Nigeria: Exploring tax options to survive recession

The Federal Executive Council last Wednesday last week approved a revised National Tax Policy to address low taxation in the country.  CHIMA  NWOKOJI in this report highlights the need for  appropriate tax options  in a period of recession.

 

Given the sharp drop in oil prices, Federation Account Allocations to states have dropped by an average of about N2 billion monthly per state, which partly explains their inability to meet some basic recurrent expenditures including payment of workers’ salaries.

More worrisome was the fact that prevailing negative economic environment had a very adverse effect on the performance of the Federal Inland Revenue Service (FIRS), the nation’s most important revenue agency. The FIRS collected only N1. 207trillion in 2016 compared with a total of N2.92trillion from taxes in the first nine months of 2015, statistics obtained from the Service revealed.

The 2015 amount, when compared with the N3.44trillion, which the Federal Government had set for the FIRS as target for the nine-month period, represented a decrease of N520 billion. In fact, the recession has forced the Federal Government to reduce its Company Income Tax (CIT) budget for 2017 to N808 billion, representing a 7 per cent cut.

A summary of collections indicated that only N 299.802 billion was collected as CIT, which was a far cry from the expected N867 billion contained in the 2016 budget.

This therefore calls for urgent steps not only to save the Nigerian economy from slipping into depression, but to boost revenue in order to settle immediate recurrent obligations.

In this regard, the Federal Executive Council on Wednesday last week approved a revised National Tax Policy to address low taxation in the country. According to the Minister of Finance, Mrs Kemi Adeosun, the main thrust of the tax policy is to establish fundamental principles to guide and orderly develop the Nigerian tax system toward meeting its objectives. It also recognises the primacy of the taxpayers and clearly states their rights and duties.

Nigeria’s tax contribution to the Gross Domestic Product (GDP) is said to be the lowest in the world with about six per cent. Its Value Added Tax is also said to be the lowest in the world at five per cent.

The minister, however, said under the new tax policy, consumers of luxury goods would pay a higher Value Added Tax (VAT).  This better explains why the Value Added Tax budget has been increased from N198 billion in 2016 to N242billion in the 2017 budget, a N44 billion or 22 per cent increase.

The minister expressed the hope that the new revised tax policy, which was recommended by the ministry’s National Policy Tax Review Committee in August 2016, would entrench an efficient tax system.

“What the committee has shown is that we should look at actually increasing VAT on some luxury items. With VAT of five per cent, we have lowest VAT; and whilst we don’t think VAT should be increased on basic items, if you are going to drink champagne, champagne in the UK has VAT of 20 per cent, why should it be five per cent in Nigeria?” she stated.

Even before the approval, many stakeholders had expressed their strong support for exploring tax options especially now that the revenue accruing to the Nigeria Government has been reduced drastically.

A public policy analyst, Adebola Olubanjo believes that taxation should continue to be a major focus for revenue generation, while also stressing that “the tax authorities are expected to be more aggressive in enforcing those laws that were hitherto left in the statute books without any attempt to ensure compliance.”

This means that the tax regimes are already in extant laws but are not or poorly implemented, except for a state like Lagos that is adjudged to be doing very well in this space.

Lagos State has been recognised as one state in the federation that quickly understood the goldmine in taxation as the major source of Government revenue. But how well the state and other states following its template have been able to apply basic principles that should guide a good tax system remains a subject of debate.

Apart from the above policy analyst, other stakeholders have even gone a step further to unravel hidden areas to be explored.

For instance, in recommending “Policy Options for Reversing Nigeria’s Economic Downturn”, CBN governor, Mr. Godwin Emefiele at the 2016 bankers’ night acknowledged that there are several ways the federal and state governments can raise additional revenue to finance the increased expenditure that is needed to engender fast and sustainable growth in the economy. One of such is taxation.

In his words:  “I think we can consider introducing a negligible telecom surcharge to be entirely borne by the initiator of a call. In order to protect the poor and vulnerable amongst us, we could structure it to only take effect after the third minute of talk. “

He said some analyses have indicated that the government could earn about N100 billion per annum from this alone since Nigeria at the moment has more than 216 million registered mobile phones . What Emefiele had in mind obviously is that this surcharge will mainly be borne by middle and upper class people since “I do not know many poor people who make calls for more than three minutes.”

“We could also consider introducing minimal property taxes across the country. This not only raises money for the government but also could be a veritable weapon against corruption since it creates a database of who really owns homes in this country,” the governor suggested.

While some analysts agree with Emefiele’s suggestion, others differed, saying that  it has resemblance to  a bill seeking to introduce a communication service tax of 9 per cent  introduced last year by the National Assembly but was vehemently rejected by telecommunication providers, other stakeholders and the public.

There are over 93.2 million bank accounts as at September 2016 according to the Nigeria Interbank Settlement System (NIBSS).  65.435 million of the number are savings accounts and about 49 million registered Bank Verification Number (BVN) as at last quarter of 2016. According to the National Bureau of Statistics (NBS), there are over 30 million Nigerians who work in public and private sectors who meet the criteria of joining the Retirement Savings Account (RSA) system.

Nigeria has 7.2million people in the Retirement Savings Account (RSA) system as at December 2016, whose pensions are being remitted. That means that the owners of the retirement savings automatically pay some form of taxes to the government while close to 22.8 million working people do not have retirement savings accounts.

A little comparison exposes the fact that somebody is not paying taxes. Someone that has BVN may not be a minor but must be earning some kind of income apart from students. Clearly, if tax authorities begin to mine that BVN data base, data base on 30 million Nigerians who work in public and private sectors and encourage them to pay something, both states and federal government will have higher revenue from taxes.

Corroborating this idea, Managing Director of Afrinvest West Africa Limited, Mr. Ike Chioke said: “If there is a verification system that ties your BVN to your bank account and to more than 216 million registered mobile phones in Nigeria, it will also expose more taxable agents. These tell us that Nigerians can participate in any programme if there is transparency, efficiency and clear operation.”

The move by the executive chairman of FIRS, Mr Babatunde Fowler can be said to be in line with the above discovery. He created a new unit early 2016 and the unit was able to add into the tax net, about 700,000 companies that have not paid taxes. It was then predicted that about 10 million individuals across the nation would also be added into the tax net by December 2016.

 

Appropriate tax system

How well the Lagos State and indeed other states following its template have been able to apply basic principles that should guide a good tax system will cease to be  a subject of debate when basic principles of a good tax system is well understood and internalized.

In Nigeria, all persons in employment, individuals in business, non-residents who derive income from Nigeria as well as companies that operate in Nigeria are liable to pay tax. Some taxes are payable to the Federal Government (and administered by Federal Inland Revenue Service), some are payable to the State Governments and some to Local Governments.  It behooves on Policy makers to ensure that all these conform to basic principles of a good tax system.

In the medieval times, no proper attention was given to the tax by the economists. They believed that Government should collect minimum revenue from tax.  But the changing nature of commerce has put this school of thought to severe test. As tax affects every section of the society in one way or the other, economists now maintain that it should be levied very carefully with a view to avoiding unnecessary hardships to those who have no capacity to pay.

They therefore suggest that any tax system should follow the canons of taxation propounded by various economists for efficient economic administration. A good tax system is one which is designed on the basis of an appropriate set of principles (rules).  This was why the minister of finance, clarified that the main thrust of the newly approved tax policy is to establish fundamental “principles to guide and orderly develop the Nigerian tax system toward meeting its objectives.”

In other words, the characteristics or qualities which a good tax should possess are described as canons of taxation. Canons of Taxation were first originally laid down by economist Adam Smith in his famous book “The Wealth of Nations”.

In elementary economics, Adam Smith’s four Main Canons of Taxation are: Canon of Equity, Canon of Certainty, Canon of Convenience or Ease and Canon of Economy.  He said, “Every tax ought to be contrived as both to take out and keep out of pockets of the people as little as possible over and above what it brings, into the public treasury of the State.”

 

Lagos State’s example

At a time when the Nigerian economic situation has particularly hampered the effectiveness of most state governments in carrying out state functions and paying workers’ wages, the Lagos State government has been celebrating the achievement of greater Internally Generated Revenue (IGR).

It has even continued to execute developmental projects, expanding the infrastructural profile of the state’s landscape and also instituting numerous welfare and empowerment schemes for its citizens.

Lagos State recorded more IGR in 2016 than what was recorded in 2015. As at December 16, 2016 the state had raked in N287 billion IGR for the year under review as against N268.2 billion generated in 2015. Available records from NBS showed that the state earned N202.76billion in 2011, N219.2billion in 2012; while the sums of N384.25billion, N276.16billion and N268.2billion were generated as IGR in 2013, 2014 and 2015, respectively.

Latest figures from the National Bureau of Statistics (NBS) reveal that a total sum of N3.5trillion was earned as IGR by 36 states of the federation within a 66-month period from January 2011 to June of 2016.

It showed that the IGR of the 36 states recorded a sharp increase between 2011 and 2013, after which it declined steadily up to 2016. For instance the sum of N499.08 billion was earned by states in 2011.  The figure rose to N 567.99billion and N800 billion in 2012 and 2013, respectively.

However, in 2014 and 2015, the states’ combined revenue dropped by N92.15 billion and N25.18 billion to N707.85 billion and N682.67 billion, respectively.

According to NBS, the IGRs were generated from: Pay-As-You-Earn; direct assessment; road taxes; ministries, departments and agencies of government and other revenues.

Further analysis showed that Lagos State, with a total of N1.35trillion generated in the 66-month period, led the IGR collection chart.

Lagos State Governor, Mr Akinwunmi Ambode on this note, hailed tax payers in the State for performing their civic obligations faithfully. Governor Ambode said the taxes paid by the people have been judiciously utilised to upgrade infrastructures and provide various services, just as he said that Lagosians deserved to be appreciated for cooperating with government in that regard.

“The tax payers are the ones giving us the little energy that we have even though they say Nigeria is in recession, but somehow Lagos has been able to do it and it is because people are paying their taxes,” he said.

In November 2016, the governor had given a hint of this feat at another public forum when he said the state has the potential to generate N50 billion monthly as internal revenue. Ambode made this known at a colloquium on the state of the nation, organised in Ikoyi, Lagos, by the Coalition of Nigerian Apostolic Leaders (CNAL), an affiliate and the Nigerian arm of the International Coalition of Apostolic Leaders.

The governor said that whatever the state was realising at that moment as internally generated revenue was only 65 per cent of what it could achieve.

He added that the state government had the population and the youth to achieve the target and was working on critical policy objectives that would unlock the state’s potential to build a more vibrant economy.

 

Outlook on taxation in Nigeria

In his 2017 tax and fiscal policy prospects, Taiwo Oyedele, Head of Tax and Regulatory Services at PwC Nigeria and Tax Leader for PriceWater Coopers (PwC) West Africa gave reason why tax revenue will continue to be disappointingly low in 2017.

His words: “It is counter-intuitive that many politicians play politics with revenue generation by placing political considerations ahead of professionalism. Unfortunately, many lawmakers, administrators and policymakers lack proper understanding of the tax system.

“This coupled with undue political interference and vested interests mean that tax revenue will continue to be disappointingly low.”

According to Oyedele, as a country Nigeria has expectations for tax, so do individuals and organisations. To a large extent and under normal circumstances, tax should be relatively more predictable given that the rules and administration are totally within the control of appropriate authorities.

This view re-echoes the idea behind the canon of certainty. This is unlike attempting to predict the weather for a whole year or other natural and supernatural events

In 2017, the tax expert in his prediction said, “It is expected that due to losses being reported by many companies, in addition to other tax attributes such as unutilised capital allowances, the government tax take will be lower than anticipated, especially from Companies Income Tax.

“VAT collection is likely to improve partly due to the impact of the government social welfare scheme of conditional cash transfer and increased enforcement of compliance by FIRS, but will still perform much below its potentials.

“The Tax Appeal Tribunal will be reconstituted. The aggressive level of tax audits by tax authorities especially the progress being made by the FIRS regarding transfer pricing reviews will lead to more disputes and hence a rise in tax appeal cases. The Federal Capital Territory (FCT) Internal Revenue Service will make some progress towards the full implementation of its mandate.

“Adoption and implementation of e-tax systems by various tax authorities will continue to be slow and ineffective. More stakeholders will trigger the necessary provisions of the Freedom of Information Act to request for relevant information on tax administration, spending and expenditure control.

“Some of the initiatives by the FIRS such as joint audit and use of consultants will continue to face implementation hurdles and unlikely to yield any major results.”

Finally, Oyedele said, “Just in case you do not have any New Year resolutions for tax, you need to commit to paying your taxes correctly and on time. Tax will not just be a compliance matter but a business continuity and sustainability issue.

“More importantly, as a taxpayer, you must hold government accountable for the taxes paid. This will create more tax awareness and citizen engagement.

“Overall, the tax journey in 2017 will be bumpy, but I am cautiously optimistic that it will end in safe landing albeit with some bruises.”