Nigeria has opted for aggressive increments in taxes levied on its citizens, rather than intensifying efforts at increasing the number of people in the tax net, even though the former might have some negative implications in an economy struggling to grow above 2 percent.
The Federal Government is planning a hike in indirect taxes across a range of goods and services from telecommunication to banking and consumables, a move that analysts say is ill-advised, considering that the effects of higher costs of goods and services would invariably be borne by consumers. Many of these consumers are already burdened by weak purchasing power.
The aggressive tax increase which is aimed at boosting government revenues, in the wake of a shortfall, is coming at a time when Africa’s biggest oil-producing economy is stuck in slow growth, high unemployment, low investment, harsh operating environment, low government finances, high inflation and insecurity. And even the readings from Purchasing Managers Index, a forward indicator of economic activities, are not showing signs of any improvement.
First, is the government’s plan by 2020 directing banks to impose a tax on all online transactions for the purchase of goods and services, then a move to increase by 50 per cent Value Added Tax (VAT), from 5 per cent to 7.5 per cent.
Nigeria has also passed the Nigeria Police Trust Fund (Establishment) Act into law. The new law, aimed at throwing support for police training, equipment purchases, and other police personnel matters, calls for the imposition of a 0.005 per cent levy on the net profit of companies carrying on business operations in the country. Without allowing the dust of the aforementioned planned increase to settle, the Senate is proposing a Bill entitled “Communication Tax Bill, 2019”.
The Bill if passed into law will require consumers of voice, data, Short Message Service (SMS), multimedia message services and payTV services to pay a 9 per cent tax on the fees paid for the use of these services.
This additional tax is exclusive of the 5 per cent VAT, already paid by consumers and communication services, as well as the 12 per cent Customs import duty paid on ICT devices, and the 20 per cent tax levied on SIM cards.
Analysts say the planned move by the government would cause severe pains on small and medium enterprises that are known to be the engine of growth in any economy. It will also stifle aggregate demand since companies would have to shift the burden to final consumers in the form of higher prices.
“I am aware that Nigeria is faced with a revenue shortfall, but I do not agree that it needs to multiply the number of taxes for it to raise all of the money,” said Yomi Olugbenro, Partner and West Africa Tax Leader at Deloitte.
“Rather than imposing different taxes which will add to the challenge of compliance and administrative inefficiency, the government can be more efficient with tax collection by expanding the tax net and blocking all loopholes,” Olugbenro told BusinessDay.
At 6 percent, Nigeria has one of the lowest Tax-to-GDP ratios in the world, going by latest figures from the Organisation for Economic Co-operation and Development (OECD), a grouping of the world’s leading market economies.
The ratio is meagre when compared with the 15 percent level that the World Bank says is necessary to achieve economic growth and poverty reduction. It also falls behind other countries in the continent including South Africa with 29 per cent; Ghana 18 per cent; Egypt 15 per cent, and Kenya 18 per cent, says the OECD.
As of May 2018, of the roughly 80 million Nigerians who are economically active, only about 20 million paid any federal or state taxes at all, showing that the tax morale is very low.
This low inclination to pay taxes by the citizens spans from factors including little information about taxes, negative experience with tax authorities and lack of trust in tax officials or the government, according to a 2018 survey by the Nigerian Economic Summit Group on the perceptions of taxation.
However, rather than focusing more on efforts that would bring in more citizens from the informal sector into its tax net, government has resorted to increasing the amount of taxes and creating a multiplicity of taxes for the few that pay.
“The continued introduction of these charges will continue to weigh down on these companies and the future revenues for government, because if these companies are struggling, it will reduce their ability to expand operations, which will invariably affect government’s revenue from taxes,” said Ayodeji Ebo, managing director/CEO, Afrinvest Securities Limited.
Ebo noted that the Federal government is putting the cart before the horse, with the various tax hikes, which should not be the case. “They need to think of bringing down the cost of governance too,” he said.
The Federal Inland Revenue Service (FIRS) for the past five years has failed to meet its revenue targets. But that is because, within the said period, economic activities in Nigeria have struggled to pick up following the 2016 economic recession.
The overall measure of economic activities, otherwise known as the gross domestic product (GDP), is a function of government’s expenditure, private investments and consumption by households.
With Budgetary spending from the government accounting for only 12.5 percent of the entire GDP while private investment and households’ consumption account for about 80 per cent of the total output, overburdening the last two components with various taxes, to generate government revenue to spend would be at the expense of economic growth.
MICHAEL ANI
