Overtaxing a Diminishing Workforce, Strangulated Economy

By Okey Nwachukwu

Nigerian leaders have a long uncanny history of triggering a cause of action only to turn around to expect a different outcome. Faced with failure, they deploy an array of weapons to search for scapegoats.

By his words and countenance, Muhammad Nami, Chairman of the Federal Inland Revenue Service (FIRS), was quite upset with Nigerians for the seeming shortfall in revenue, a situation he attributed to the low numbers of people paying taxes. The revenue deficit underpins the government’s failure to perform and forced it into borrowing binge.

Having just 41 million as tax payers in a country of 200 million people, Nami argued, is inconceivable, noting that tax evasion has become a cankerworm that must be exorcised from the Nigerian system.

Therefore, more taxes will be introduced and the tax net expanded.

Nami however failed to acknowledge that an estimated 23 million of Nigeria’s 80 million employable workforce have lost their jobs due to failed policies. He also failed to acknowledge that taxation is embedded in the relationship between the government and the governed.

He described as incorrect the classification of Nigeria as a rich country based on accruals from oil sales. Instead, taxation is the magic wand required to produce prosperity but Nigerians are undercutting this obligation.

He said, “People are not willing to pay even when they are appointed as an agent of collection; whatever they have collected they find it difficult to remit. We assume that we are a rich country; I don’t think that is correct, we only have the potential to be rich, because we have a very huge population of about 200 million.

He said Nigeria still earned lower than what its counterparts across Africa generate from Personal Income Taxes (PIT). “If you also compare that with South Africa where they have a total population of about 60 million people, with just 4 million taxpayers, the total personal income tax paid in South Africa last year was about N13 trillion. You can now see that these things are not adding up.

“The number of billionaires in Lagos alone is more than the number of billionaires in the whole of South Africa but yet what we generated as PIT by Lagos State was low. So, if we don’t pay these taxes, there is no way the government will be able to provide the social amenities required, the critical infrastructure required for the wellbeing of the country.”

Nami and Mrs. Zainab Ahmed, the Minister of Finance, Budget and National Planning, voiced their minds while presenting the detailed breakdown of the 2022 budget, and dismissed widespread concerns about Nigeria’s borrowing spree while identifying inadequate revenue as the hurdle.

Ahmed said, “What we have is a revenue problem and we are working on it to be able to fully fund the operations of government as well as be able to service our debt obligations. Borrowings are essential for us to be able to continue to deploy necessary capital expenditures as well as human development.”

Apart from borrowing, the government is looking at introducing new taxes in order to shore its revenue base to finance the 2022 budget.
This is invariably a hydra-headed option that stakeholders are already saying would further strangulate current tax payers, whether individuals or businesses, and consequently trigger a chain of depressing reactions.

The Manufacturers Association of Nigeria (MAN) and Lagos Chamber of Commerce and Industry (LCCI) have already enumerated the drawbacks which the proposed tax increases would impose on the people and economy.

Segun Ajayi-Kadir, Director-General of MAN, said the proposed excise duty on soft drinks by the Nigeria Customs Service would choke the manufacturing sector, which is already burdened by multiple taxes, levies and fees.

Should government proceed with the excise duty, millions of micro enterprises along the distribution chain will be hard hit. Manufacturers will in addition lose up to N1.9 trillion in revenue sales.

Manufacturers, who are already strangulated by covid 19, are battling with extremely low margins, Ajayi-Kadir said, noting that “We risk an unprecedented build-up of unplanned inventory, downsizing of the labour force and factory closures. All these would vitiate the revenue expectations of governments and therefore counterproductive. The current unbridled avalanche of taxes, fees and levies from the three tiers of government and their overzealous regulatory agencies may be compounded.”

A similar position was taken by the Director-General of the LCCI, Dr Chinyere Almona, who said expecting more revenue from government-owned enterprises (GOEs) comes with adverse effects because as regulators of their operating environments, the GOEs might launch policies that would affect private enterprises adversely. “We have noted in the breakdown of the budget that more revenue is expected from the government-owned enterprises, some of which are regulators of some sectors. Good corporate governance principles and practices should be adopted. The push for more revenue should not compel the GOEs to undermine the health of the business environment in the pursuit of revenue targets.”

There is hardly any sector of the economy not buffeted by such challenges as multiple taxation and over-regulation, poor power supply or outages, weak infrastructure and deplorable roads, and worsening insecurity.

Taxation is already high in such sectors as aviation, telecommunications and manufacturing where all forms of fees are demanded by multiple agencies.

The aviation sector, which has the potential to create huge job opportunities, is still struggling to recover from the disruption inflicted by covid 19, besides such traditional challenges as “poor capital structure, difficulty in accessing finance, difficulty in accessing cost effective leases, high insurance costs, difficulty in accessing FOREX for maintenance and spare parts, multiple taxation by government agencies, weak corporate governance structure, lack of airport infrastructure and very marginal share of the lucrative regional flights of under 20 per cent.”

The projected increase in the number of taxes and taxpayers, as envisaged by government officials, would undoubtedly generate additional revenue to support development. Their optimism would come at an expensive cost.

Data from the National Bureau of Statistics (NBS) showed that the country’s unemployment rate in the fourth quarter of 2020 stood at 33.3%, meaning that with a labour force of 80.2 million, about 21.7 million Nigerians are unemployed, a figure in excess of the population of 35 of Africa’s 54 countries. At present, Nigeria’s jobless market is put at 23 million. This number of Nigerians outside the tax net. The five-year Country Partnership Framework of the World Bank for 2021-2025 indicated that COVID-19 pushed five million Nigerians into poverty.

Over the past six years, the country was plunged into two dire recessions, first in 2016 and again in 2020. The depression in 2020, in which the economy recorded gross domestic product contraction of 3.62 percent in the third quarter, was largely blamed on the COVID-19 pandemic, while the one in 2016 was triggered by arbitrary and incoherent inconsistencies. For instance, the government, claiming to checkmate illegal smuggling, suddenly closed the country’s land borders. The immediate upshot of that policy was the skyrocketing of prices of almost all goods. Smuggling became deadlier and continued in earnest. Though the borders have since been reopened, the prices of goods have remained skyward.

Policy inconsistencies naturally trigger capital flight as no investor would risk his capital where stability and coherence are absent. Of course, diminishing investments in an economy propels a spike in unemployment as well as drag more people into poverty. Tax revenue takes a hit consequently.
Multiple tax audits are also known to discourage investment in any nation’s economy as investors, for obvious reasons, avoid an economy laden with too many taxes. It will also trigger disincentive to the payment of taxes. “It will hamper ease of doing business in the country, erode investor’s confidence in the country and further decrease foreign investments,” one expert said.

Nigeria is reported to have about 41 million registered MSMEs in the country. This all-important segment has been known to underpin the development of several economies across the world. The reverse is the case in Nigeria where support to the sector has proven ineffective. They are faced with such difficulties as access to market, lack of credit facilities, infrastructure deficit, insufficient cashflows, multiple taxation, regulatory burden, and sub-optimal implementation of the provisions of the country’s MSME policy. In the absence of an enabling environment for them to thrive, these small businesses take tax avoidance as a natural recourse.

The multiple imposition of taxes is particularly brazen in the states. They come in every guise and form. Efforts to raise internally generated revenue among the states and local governments have largely been interpreted as the introduction of all manner of levies and charges. As the bulk of the states are dominated by civil servants, farmers and traders, revenue from these segments are just meager.

FIRS and some states are currently in court over the collection of the Value Added Tax (VAT), ‘a consumption tax levied on a product repeatedly at every point of sale at which value has been added’.

A cursory look will show that due to lack of meaningful productive activities, only a few states, namely
Lagos, Kano, Oyo, Rivers and Ogun generate significant revenue from this tax. But because it is a federally-collectible tax, its proceeds are first warehoused by a federal agency before being shared among all the three tiers of government in the country by the Federation Accounts Allocation Committee (FAAC). In 2020, N1.53 trillion was generated as VAT in the country. Based on the national sharing formula, the Federal Government got 15 percent; the states shared 50 percent, while local governments shared 35 percent.

Strident calls have been made for collaborative efforts between the federal and state governments to evolve a mechanism that leads to the reduction of multiple taxes on payers. Nigeria is lagging behind in ease of paying taxes because of multiple taxation and other unfriendly tax laws.

Judging by the current deplorable state of the economy, in which a large number of Nigerians are currently unemployed or being shoved into the job market, rather than expanding the tax net, it may just remain stagnant, or shrink even further.

The existence of a conducive environment will inevitably engender the creation of opportunities, especially the establishment and expansion of businesses that would subsequently provide jobs. These jobs would in turn be taxed to fund government. Right now, job creation is in reverse gear.

People are happy and willing to perform their tax compliance responsibility once they are presented with opportunities and they see a correlation between revenue and development. They recognize that taxation is an integral part of governance and nation-building. The task before government then is to assure compliance by powering prosperity across board. The reverse is presently the case.

Widening the tax net, when the chips are down, will translate to the overburdening of the already overtaxed and rapidly declining workforce and businesses. The negative ripple effect on the economy will simply remain.

If diversification makes any meaning to policy makers, now is the time to commence a concerted execution.
Nwachukwu can be reached via informokeynow@yahoo.com