Nigerians’ obligation to pay tax is centred on a social contract where earnings are entrusted to the elected government to provide basic amenities. Most people in Nigeria provide their basic amenities. At present, Nigerians are battling growing inflation, declining consumer purchasing power, and the devaluation of the naira. However, as a countermeasure to improve the macroeconomic environment, the government aims to raise taxes and widen the tax bracket with a view to increasing revenue and decreasing the borrowing which is sucking up our revenues through debt servicing. In this interview with BusinessDay’s Onyinyechi Ukegbu, Kelechi Okparaocha, Managing Partner, WTS Blackwoodstone discusses the proposed tax reforms in view of Nigeria’s macroeconomic battles and the vitiated social contract.
• What is the basis of the justification of tax as a civic duty?
Civic duty is a responsibility that each citizen owes to their nation or society typically implied by a social contract between the government and its citizens. Tax is a compulsory levy imposed on the citizens as a duty that, in turn, would ensure that the government provides basic services. In Nigeria, there are different taxes imposed today on citizens which are intended to help the government to generate the revenue needed to pursue better economic opportunities and provide basic amenities. It is an essential civic duty.
• How many taxes does the average Nigerian have to pay?
We can look at it from an individual or corporate perspective. Some of the common ones for individuals are Personal Income Tax, Value Added Tax, Stamp Duties, Withholding Tax, and Capital Gains Tax. For companies, there is the Basic Company Income Tax, and other more specific taxes such as Nigeria Profits Tax, Education Tax, etc. On average about five taxes at the federal level. Of course, there are several others that will come at the state and local government levels.
• What are the key differences between the current tax regime and previous ones, if any?
There are differences and similarities. Nigeria operates a decentralised system so the different levels of government are responsible for the taxes administered in their jurisdictions as prescribed by the Constitution. We also employ a progressive tax system where individuals with higher incomes pay higher taxes. This is common to all tax regimes, past and present.
The major difference in this tax dispensation is the introduction of the Finance Act. Extant tax laws have been amended consistently since 2019 and the Finance Act has introduced significant changes that reflect our current realities, for instance, digital tax, and significant economic presence tax.
Also, the Ministry of Finance and National Policy Planning Committee introduced some fiscal policy measures via a circular by the Minister of Finance, Budget and Planning, Zainab Usman. Some of the takeaways are the Supplementary protection measures, the revised import prohibition list with new items included, and green tax by way of excise duties on single-use plastics.
Other notable differences are the Automatic Registration of Taxes upon Registration; the Integrated Tax Administration System; Tax Pro Max, and other reforms by the FIRS that ensure that taxpayers are being dealt with in a timely manner, all aimed at making Nigeria business-friendly.
• According to the World Bank, the loss in purchasing power has pushed 4 million Nigerians into poverty between January and May this year. In view of this, what are your thoughts on the proposed tax reforms?
I am of the opinion that the tax reforms if properly implemented will bring about positive changes. There are claims that Nigeria’s revenue has shrunk in recent years becoming insufficient to meet interest rate obligations, so it is evident that the current administration aims to generate more revenue through taxation.
The elimination of the petrol subsidy and some of the ongoing reforms in the foreign exchange market are crucial to restoring macroeconomic stability and if done properly will lift Nigeria’s growth potential as expected, from the current 3.3% to 3.7% next year and 4.1% in 2025 according to the World Bank IBRD report.
I agree with the above on the ground that there is some cushioning for the common man who is likely to be most affected and the reforms are implemented as quickly as possible.
• The IMF has urged Nigeria to raise its VAT to 15%. Do you think this suggestion is apt for our present circumstances?
An increase from 7.5% to 15% would be premature at this time. 15% is double the current rate, and with the current economic situation, it would drastically affect the pocket of the consumers, especially low-income earners who are equally affected by this.
Nigeria is currently in a recession phase that we have never experienced before. The economy is sore, cost of goods and services has skyrocketed. It is not practical. There are other ways however to increase VAT revenue without applying it directly to the consumer. For instance, VAT waivers can be reviewed to capture some sectors; borders can be better policed to improve import VAT collection, and the VAT framework on imported services and the digital economy should be actively examined. It is true that Nigeria’s VAT rate is one of the lowest in the world but the government should also be sensitive to the people.
• What sort of tax reforms should we be looking at as a nation?
We should consider reforms that improve service delivery to the public in such a way that taxpayers can see and derive the benefits from the taxes that they pay. Also, boost non-oil tax revenue and look more towards the digital economy. As we consistently review our tax laws to address the demands of the day it would help curb instances of tax evasion and avoidance, and improve our tax regulation as well.
• What outcomes are you expecting from the Presidential Committee on Fiscal Policy and Tax Reforms headed by Taiwo Oyedele?
An improved tax administration is something worth looking out for. One of the objectives of the Committee is to transform the tax system to support sustainable development while achieving a minimum of 18% tax-to-GDP ratio. So far the new administration has borrowed so much to finance government spending but if they can create sustainable developments as it supports at tax-to-GDP ratio, it will go a long way to establish our macroeconomic control. Nigeria is a rich and blessed nation but a major flaw we have had has been our administration.
Taiwo Oyedele is someone that a lot of us in the tax space have followed over the years. He has seen tax as a citizen and from the lens of a consultant. I am actually positive that there will be some improvement in our tax administration in the areas of effective allocation of tax and other revenues; multiple taxation and revenue collection agencies; low tax compliance; widespread tax evasion, and lack of coordination between fiscal and economic policies.
• How pervasive do you think the alleged abuse of tax incentives and waivers is? And what is your expectation of the ad hoc committee inaugurated by Tajudeen Abass, Speaker of the House of Representatives?
Tax incentives are essential to a nation because they are used by the government to spur economic growth, lure investments in the country and encourage job creation. So its abuse impedes social development and must be halted. The ad hoc committee is a brilliant initiative, however, it must ensure transparency in carrying out its investigation. They must also ensure as part of the outcomes that sanctions are imposed and enforced to serve as a deterrent.
• The large-cap recorded a dip in their income tax in the first half of 2023 to N150.57 billion from N254.15 billion recorded in the same period of 2022 citing a challenging macroeconomic environment as the reason. All predictions indicate that the macroeconomic environment will take a while to improve. How should tax policy and projections account for this?
The macroeconomic environment is made up of different factors that affect the economy. Over the past couple of months, Nigeria has gone through several changes that have impacted its macroeconomics, from the change in the Naira to the rise in interest and exchange rates which have caused a crunch in our economy, so I’m not surprised by the dip in income tax. It is important that a holistic, not just tax-centric, approach be applied to adequately capture the issue.
• Can citizens take legal action against the government for failing to fulfil their obligations?
The Constitution clearly provides under Section 6(c), with respect to the powers of the judiciary that the government is not obliged to conform with fundamental objectives and derivative principles of state policy set out in Chapter 2 of the Constitution. This indirectly means that the Judiciary will not entertain matters under Chapter 2 of the Constitution. Chapter 2 contains the social responsibilities that the government owes the citizens further to the tax obligations that the citizens have. All the bills that have been proposed to amend this section have been jettisoned, so I am not certain that citizens can take legal action.
Read also: FG, states begin harmonisation of taxes
• How can the citizens keep the government accountable?
The fears of Nigerians are not out of place, considering the challenges and the seeming lack of concern of the government to present economic decline and the cries of the citizens. Over the years, the government has introduced a plethora of policies that Nigerians have taken with doggedness, so to an extent, the government leverages the fact that Nigerians will adjust. Nigerians need to choose not to accept [unbeneficial] policies without a kickback. In a bid to ensure accountability, it might be prudent to create committees for professional organisations, for people to come together with a voice and then table their complaints to the National Assembly or appropriate authority. That should be able to create checks and balances devoid of political interference.
It is true that a lot of Nigerians provide their basic amenities. And for many years there has been little or no trust between the government and citizens due to many failed promises from successive administrations. It would therefore take some time; time within which they implement beneficial policies and show that the administration is functioning. Policies that encourage transparency, a flexible and dynamic tax system that is cognisant of our realities, and evidence that taxes are spent to promote sustainable economic growth.