Capturing the Uncaptured

With an ambitious revenue projection of over N5 trillion in the 2017 budget, the federal government has a lot to do to drag more Nigerians into the tax net, writes Obinna Chima

The federal government recently disclosed that only 214 people in the entire nation pay taxes of more than N20million and all in that category are in Lagos.
Regrettably, with a tax to Gross Domestic Product (GDP) ratio of six per cent, the country is rated one of the lowest in the world.

Crucially, with an ambitious revenue projection of N5.08 trillion in this year’s budget, the government would have to step up its gain to ensure that it meets its target. By implication, increasing tax revenue has to remain on the front burner, especially given lower crude oil proceeds.

In line with this drive, the government recently directed agencies not to engage in any transaction with companies and other corporate bodies that are not registered by the Corporate Affairs Commission (official body responsible for maintaining the database of registered businesses nationwide).

Although a circular to that effect said the measure was “aimed at protecting the agencies from entering contractual obligations with fake or unregistered companies,” analysts believe there’s more to this, and that it has to do with taxes.

“We therefore be infer that banning transactions with unregistered businesses (most of which do not pay taxes, allegedly) is among strategies channelled at widening the tax net.
“Unfortunately for the government however, tax proceeds have been negatively hit by Nigeria’s poor economic health,” Lagos-based CSL Stockbrokers Limited stated.

That said, there may still be room for modest optimism. The strong increase in taxpayers suggests that tax collection efficiencies have improved significantly.
In addition, a pickup in economic activities seems to be around the corner.
However, there is need for the government to work towards formalising the informal sector.

Efforts to Boost Compliance
As part of efforts to encourage compliance, the Minister of Finance, Mrs. Kemi Adeosun recently said the federal government might adopt name-and-shame strategy to expose tax defaulters in the country.
Adeosun however, said that the government does not intend to introduce new taxes, saying the government would in the coming days enforce compliance aggressively.

Adeosun further said the federal government will have to step on big toes to block tax revenue leakages and illicit flow of funds out of the country.
She explained: “We have just 40 million active tax payers out of an estimated 69.9 million who are economically active in Nigeria.

“Among those who are even paying tax, there is widespread malpractice that results in only part of the actual income being subjected to tax. These practices harm Nigerians and must stop.”
She said: “We have a lot of work to do if we are going to build a sustainable revenue base that we deliver the growth we desire. Even within our tax-paying community, only 214 people in the entire nation pay tax of N120m in spite of having some of the richest people in Africa and some of the best-capitalised companies in Africa; only 214 in the entire country, all of which are in Lagos State.”
Adeosun maintained that the issue of tax evasion must be addressed aggressively for the country to grow.

“And to do so, we will have step on some big toes, and we will need to step on them hard. But we really have no choice. For the size of government we have, the size of country we have and the needs we have, government revenue is simply too low,” she added.
In addition, the federal government launched a tax enlightenment campaign to canvass tax payments at mosques, churches, markets and other public places.
Speaking at the launch of the scheme, Adeosun said the project would engage 7500 young Nigerians through the N-Power portal.

Furthermore, she said that the target is to increase the tax payers to about 17 million in the next two years from the current level of 14 million, equivalent to 35 per cent increase.
However, Taxaide, a firm focused on tax management urged the federal government and the Federal Inland Revenue Service (FIRS) to focus on home grown technologies that understand the peculiarities of the Nigerian tax system and essentially designed as services and not as one-size-fits-all product.

Also, Manager, Tax, Regulatory and people Services, KPMG, Chinedu Ezomike, noted that a sustainable way of ensuring steady revenue flow for the government is to put in place an effective and efficient tax system which will enhance the efficiency of the tax collection process and encourage voluntary compliance by taxpayers who are currently non-complaint.

This, he said is in line with the cardinal principles of taxation which encourage ease of compliance and efficiency of collection. Such a system will, in effect, ensure that taxation becomes the “new crude oil” as far as funding government expenditure is concerned.

On her part, the Managing Director and Chief Executive Officer of FSDH Merchant Bank Limited, Mrs. Hamda Ambah called on the federal and state governments to immediately reform tax administration in the country in order to encourage local and foreign investors to invest in the country.
Ambah, who described the current process as burdensome, said the federal and state government must reform tax auditing and inspections in a way that does not encourage corruption.

According to her, “Taxation in Nigeria is really unbearable; I am not suggesting that people should not be paying tax. I am suggesting that the systems should be streamlined and it must be done in a way that it does not actively encourage corruption.
“Financial institutions are more burdened by the tax system in Nigeria because of the number of tax inspections that we have to go through. I also appreciate the need for government to ensure that things can be done properly.”

Capturing the Uncaptured

The sector, which is also referred to as ‘grey economy’ is the part of an economy that is neither taxed, nor monitored by any form of government. Unlike the formal economy, activities of the informal economy are not included in the gross national product (GNP) and Gross Domestic Product (GDP) of a country.
The informal sector generally is characterised by absence of official protection and recognition, non-coverage by minimum wage legislation and social security system, predominance of own-account and self-employment work, absence of trade union organisation, low income and wages, little job security as well as the absence of fringe benefits from institutional sources.

The informal sector represents an important part of the economy, and particularly of the labour market, in many countries, especially developing countries, and plays a major role in employment creation, production and income generation.

Indeed, in countries with high rates of population growth or urbanisation like Nigeria, the informal sector tends to absorb most of the growing labour force in the urban areas. Informal sector employment is a necessary survival strategy in countries that lack social safety nets such as unemployment insurance, or where wages and pensions are too low to cover the cost of living.

According to the Africa Development Bank (AfDB), the prominence of the informal sector stems from the opportunities it offers to the most vulnerable populations such as the poorest, women and youth.
Even though the informal sector is an opportunity for generating reasonable incomes for many people, most informal workers are without secure income, employments benefits and social protection, the multilateral institution noted.

This explains why informality often overlaps with poverty. For instance, in countries where informality is decreasing, the number of working poor is also decreasing and vice versa.
Beyond poverty and social issues, the prevalence of informal activities is closely related to an environment characterised by weaknesses in three institutional areas, namely taxation, regulation and private property rights.

Considering Nigeria’s present economic situation, a report by the Chatham House, the Royal Institute of International Affairs had stressed the need for reforms by government that could encourage millions of businesses in the nation’s informal sector to move into the formal sector.
This, according to the report would provide clear opportunity for diverse business growth in Nigeria and also ensure greater regional self-sufficiency in areas such as grains and cotton textiles in West Africa.

Clearly, the London-based independent policy institute, in the report titled: “Nigeria’s Booming Borders -The Drivers and Consequences of Unrecorded Trade,” revealed that despite the size of Nigeria’s Gross Domestic Product (GDP), estimated at $510 billion, vast external trade in the country remains largely informal, unrecorded and untaxed. This, it stressed leaves much of the country’s economic potential unrealised.

It po
inted out that a substantial proportion of Nigeria’s cross-border trade currently flows through informal channels, adding that there are strong indications that unrecorded flows through the key economic corridors between Nigeria and its neighbours are several times greater in volume than the amount of trade that is officially reported.
This, it noted, also reflected the scale of domestic informal business within Nigeria, just as it estimated that unrecorded or informal activity could account for as much as 64 per cent of Nigeria’s GDP.

To Dr. Kim Bettcher of the Center for International Private Enterprise (CIPE), informal businesses account for 35-50 per cent of GDP in a lot of developing countries. According to him, the sector contains both entrepreneurial spirit and the struggle for subsistence in any nation.
He argued that the solution is neither to encourage nor suppress informal economic activity, but rather to facilitate the transition of informal businesses to the formal sector and reduce barriers for all businesses(formal and informal).

“Opening routes to formality creates new opportunities for the poor to realise their potential and raise national competitiveness. Acquiring formal status allows entrepreneurs to access formal markets, invest with security, obtain new sources of credit, and defend their rights.
“An effective route to formality, however, requires more than registration and enforcement. It requires the tearing down of barriers at the origin of informality to improve the business climate for all entrepreneurs. Lowering barriers increases business opportunities while facilitating compliance.

“Simply put, informal entrepreneurs have tremendous potential, but in order for them to realise that potential they must be allowed to make the shift into the modern market economy. This will give the same opportunities to all entrepreneurs and create higher-quality new jobs,” he wrote in a report.
Also, the President, Chartered Institute of Bankers of Nigeria (CIBN), Prof. Segun Ajibola, said formalising the informal sector would help boost government’s revenue generation capacity.
Clearly, taxing the informal sector can be through registration and formalisation to push these firms and individuals into the tax net.