic product (GDP). This continues to be a significant external income source for many Nigerian states and local governments.

One of Nigeria’s key sources of local government funding is Grant money from the federal and state governments. Grants are essentially just financial aid provided by the government or an organization for a specific project. Note that grants are often non-repayable monies; therefore, if grants are granted to the local government, there is no expectation that the money will be repaid by a particular date or time.

In Nigeria, local governments rely heavily on grants from higher levels of government. However, the local government is not allowed to receive funding at any moment. The local government typically requests the grant, and the intended use of the funds is specified in the request. The federal or state government then decides whether or not to provide the grant.

Allocation from the federal and state governments

In Nigeria, allocation is a major source of funding for local governments. It simply implies that the local government is entitled to the money because it is established in the legislation. Because of its federal nature, Nigeria’s constitution mandates that state and federal funds be distributed equitably to the country’s many levels of government to fund local infrastructure and social programs.

As a result, all of Nigeria’s state and federal governments must get funding at a certain rate. If the federal government attempts to prevent a state or local government from collecting this money, the local government may file a lawsuit against the federal government for damages.

Dividends from Sales Tax and Debt Consolidation Loans

Simply expressed, value-added taxes are levied based on how much an item has grown in price throughout each step of its manufacture. The federal government is the legal authority to collect VATs. Nonetheless, Local governments in Nigeria often get a portion of VAT revenue. 

Conclusion

The importance of local governance in determining a country’s overall progress cannot be overemphasized. It is crucial to let local governments maintain the monies they earn and spend it however they choose without intervention from the higher levels of government.

Nonetheless, local governments in Nigeria have been greatly impacted by the lack of funds following states’ actions in crippling local governments’ economies. With a few local governments thriving in some states, the continued growth of the Nigerian local government system might be a mirage if the current system is in continuance.

Frequently Asked Questions (FAQs)

Are local governments provided for in the constitution?

Partially, the constitution simply listed the local governments in each state in Nigeria. However, the constitution failed to expressly provide for the powers of the local governments, leaving such powers to the state government to legislate upon.

Can local governments tax companies?

No, the taxing of companies is a duty of the federal government alone. Nonetheless, local governments could place fees or permit charges on companies.

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Richard Okoroafor

Richard Okoroafor

Richard is a brilliant legal content writer who doubles as a finance lawyer. He brings his wealth of legal knowledge in corporate commercial transactions to bear, offering the best value that exceeds expectations.

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