As realisation dawns on the Nigerian government that tax is an important revenue source, many believe there is need to temper the tax drive with the imperative to incentivise investment. Vincent Obia writes
For a long time, the imperative of tax revenue has been lost in the debate about government finances in Nigeria. But the federal government is trying to reverse the trend, especially with the decreasing oil receipts. Of late, the government has brought the issue of tax to the fore, fuelling fears about its effect on business, and reservations about the rationale for such levy on a largely deprived citizenry.
Nigerians harbour particularly grave misgivings about tax payment, which are accentuated by weak institutions and a nearly total dependence on crude oil revenue. The result is a general view of tax as a mere side issue in government finances. But the Federal Ministry of Finance is poised to change all that.
The pressure to look to tax is heightened by the record fall in the prices of crude oil in the last few years. The prices have fallen from over $100 per barrel in 2012 to less than $50 per barrel currently.
The Federal Ministry of Finance has launched a campaign, through the Federal Inland Revenue Service, an agency under the ministry, to increase tax revenues. The campaign is driven by a tax amnesty initiative anchored to the Voluntary Assets and Income Declaration Scheme.
VAIDS was launched by Vice President Yemi Osinbajo on June 29 in Abuja after he had signed an Executive Order to back it. The scheme aims to increase tax revenue through tax awareness and increased compliance by granting tax payers, who had defaulted, a time-limited opportunity to regularise their tax status without penalty. It is jointly implemented by the federal and state governments.
Hitherto, the emphasis had been on very few compliant corporate organisations and persons under the Pay As You Earn system. But the new tax policy is trying to widen the tax net by putting together a robust data base.
VAIDS, a nine-month programme, runs from July 31, 2017 to March 31, 2018. In exchange for full and honest declaration of previously undisclosed assets and incomes within the amnesty period, tax payers are promised forgiveness of overdue interests and penalties and assured they would not face criminal prosecution or tax investigation. Tax payers who take advantage of VAIDS between July 1 and December 31, 2017 would pay the tax liabilities owed without the associated interests and penalties. But those who join the scheme between January 1 and March 31, 2018 with pay their taxes with the accruing interest, without the penalties.
VIADS is implemented by the FIRS and the boards of internal revenue of the 36 states of the federation and the Federal Capital Territory. It affects Nigerian nationals and residents earning incomes both in the country and abroad.
Already, the federal government has contracted asset tracers to try to find Nigerian companies and assets hidden under various covers overseas. This is for purposes of tax assessment under the VAIDS initiative. The finance minister says 150 companies belonging to Nigerians would be traced in the first phase of the programme.
Nigeria has an abysmal tax compliance rate, which the finance ministry is trying to change through the current aggressive tax drive. The Joint Tax Board revealed that only about 14 million of an estimated 69. 9 economically active Nigerians paid taxes as at May. The 14 million, which represents less than 20 per cent of the economically active population, are said to be mainly persons in the formal sector and people under the PAYE system. Self-employed persons, professionals, and high network people are widely accused of tax evasion.
There are an estimated 37. 5 million small scale businesses in Nigeria, out of which only about 10 million are in the FIRS tax net.
The countryâ€™s tax to GDP ratio of six per cent is among the lowest in the world. It compares poorly with Indiaâ€™s 16 per cent, Ghanaâ€™s 15. 9 per cent, and South Africaâ€™s 27 per cent, and even more so with the ratio for most developed countries, which ranges between 32 per cent and 35 per cent.
Minister of Finance, Mrs. Kemi Adeosun, says, â€œThe majority of people that are paying tax at the moment are PAYEs, people whose taxes are deducted at source. But the people who seem to be evading taxes are the people who either have their own business or are on high network. Ordinarily, they are supposed to bear the biggest share of the tax burden.
â€œWhat is happening at the moment is that the lower end people are carrying the highest burden, which is unfair. We need to reverse that. Everybody has to pay their fair share, according to their level of income. That is how progressive taxes work everywhere in the world.
â€œTax is one of the things that government uses to redistribute income; take from the rich to support the poor.â€
Adeosun, who spoke at a recent forum on VAIDS in Lagos, also believes increased tax compliance would improve Nigeriaâ€™s poor budget to GDP ratio, which is put at 11 per cent. The ratio for Chad is 14. 3 per cent, Central African Republic has 12. 4 per cent, and India 27.9 per cent.
The federal government wants to change an ironical situation where oil, which accounts for just about 10 per cent of the economy, is responsible for over 80 per cent of government budgets.
The finance minister had stated that research showed only 214 Nigerians, out of a population of nearly 180 million, paid taxes of N20 million or above. This is despite the countless millionaires and billionaires in the country.
Last year, the FIRS did an initial amnesty for corporate organisations and said about 2, 700 corporate organisations were brought into the tax net. Chairman of FIRS Babatunde Fowler disclosed recently that the newly captured corporate organisations paid their outstanding taxes and on that alone, the agency generated about N27 billion within 45 days.
The government has set a preliminary target of $1 billion as expected fund from VAIDS. â€œWe think we might get more, but letâ€™s see how it goes,â€ Adeosun says.
She stresses, however, â€œFor me, itâ€™s not really about how much money we recover. Itâ€™s about getting people to pay the right taxes continuously. How much we recover from VAIDS is not as important as getting people into the tax net and paying the right taxes.â€
The minister also tries to respond to reservations about judicious utilisation of funds realised from tax, saying, â€œWhy I am sure that the tax would be used judiciously is that when people pay tax, they get involved.â€
Most Nigerians believe that an efficient and effective tax regime would have a significant impact on government revenue. However, they are wary of corrupt officials at various levels of government, who may siphon the funds.
Adeosun says the present regime has summoned the technology, orientation, and will to efficiently and prudently collect and manage tax.
Effect on Business
But as the finance minister ratchets up her campaign for more tax compliance, questions are raised about whether the fierce tax drive would conduce to badly needed investment in the economy.
Director-general of the Lagos Chamber of Commerce and Industry, Mr. Muda Yusuf, says, â€œThe investment argument in our tax system is almost been crowded out by the focus on revenue.â€
According Yusuf, â€œWhen we talk of tax, there is too much emphasis on revenue. We also need to use tax to stimulate investment. We need to encourage the private sector to create wealth.â€
There is a growing recognition of the need to deploy tax to not only raise revenue for government, but also stimulate business.
â€œThere is a difference between having a collection mind-set and a larger mind-set that is more administrative and long term in nature, to say, what would the implication of this action on the revenue of this company be?â€ former chairman of FIRS, Mrs. Ifueko Omoigui-Okauru, tells THISDAY at a recent interview. â€œWould they be able to employ more staff? And if they employ more staff, would that add to the tax base and, therefore, would the multiplier effect of whatever decision I take now come back to me as additional revenue? Iâ€™m not sure we have put in place that rigour and discipline to go the whole hog. That is why I think we need to shift from mere collection to the totality of administration of tax.â€
Double taxation, which is prevalent in many urban areas of Nigeria, is one factor of tax administration in the country that has remained a nightmare to business and investment. Though, constitutionally, individual income taxes belong to the states â€“ the federating units â€“ while corporate organisations pay their taxes to the federal government, the lines of demarcation are so thin that conflicts often arise over who should collect what, with private business owners always at the receiving end.
Chairman, National Tax Policy Review Committee, 2017, Professor Abiola Sanni, acknowledges the constitutional inconsistencies in tax administration in the country.
The lecturer in the Faculty of Law, University of Lagos, whose committeeâ€™s recommendations gave rise to the tax amnesty scheme, believes, â€œThe constitutional framework for allocation of taxing powers is problematic because you have a situation where personal income taxation in terms of administration is at the state level. This inexorably would lead to leakages because people can move in from across states and also across the country.
â€œThis calls for cooperation between stakeholders, principally, the state and the federal governments.â€
That cooperation has remained illusory in most cases, resulting in situations where private business owners are subjected to multifarious tax liabilities across tiers of government and between states.
For the current tax drive to actually support economic growth â€“ and not discourage it â€“ experts say there must be an effective framework to guard against the problem of overlapping and conflicting tax liabilities.
Tax Law Reform
Partner at KPMG, Ayo Salami, says, â€œBeyond trying to expand the tax net, the greater factor is that tax laws also have to keep pace with the realities of our time.â€
The National Tax Policy Review Committee has reviewed the federal governmentâ€™s tax policy and made recommendations. Besides the tax amnesty being implemented by the federal and state governments, Sanni says, â€œThe tax policy document had proposed major review of the tax law.
â€œI believe that the Federal Ministry of Finance is going to set that process in motion very soon.â€