As the Nigerian government experiences a shortfall in revenue and as a country witnessing an increase in the burden of national taxation, a panel of experts at the recent pre-summit webinar ahead #NES28 advocated a new approach to tax collection policies to boost capital and recurrent expenditure. Excerpts by Gbemi Faminu.
THE PANELISTS
Segun Ajayi-Kadir, director-general, Manufacturers Association of Nigeria (MAN), represented by Oluwasegun Osidipe, director of Research and Advocacy, MAN
The theme for this webinar is apt and timely, especially at this time when the government is experiencing a shortfall in revenue and as a country we are witnessing an increase in the burden of national tax although the tax to GDP ratio is very low.
Looking at the overarching theme, critical questions need to be asked such as what is the ideal tax to GDP ratio that should be set as a target for the country, given the structure and the nature of our economy?
Secondly, how do we set machinery in motion to gradually move Nigeria to the desired ratio, without increasing the threshold of pain points of industries and Nigeria in general? Thirdly, how can the tax net be widened in a manner that resistance from the populace will be at the barest minimum? It may be expedient to also look at countries that have better ratios and what they are doing differently?
Chioma Ifeanyi-Eze, CEO, AccountingHub
Listening to the economic review about Nigeria, it looks like everything is on a downward slope but Nigeria remains the largest economy in Africa.
The SMEs form a huge part of this economic activity that we talk about in Nigeria. If we are really talking about critical reforms that will bring about prosperity while considering that Nigeria remains the largest economy in Africa and that SMEs form a huge part of this economy then it needs to become more friendly for SMEs.
Rajul Awasthi, senior public sector specialist and co-lead, Domestic Resource Mobilisation Global Solutions Group at the World Bank
Nigeria is the largest economy in Africa and it has the largest country by population too, and it is a critical pivot for Africa’s progress but it is important to highlight that the government of Nigeria from the public finance perspective is really facing an existential crisis. In the latest World Bank’s Nigeria development update, Nigeria is 115th out of 115 countries, in terms of the average revenue to GDP ratio, and in the worst position.
Secondly, despite the rise in the world’s oil prices, net revenues on oil and gas have been coming down because of the tremendous impact of the subsidy. So, what’s going to happen in 2022? the Federation revenues are going to be significantly lower, they are already very low as Nigeria is already the lowest in the world out of 115 countries. This year is going to even be lower than it was in 2020 because of the debilitating impact of the fuel subsidy
Possible solutions starting with the non-oil part include bridging the wide gap in VAT compliance, the tax expenditure statement of the budget office of 2020 states that the VAT gap in 2019 was over N3.1 trillion whereas the collection was over N1.2 trillion.
About 2/3 of that gap is coming from compliance gaps, which is a huge important issue that needs to be addressed because it is the reason why there is a low tax base, making few people feel like they are being overtaxed.
Secondly, there is a need to rationalise tax expenditure; tax incentives need to be evaluated in terms of what they are delivering for the policy promises they were supposed to deliver on.
Third is the personal income tax. There need to be data sharing between the FIRS and state inland revenue service. Companies, directors and individuals are taxed in the state, where is the coordination? It is necessary to improve revenue from the personal income tax.
At the state and local government levels, Nigeria has tremendous potential, there are millions of households with diverse properties, there are many rich people who need to be paying property taxes.
Nigeria does not have an excise duty on telecoms, neighbouring countries have excise rates of 10-12 percent. We need to find handles to raise revenues otherwise when discussions around raising revenues start, there will always be an excuse why something should not be taxed.
Fifth, there is a need to reform the PMS subsidy regime at least by 2024 and all these are critical for the country.
Read also: #NES28’ critical tax reforms for shared prosperity’ (1)
Taiwo Oyedele, Africa tax leader, PwC
The timing and design of the excise duty policy raises concerns because context is important, and if people are struggling to survive because they are in extreme poverty, they cannot give what they do not have. Taxes should be introduced to those who can afford it.
When you have the economy recovering and you are seeing the progress then you can extend it to the rest of the population. For example in East Africa, they have rates in double digits and their VAT is around 17-18 percent but all of that should be contextualized and faced over a period of time.
Aisha Obomeghie, executive secretary, Joint Tax Board (JTB)
Nigeria has engaged in tax reforms over the years but it has been one sided, and the purpose of tax reforms is to improve the process of tax collection and to also improve how tax revenue is managed to address social issues.
We should talk more on how to make sure that the tax reforms are given the human face and the poor are actually protected. But in a country where the tax to GDP ratio is one of the lowest in Africa, hovering around 6 percent instead of 10 percent, and has ironically the highest population in Africa, how can enough revenue be raised to support the government while considering the masses?
One of these areas is to look at the number of taxes and streamline them. The taxes and levies collectible by the various types of government, by the Federal we have 11, by the state we have 19 and by the local government we have about 21. And basically speaking, the JTB does not even administer up to 20 percent of these taxes. There is a need to review these schedules and the government should clear them and make them two or three taxes.
Also, there is a need to build up a robust database where all the tax authorities can key into and raise the right assessment to collect the right amount of taxes that is needed. If the right amount of taxes are being collected, the two sides of the divide on the social contract will ordinarily live up to their expectation.
Quote: If the right amount of taxes are being collected, the two sides of the divide on the social contract will ordinarily live up to their expectation.
In this kind of modified social contract that we are operating whereby the citizens pay less and ask less questions needs to change and that is what brought us to where we are today and we need to change that narrative. For example, not introducing more taxes or more agencies is the solution as we are having today but leveraging more on indirect taxes, where the poor feel less of the impact of those taxes.
There is a an entertainment tax that should be collected by the local government but today, not up to 2 percent of that tax is being collected. That is a tax that can be collected seamlessly without people feeling the impact, especially when you tie it to the time they are buying data. For example, paying N200 tax on N5000 worth of data, they won’t feel the impact, and that will bring out immense revenue to all the tiers of government, although that type of task belongs to the local government.
But as we speak today, reaching the telecoms sector operators and digital service providers is a Herculean task. We have these silos of data that if by today, they have been brought together and every tier of government is able to access the data, we will be able to generate enough revenue that will help to fund at least the recurrent expenditure and service our debts, and then we will be left with the capital expenditure.
We are working assiduously to encourage sharing of data between the federal Inland Revenue Service and the state inland revenue services and soon the national data bank that will bring people to the limelight to pay the correct taxes will be up and running.
We however have challenges with capacity building even with the level of integration we have at the JTB. In a recent analysis, we did revealed that out of the 27 states’ Internal Revenue Authority integrated into the database of the JTB, we have up to six or seven that have never pulled any data, not even a single data.
Taiwo Oyedele’s response
How can the government boost revenue when six to seven state revenue agencies cannot provide data or optimise available data? For example, South Africa has a smaller economy than Nigeria but they raised the equivalent of N14 trillion from the personal income tax alone last fiscal year and that is more than all the taxes collected in Nigeria even with all the states combined.
In Nigeria, that number has never crossed N1 trillion and a lot of the reason why this is the case is that, we are not using data intelligence for tax compliance, so people who make lots of money are not paying taxes, but the burden is placed disproportionately on the poor people who earn PAYE and they earn minimum income and are the ones funding government.
This data also show that about 96 percent of the personal income tax is coming from PAYE and we cannot continue like this, it gives room for people to get away with tax evasion and that is not acceptable.
The Manufacturers Association of Nigeria has been very vocal and they speak up every single time about policies and the impediments they face, which is the right thing to do. But it is important to enable businesses but there is never a convenient time to introduce a tax or increase rates. How can we strike a balance by helping the private sector thrive while the government grows its revenue?
Nigeria definitely needs money and all hands must be on deck to bake a larger cake that will also add value to the entire economy, but it is expedient to look at the timing of such taxes.
But in doing so, some critical things need to be considered, like the process of increasing the size of a cake should be done in a manner that would pay due attention to the structure and the status of our economy. For example, if you look at countries like Turkey, Malaysia, China, and even South Africa, they are better than us but looking at their per capita income, it is as high as to $11,000, but the national minimum wage for the country is hovering between about $350/ $380 and in Nigeria it is about $95. The beauty of looking at some of these indices is that it helps us understand the likely implication of instant upward review, so we need to look at our current status before effecting increases.
Secondly, MAN expects that taxes should be structured to take more resources from the rich than the poor, and that the country develops an integrated framework that will facilitate the intentional movement of operators in the informal sector to the formal sector because huge transactions take place in the informal sector and it is better than overburdening the already compliant companies.
Similarly, we need to widen the tax net rather than increasing the tax burden of existing taxpayers, and lastly we need to promote harmonization of taxes and levies so we can attract more investment.
There is also need for constant roundtable consultation with stakeholders in the private and public sector because oftentimes those new taxes have far reaching implications on the processes and systems of businesses.
Oyedele’s response to MAN
It is okay to ask everyone to pay taxes but it is necessary to consider the local context in terms of per capita income, minimum wage, and level of poverty. Also, the biggest opportunity for the government to raise revenue is not new taxes or higher rates, rather it is to bridge the non-compliance gap and address inefficiencies.
Quote: Also, the biggest opportunity for the government to raise revenue is not new taxes or higher rates, rather it is to bridge the non-compliance gap and address inefficiencies
There is a need for enhanced collaboration and engagement between the government and the private sector to better understand policies. For example, if we must introduce excise duty on services, it should be collected by FIRS not the customs because the latter has zero experience in collecting excise on services.
The government has prioritized supporting SMEs but these business owners don’t seem to feel the impact of government intervention because they still have to deal with informal, implicit and illegal taxes. What are the top concerns of SMEs when it comes to tax matters and the tax environment? What will small businesses like the government to do as a way of addressing their challenges? (Accounting hub)
The biggest problem that small businesses have with taxes is poor education, they do not understand what to pay, how to pay, how to calculate it, the processes to follow, etc.
Over 60 percent of businesses are willing to pay their taxes if they know what to pay but most times, when tax authorities are implementing anything they are usually trying to increase collection and how to punish offenders but you rarely see them increasing sensitization.
Now the CAC is giving TIN to businesses after incorporation, they should also be able to educate businesses from that point. Rolling out voluminous laws means nothing to them if they are not being educated. If we do more on education, we will drastically increase the taxes.
Secondly, tax policies and tax laws do not trickle down to the processes that the SMEs meet at the tax offices, which constrain SMEs as they are sometimes, wrongfully charged with tax offences they have no knowledge of.
Thirdly, the length of time that it takes an SME to get anything required from the tax offices is too long. Tax authorities need to learn the give and take mentality, if they want taxes from SMEs they need to support these businesses such as reducing the delay in giving TCC. Finally, it is still very difficult to remit taxes in Nigeria, many SMEs pay taxes collectively and the process is rigorous.
What exactly is the JTB doing to increase tax compliance among politicians and other political leaders, because tax evaders should not be holding positions to handle tax payers money?
At the last JTB meeting, the focus was on how to make political office holders tax compliant. In Nigeria generally, there is a resistance to pay tax right from the colonial period. Also, the civil society is not inquisitive about how taxes are being used, not actually asking many questions about how their taxes are being used.
The morale of tax rates are very low here because reference is made to political office holders like the lawmakers who earn as much as N30 million and are not tax compliant. This is why we are trying to make sure that the political office holders are compliant because they are to superintend on the taxpayers money.
However, we are building an all-encompassing compliance mechanism for both political and non-political office holders, so when the National Data Bank is built everyone will pay tax.
Also, there is the data for tax initiative which aims to link up 38 economic activities which are linked to an individual’s identity, so that all the person’s economic activities, basically 90 percent will be visible and appropriate taxes will be requested.
There are many factors aiding the low compliance level in Nigeria, that is why the tax to GDP ratio is very low in spite of the huge population we have.
Every agency of government holds on to its own data and refuses to share or link with other agencies. All agencies need to collaborate and increase tax compliance. We need to reset the whole system if we are having to change the narrative and head towards a level of development.
Also, the JTB during meetings showcase how tax money is used to carry out expenditure in order to motivate citizens to pay more taxes. We also established a zonal tax compliance committee which has six chairmen representing the geopolitical zones, because we realise that driving compliance is not easy and are waiting for information to kick start the process. The committee has partners like INEC, ICPC and CCB.
The function of this zone is to revalidate and approve TCC for potential aspirants so that before INEC accepts such TCC, they will see the signature of the zonal committee.
However, some challenges will be encountered in carrying out the functions of this committee. For example, INEC does not deal with aspirants but candidates and they are not mandated to get TCC from those vying for political post.
We want the National Assembly to amend the law to make the presentation of the TCC mandatory for people vying for political office.
Engagement of political office holders by JTB needs to be extended to an interview session whereby they are asked about their tax agenda before they assume office, which will be used to enlighten the public.
It is when election time is close that they rush to any of the offices where they feel that they will get the cheapest TCC to present to their political parties which is most times not linked with the assets that they have declared.
The World Bank has been very consistent in trying to nudge the Nigerian governments in the direction of addressing the unsustainable subsidy regime, revenue mobilization ideas, and how to manage debt sustainably.
How can Nigeria balance our competing needs as a country so as to raise revenue? What can we learn from other climes that you think can work within our context?
Generally, looking at experiences of other countries like the Scandinavian countries that raise some of the highest taxes in the world ranging between 40 to 50 percent of GDP and that is like 10 times of what Nigeria raises.
There is no conflict between having a tax regime that can raise a lot of revenue for the government and yet having a system that is friendly to business, friendly to investment and friendly to growth. Achieving a balancing act is possible and this can be done using technology. If we look at the private sector, especially the telecom and financial sector, technology is paving the way for seamless customer client interaction. So obviously, the capacity exists within the country and there is a need to optimise the opportunity.
Secondly, the government is resorting to introducing new taxes because there is no broad base and sufficient revenues are not being raised but it is not the right approach.
There is a huge opportunity to raise excise tax on some goods like beer, wine, spirits and cigarettes, although a very tiny tax has been introduced on sugar sweetened beverages that could have been much higher. But globally there is a consensus that these rates should be higher because they are supposed to attack and address negative externalities of these products.
The second reason this is happening, the electronic money transfer fee. I think this will raise some revenues. The third and this has been talked about a lot I think.
There is a need to improve overall tax compliance, now we are working with the FIRS for developing VAT advisory visit programmes, which means that FIRS officials will go to SMEs and educate them. The FIRS has already developed a programme and they are going to be working on implementing this with our support.
There is a need to reintroduce the VAT on premium motor spirit in line with the climate change agenda, this was exempted in 2018.
In the medium term you know, we as the World Bank have been advocating rollback PMS subsidies and adopting the free market price. This is critical, again for the climate change agenda, but in the immediate and medium term from the point of view of the public finances, there’s a need to rationalise tax expenditure.
The World Bank is also asking states to eliminate all these different taxes and fees in the states for the small businesses, focus on a simple turnover base tax with 2 or 3 percent of turnover so it is easy to calculate and have an electronic platform through which that tax can be paid for small businesses with a turnover less than N25 million.
There is a case for increasing the VAT rate in the medium term, to move towards the sub-Saharan African average. But first, the government must demonstrate that they are making efforts and being successful in reducing the compliance gap. The VAT increase should be accompanied with reforms on the input tax credit systems when it becomes a true VAT.
And then in the long term, there’s a lot to be done on modernizing and strengthening the various tax laws. Nigeria’s tax laws are already pretty aligned with international good practice but there are things that can be done that will make the tax system more compliant and more aligned with international good practices, which multinational corporations look for and that will also help to improve the investment climate in the country.
