The Bills aim to promote uniform procedures for the consistent and efficient administration of tax laws, facilitating tax compliance in line with current realities. They also propose overhauling existing structures by replacing the Federal Inland Revenue Service (FIRS) with the modernised Nigeria Revenue Service (NRS).
However, critics have highlighted potential drawbacks, including increased burdens on consumers due to higher VAT, challenges for states with less diversified economies, lower purchasing power, living wage, and higher compliance costs for medium-sized enterprises, among other concerns. This debate reflects broader concerns of trust in government expenditure and whether the projected revenue increases will lead to tangible public benefits.
To speak to this, BusinessDay recently interviewed Jibrin Dasun, Senior Associate at AELEX Legal Practitioners & Arbitrators to share his insights.
Here are his thoughts on this:
Could you shed some light on the legal perspectives underscoring the current tax reforms?
A tax policy was proposed to replace the one from 2017, though it’s unclear if it has been finalized, as I saw a draft around mid-year. This policy was part of the reforms worked on by the Presidential Fiscal Policy and Tax Reforms Committee, aiming to avoid the annual amendments to our tax laws that have been made through the Finance Acts from 2019 to date.
The piecemeal amendments to our tax laws over the years have made it difficult for taxpayers to keep track of changes. More importantly, these amendments disrupt the certainty that taxpayers prefer. They often lacked coherence, were not policy-driven, seemed reactionary, and frequently didn’t align with monetary policy, creating a disconnect between fiscal measures and monetary actions, particularly with regard to inflation.
The 2017 tax policy proposed a five-year review of our tax laws to evaluate their relevance after that period. However, this proposal wasn’t followed, leading to inconsistent reviews and amendments.
Another major concern is the outdated nature of our tax laws. For instance, the Companies Income Tax Act, originally enacted in 1961 and re-enacted in 1979, still contains provisions that are in effect today, even though they may no longer be relevant to the modern economy. This raises the question of how far piecemeal adjustments can go while still maintaining a coherent tax system for the current economy. To address this, some have argued for consolidating the various tax laws into a single piece of legislation, while others have suggested reforming them separately.
Moreover, there are numerous taxes across the federation, which is unsustainable from a business perspective. These issues have been long recognized and discussed, but no government policy has successfully addressed them.
The current administration focuses on generating more domestic revenue rather than relying on borrowing or printing money. With a tax-to-GDP ratio of about 10%, the current administration aims to grow the GDP to $1 trillion and increase the tax-to-GDP ratio to 18-20%. Achieving this would mean collecting close to $180 billion in taxes annually. However, this goal can only be reached if the economy expands and the bottlenecks that inhibit growth are addressed. Investments in essential infrastructure are crucial, but subsidies often hinder these investments, as investors find it difficult to recover their ROI. A case in point is the cessation of natural gas supplies to GENCOs by wholesale gas-producing companies, who cited escalating debts as the reason for the suspension.
There are two perspectives on the reason for the current tax-to-GDP ratio. One school of thought posits that there is ineffective enforcement of existing laws, while the other believes the laws are outdated and unfit for purpose. The truth likely lies somewhere in between.
A prime example of ineffective enforcement can be seen with online vendors, who often fail to include VAT in their pricing or invoices, leading to tax leakage. The informal economy presents a similar challenge. While there have been proposals to harmonize tax identification numbers, it remains unclear whether this would succeed in bringing the informal sector within the tax net.
The debate continues over whether to enforce current laws more rigorously or to revamp the laws entirely. The Committee has opted to revamp the laws, but only time will tell how effective this approach will be. The motivations and logic behind the reforms are clear, but their success remains uncertain.
From a legal perspective, the key issue is whether the reforms align with a coherent tax policy. In my opinion, the proposed Bills largely conform to a coherent tax policy. If the Bills are passed, subsequent amendments should ideally be consistent with the tax policy, including the proposed five-year review period.
What is the impact of the tax reforms on low income groups, that is persons earning N800,000 and below annually?
It is commendable that the government aims to increase the threshold for individuals required to pay tax, currently set at N30,000. However, I believe a uniform threshold across the entire country is not ideal, as purchasing power varies significantly across different states in Nigeria. Instead of fixing the threshold in the law since any adjustment would necessitate a review of the law, which can be cumbersome, it would be more effective to allow for flexibility.
In my opinion, the living wage threshold for each state should be determined by an independent body, taking into account the cost of living in each state in Nigeria. This living wage should be reviewed annually, considering inflation and other relevant factors. At the end of each year, tax adjustments could be made in line with the updated living wage, ensuring a fairer and more equitable system.
The living wage for each state should serve as the exempt income threshold, meaning that any income up to the living wage would not be taxed. Income above that threshold would be taxable, which would provide a fairer approach to taxation. For example, someone earning N800,000 might still struggle to meet basic needs in states with a higher cost of living. Furthermore, many states have yet to implement the minimum wage, which adds another layer of complexity. Therefore, it is crucial to index the income tax exemption threshold to the living wage in each state, ensuring that the system is equitable and takes regional differences into account.
How does the current VAT system impact the purchase of essential goods and services from formal and informal vendors and how impactful is the exemption?
The exemption of essential goods and services from VAT is a commendable move. However, there is an inherent challenge in defining what is deemed “essential”. What is considered essential in State A might not be the same in State B, and this raises questions about how we can create a definition that is both fair and relevant across all states.
There should not be a blanket description of essential goods and services. Instead, an independent body should be tasked with determining what constitutes essential goods and services on a state-by-state basis, taking into account local conditions and needs. This approach would ensure that the exemption is more relevant and applicable to the specific circumstances of each state.
Take basic food items, for instance, as food and transport are key expenses for most people. Oftentimes, VAT is only applied when purchasing food from formal vendors or outlets. However, when food is bought from open markets or informal vendors, VAT is often not applied. Although the law prescribes VAT on these items, it is not always enforced, especially in the informal sector, where these transactions take place. Consequently, exempting these items from VAT may not significantly impact most people, as they tend to purchase from informal vendors who are not typically required to charge VAT.
This underscores the importance of tailoring VAT exemptions to the realities of local markets and ensuring that they align with how goods and services are bought and sold in each state.
How do these reforms influence Nigeria’s long-term economic stability?/ Is it better to distribute the tax burden based on income levels
This is the first time we are amending our tax laws with some policy objectives in mind, and I think it is important to emphasize this point. Without a defined objective, actions tend to be reactive rather than proactive. As I mentioned earlier, the current administration’s goal is to significantly grow the GDP to at least $1 trillion, and to achieve this, the tax laws must be fit for purpose.
The progressive income tax rates are designed so that high-income earners pay more, aligning with the principle that those who can afford to should contribute a larger share.
Regarding VAT, I suggest that a flat rate should not be applied. Instead, VAT rates should vary based on the type of goods. There could even be a ranking system based on necessity. For instance, a study could be conducted to determine what low-income earners typically spend their money on, and those items should be fully exempt from VAT. The middle class and high-income earners could also benefit from VAT exemptions on essential items, but the VAT rates on non-essential goods for middle-income earners should be lower than those for high-income earners.
The long-term goal is to ensure a fair tax distribution, with high-income earners bearing more of the tax burden. This stands in contrast to the approach in the US, where high-income earners often receive more tax exemptions with the assumption that they will reinvest in the economy. I believe it is fairer to distribute the tax burden based on income levels.
Is there still need for further consultation on the proposed reforms? What are your thoughts on VAT revenue sharing and the need for a separate legislation
I believe there is still a need for further consultations on the proposed tax reforms. Also, I don’t think the government has provided a clear explanation as to why the tax legislations are being consolidated into one document, and I am genuinely curious about the reasoning behind this decision. One of the major controversies surrounding the Bills relates to the sharing of VAT revenue, and this is just one section of one of the Bills. If the issue of VAT revenue sharing were addressed in a separate piece of legislation, discussions could likely progress more effectively.
For example, most people haven’t criticized the tax rules themselves. There are some concerns, but generally, the tax rules are acceptable. The primary controversy lies in the administration and sharing of the revenue. It may not be too late to consider having separate bills dealing with separate issues. This would help avoid a situation where the fate of one issue could negatively impact the entire Bill.
The reforms could have progressed further if the issue of how to share the tax revenue wasn’t so contentious. From a taxpayer’s perspective, I am primarily concerned with understanding the rules for paying taxes. How the revenue is shared, however, is a political issue that requires a political solution. This involves consulting and convincing all stakeholders about the rationale behind these decisions.
Although I’m surprised that these issues have arisen, I understand that the Bills were discussed among various stakeholders, lawmakers, and even governors. However, I am unsure to what extent the controversial provisions were fully discussed. Ideally, securing the buy-in of all key stakeholders, particularly regarding the controversial provisions, before the Bill progresses would have been the best approach.
In any case, further consultations are definitely necessary.
Jibrin Dasun is a Senior Associate in the Tax practice group, AELEX.
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