States’ desperate revenue drive squeezes informal sector

Dwindling federal allocations are forcing states in Nigeria to go after artisans and market women to pull the informal sector into the tax net.

 

The sun burned through the rusted roof of the barely-larger-than-a-coffin stall where 42-year old Mahmood sat over a wooden toolbox hammering nails into the sole of a shoe he balanced over a cast iron anvil.

He listened to a local station playing music in Hausa language on a portable compact AM/FM radio with built-in ferrite bar antenna for AM and a telescopic antenna for FM.

A while later, an announcer came on air and fouled his day. The government of Niger, his home-state, will start collecting taxes from artisans, suya sellers and cobblers like him to boost the sum of N4.81 billion collected as Internally Generated Revenue (IGR) in 2016, the announcer said.

Mahmood’s bloodshot eyes roamed round his stall littered with worn shoes, scraps of leather and tools, and he wondered where he was going to generate the extra money for tax when his customers have no money to even redeem their battered shoes he has managed to mend.

Niger State could not meet its N9.39 billion IGR target for 2016 but has raised its 2017 target to N9.5 billion. Ibrahim Balarabe, the state commissioner for Finance, says the state’s inability to meet its IGR target for 2016 means the government will demand that the informal sector pay their fair share of taxes.

“Enumeration is going on to capture them into one platform. Once we have data, it will make it easier for us to go after them,” he says.

Like Niger, state governments in Nigeria are foraging for revenue to fund their bloated, often impractical budgets as decline in allocations from the Federation Account Allocation Committee (FAAC), following a slump in crude oil earnings last year, takes a toll.

According to a recent appraisal of states’ IGR by the Nigeria Extractive Industries Transparency Initiative (NEITI), FAAC allocations to the three tiers of government have declined by over 40 percent since 2013.

The Federal Government which gets the bulk of the revenue received N2.08 trillion in 2016, a decline of 43.9 percent on the N3.711 trillion received in 2013. Similarly, while state governments were allocated N3.095 trillion in 2013, they got N1.642 trillion in 2016 indicating a 46.9 percent decline on the 2013 figures. Local governments saw their allocation slump 40 percent from N1.708 trillion in 2013 to N1.011 trillion in 2016.

NEITI further revealed that revenues accruing to the state governments fell short of their budgets projections, in some states by as much as 30 percent.

Lagos, for example, had a budget of N662.60bn for 2016 even though its total revenue was N410.5bn, resulting in a shortfall of about N252 billion.

States in the northern part of the country recorded even worse performance. Adamawa State had revenue of N41.05 billion against a budget of N130.10 billion, while Nasarawa generated revenue of N32.5 billion to fund a budget of N77.30 billion in 2016.

 

Lagos tax system: A national model?  

Lagos State has the highest IGR in Nigeria, generating N150.59 billion in the first half 2016 through several investments including taxes. Last year, the state developed a policy that will capture millions in the informal sector not included in the tax net.

“We have identified three categories of taxpayers in the informal sector. These are market men/women and artisans; micro, small and medium scale enterprises (including professionals); and household domestic staff,” explains Olufolarin Ogunsanwo, head of the state Internal Revenue Service.

After streamlining the taxpayers, the government pushed for voluntary compliance and improved the process by complementing e-submission with physical filing of annual returns, yet the state reports only marginal improvement in compliance this year.

Lagos has enacted laws that have helped it diversify its tax base. It collects up to 12 different types of taxes and levies. These include Withholding Tax (individuals only), Personal Income Tax, Capital Gains Tax (individuals only) and Stamp Duties on instruments executed by individuals.

Lagos also collects business premises registration fee, pools betting and lotteries, gaming and casino taxes, road taxes, development levy (individuals only), naming of streets registration in the state capital, and right of occupancy fees on lands owned by the state government in urban areas of the state.

There are also different taxes for hotel occupancy, market taxes and for fast foods called a Restaurant Consumption Tax.

“In its continuous drive to increase the state’s Internally Generated Revenue (IGR) and make tax assessment and payment voluntary, convenient, and unambiguous for taxpayers, LIRS has opened up new payment platforms, compressed the tax forms and printed them in Yoruba and Pidgin, acquired a hotline that taxpayers can call for enquiries in any of the three major languages and reviewed the cost and process of replacement of the cards, amongst other things,” Ogunsanwo told local artisans last year.

Lagos has also instituted both incentives and punitive measures to pull those from the informal sector into the tax net. For example, tax certificates have become a prerequisite for getting certain services from the government, especially vehicle licensing issues.

The state recently unveiled a micro-credit scheme to support small businesses and a condition to get on board is evidence of voluntary tax compliance.

Yet, Ogunsanwo said that of the 9 million projected taxable persons living in Lagos, only about 5 million of them are tax-compliant. The state is also finding it difficult to compel artisans and traders to pay annual tax of N5,000 as Presumptive Tax (using indirect methods such as income reconstruction or by applying base-line taxation across the entire tax base).

Many states in Nigeria aspire to be in the same position as Lagos and are enforcing all manner of rules to increase tax compliance, especially from the informal sector, but analysts say they are not taking into account their unique circumstances.

“Many of these states are trying to get the informal sector into the tax net but they have no serious economic activity. Also government agencies spend wastefully, which makes a lot of people run away from paying taxes,” says Cyprian Nwuya, former chairman of the Institute of Chartered Accountants of Nigeria (ICAN), Lagos Mainland, and partner at Agochukwu Okpalaoka & Co, a Lagos-based audit firm.

Figures from the National Bureau of Statistics (NBS) indicated that Nigeria’s formal sector last year contributed 58.82 percent to Gross Domestic Product (GDP). This leaves over 41 percent from the informal sector that is not captured in the tax net, hence the scramble to tap into this sector.

 

Teething challenges

In recent times, Nigerian states including Rivers, Niger, Delta, Edo, Ogun and Kaduna have announced measures to shore up revenue through taxation from the informal sector.

In Rivers, for example, PAYE accounted for 87 percent of tax revenue and the state says it will focus on the informal sector to diversify.

“That situation is not acceptable and sustainable. We have to expand our tax net,” said ThankGod Adoage Norte, chairman-designate, Rivers State Board of Internal Revenue Service.

However, the challenge the states have is that their informal sectors record modest economic activity and market penetration is not deep enough. In many Nigerian states, the civil service is the only serious enterprise and when federal allocations delay, economic activities grind to a halt.

In a study on taxation of the informal sector published in the International Journal of Business and Social Science in 2015, Joseph Udoh of the Department of Accounting, University of Uyo, states that the potential yield from states are low and administration cost is high thereby acting as hindrance. The high cost of collection negates the economic principle of good taxation.

Udoh avers that the informal sector typically earns less income, has unstable income, and does not have access to basic protections and services.

Worse still, the governors in these states are not exploiting their natural resources to stimulate enough economic activities to support taxation.

This is one of the reasons why many states in Nigeria are technically insolvent. As at December 2016, external debt of state governments rose to $3.57 billion, according to analysts at FBNQuest.

States already in a hole try to dig out by inflicting impractical measures on their citizens to shore up badly-needed revenue.

Delta State has announced new levies on borehole and other water-allied levies. Those who drill boreholes for domestic, commercial, and industrial purposes will now obtain annual licences at the cost of N2,500, 35,000 and N50,000, respectively. This is in addition to the cost of procuring application form and paying inspection fee of N2,000.

The people are kicking against the move because the government came into office promising to provide water and other amenities. Failing to do that, it now wants to tax citizens who try to provide their own water.

Some state governments in Nigeria have expense accounts that remove any pretence at serious governing. There are budget lines providing for construction of airports to ease the governor’s shuttle from Abuja. An analysis of the 2017 budgets of 33 states revealed that they plan to spend N2.60 trillion, or 42 percent of a total N6.22 trillion budget, on paying salaries.

 

Dredging for deeper waters

Resolving the challenges involved in getting the informal sector into the tax net has a better chance when the factors creating the sector are understood.

According to the Swedish International Development Cooperation Agency (SIDA), key factors driving the informal sector are limited absorption of labour, particularly in countries with high rate of population or urbanisation, and excessive cost and regulation of entry into the formal economy, often motivated by corruptions.

Other factors are weak institutions, limiting education and training opportunities, infrastructure development, increasing demand for low-cost goods and services, migration motivated by economic hardship and poverty, and difficulties faced by women in gaining formal employment.

As such, no economy where nearly half of the population play in the informal sector like Nigeria can succeed if, as policy initiative, it treats tax revenue merely as band aid to plug income gaps. This only indicates a poor grasp of the role of taxation in economic development.

In an economic report published last year, analysts at Financial Derivatives Company Ltd said that unlike oil revenue, taxes have limited vulnerability to external exposure. It also takes less time, effort and cost to improve tax collection than to implement grand, long-term development plans such as agricultural reformation and building revenues.

“The government needs to educate the citizens more on the benefits of paying taxes and spend wisely to encourage the informal sector to get on board,” says Nwuya.

Spending prudently and curbing corruption in public office are strong motivations to get on board large swaths of the Nigerian population who would gladly pay tithes but dodge taxes.

Paying taxes on income irrespective of the size of the income is good citizenship and provides the taxpayer a voice to demand that government keeps its part of the social contract. Some say many Nigerians put up with reckless governments because their tendency to evade taxes cures an appetite to hold governments to account.

In the research undertaken by Udoh on factors limiting the Akwa Ibom State government’s plan to deepen informal taxation mentioned earlier, he found that the government’s approach in establishing a tax database for the informal sector has not been properly articulated.

There was also no proper structure of tax base and templates for assessing and collecting taxes from the informal sector have not been properly expressed.

The government wants to use a presumptive tax regime, but this has not been adequately incorporated into the current tax laws and policies of the state, and communication with the people has not been deep enough to remove ambiguity.

Udoh also found that the tax administration organ in relation to presumptive tax regime has not been properly fitted into the tax laws of the state and staff members are not yet trained in the use of the new system to avoid conflict with the taxpayers in the course of their duties.

Therefore, states would need to streamline their tax systems and formalize levies paid by artisans, market women and commercial bus operators at motor parks or those demanded on the threat of violence by the myriads of touts who waylay buses at every stop in major cities in Nigeria, especially in Lagos.