A frontline real estate developer, Mr. Adetokunbo Ajayi, who is the Chief Executive Officer, Propertygate Development and Investment Plc., in this interview, discusses the importance of taxation and the dire implications of non-compliance with taxation rules by many operators in Nigeria’s real estate industry. He explains that these firms take undue advantage of the government’s inability to enforce rules to have unfair advantage over organisations that obey tax laws
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What is your assessment of the government’s approach to economic management?
One of the visible actions of the current administration is the drive to increase public revenue and diversify income sources. These are major high points on their agenda. These became more pressing when the country entered recession. Learning the hard way that over reliance on oil revenue is not sustainable; governments at federal and state levels have heighten the drive in collection of tax revenue at an unprecedented tempo. But in Nigeria, there is always apprehension on the subject of taxation, as individuals and organisations tend to believe that taxation is more of extortion than revenue source. There is usually an atmosphere of anxiety with respect to the impact of tax drive on businesses including real estate. However, on the assumption that the tax authorities will follow due process and the laws in their drive, one can say there should be no cause for anxiety. In any case, the current position is that businesses are normally required by law to pay tax. While parting with funds in form of taxes may be burdensome to businesses, the positive side is that when the government deploys such funds for good uses such as providing critical infrastructure for businesses to thrive and security, among others, the benefits of such payments can be quite satisfying. In addition, there is a positive side to the government’s awakening to its tax enforcement responsibility. A weak enforcement regime where few are compelled to pay taxes and majority is allowed to carry on their businesses without paying taxes creates an unfair competition.
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As a real estate developer, what is your assessment of compliance to payment of tax in Nigeria?
As an incorporated real estate development company, there are numerous obligations the tax authorities expect from you. You are required to deduct applicable withholding tax from contractors, consultants and suppliers on your projects and pass them to government. When contractors, consultants and suppliers know that you will deduct, they typically mark up their prices to accommodate the WHT deductions. You are also expected to deduct value added tax (VAT) from your sale price. If two companies produce similar real estate products and all other cost of production remain the same, the company that is tax compliant will have higher production cost than the other company that does not pay WHT and VAT. This gives the tax evading company an advantage over the tax compliant one.
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Are you saying that ineffective compliance with payment of tax encourages unfair advantage in some quarters?
It does create an unfair advantage. The overall business cost of the tax evading company is lower. They have a comparatively lower wage cost, as staff would have demanded for more pay if they were deducting personal income tax and other statutory deductions. In addition, they pay little or no corporate income tax and education tax on their profit before tax. The overall implication is that the tax evading company, producing exactly the same quality of real estate products with a tax compliant company, can mark their sale price down by up to 30% in view of these unwholesome gains; thus securing a huge market advantage. When this situation persists, the tax compliant operators may not see the need to continue on the right path since other operators are getting away with fortune, while they struggled. If the tax compliant company still intends to stick to the right path, it may be compelled to withdraw from the market, as it may not be able to compete. The system has succeeded in rewarding crookedness and the entire society suffers! As a practitioner in real estate, you see this unfair advantage play out in other areas to the detriment of those who want to do the right thing. For instance, when it comes to development matters and planning regulations, you see the non-compliant operators having clear advantage.
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How does this affect competition for development opportunity?
The non-compliant operators indulge in gross and brazen violation of setback, density and land use rules. When competing for a development opportunity with them, you may lose out because you will not be able to come up with as much development units as these non-compliant operators who disregard density and setback rules. Similarly, you may not be able to produce retail outlets on purely residential parcel. The non-complaint operators win, and typically they get away with these infractions. Unfortunately, you may also lose out as rules-complying operator when competing for tract development. While you are insisting to the potential partners (usually land owners) that estate layout be produced, your competitors are not that mindful.
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There have always been controversies on the issue of compliance with layout in Nigeria as most houses are built at variance with the approved layout.
Producing estate layout requires that part of the land will go for infrastructure, landscape and other facilities. The land owners want more land for development, disregarding critical minimum standard that will make for good built environment. While you are still pontificating on the need for standard, your competitors are already on site clearing. Usually, there are no adverse consequences to them. The situation of uneven playing field is further compounded by unaccountable operators (typically individuals), who are usually in gross violation of planning rules and their tax responsibilities. Unfortunately, the market that is buying cares more about pricing and not about the ethical standard of an operator. You notice a similar situation even among building materials’ vendors where vendors of quality and standard materials have left the market or have joined the non-compliant ones out of necessity to continue in business.
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In specific term, how does the violation of urban development rules affect real estate businesses?
We have unfortunate instances where huge real estate investments are sadly undermined by activities which are in clear violation of planning, environmental, traffic and other laws of public decency. Sporadic markets, motor cycle parks, shanties, etc have emerged to create blight, threatening millions of naira investment in real estate projects. Investors are left in virtual financial ruins by activities that are not only extremely fringe in value but environmentally degrading. The sheer lawlessness on our roads, almost with impunity in some areas, has virtually locked down investment in these locations.
People are reluctant to take up real estate products in such places due to surrounding blight and/or ordeal of daily commuting. Investors in such locations struggled for patronage, while demand pressure builds up in areas of relative sanity, leading to overpricing and overdevelopment, among other unpleasant consequences.
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What then should be the role of the government?
Government has the responsibility of promoting law, order and public good. The benefits to all are clearly seen in places where compliance is treasured. We cannot possibly build the society of our dream when businesses operating outside the clear provisions of laws and regulations are allowed to thrive. While the government might not have taken action to support lawlessness, its sheer omission to act decisively and consistently for all to see is enough incentive for deviant behavior. I believe with a renewed commitment to enforcement, due process and fairness on the part of government, we will begin to see enthusiastic followership and loyalty on the part of the citizens. The reward will be the emergence of a better society.
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