An economic stimulus bill has been proposed for passage into law by some members of the House of Representative titled a bill for an Act to Provide Relief on Corporate Tax Liability, Suspension of Import Duty on Selected Goods and Deferral of Residential Mortgage Obligations to the Federal Mortgage Bank of Nigeria for a Fixed Term to Protect Jobs and alleviate the financial burden on citizens in response to the economic downturn occasioned by the outbreak of COVID-19 Disease and for related matters. This is a laudable initiative, and timely intervention to address some of the corrosive economic impact of the COVID-19 pandemic. The sponsors of the bill deserve commendation.
The bill is aimed among other objectives at job protection and providing temporary relief to individuals and companies. The bill is also in the best interest of government both from a social stability and fiscal standpoint. The stimulus measures proposed in the bill are import duty waiver on medical supplies, deferral of payment of mortgages under the National Housing Fund and special tax rebate for employers to ward off looming job layoffs. This write-up will focus on the third element of the package for reason of economic impact and scale.
The tax rebate benefit is targeted at employers that advance government objective of job retention by maintaining the same employee status from 1st of March to December 31st, 2020. The incentive is a rebate of 50 percent PAYE tax due or paid on employees by employers for an initial period of 10 months to December 2020. The overarching objective is to discourage employers from downsizing their workforce as a cost saving measure in the face of grim economic outlook. The rebate shall be deducted through employer’s income or company income tax which suggests that the Federal Government shall bear the burden rather than treated as deduction from PAYE remittance which would have impacted the income of the various states that are already in dire financial straits.
This is innovative thinking on the part of the sponsors of the bill. However, laudable as it is, the bill needs some rework if it is to achieve the desired impact. To start with, for an economy that was already flagging even before the current global economic collapse occasioned by COVID-19, and against the backdrop of huge fiscal packages by countries to prop up their economies, an incremental approach as set out in the bill may not align with the objectives. Clearly, we do not have the resources to match the level of stimulus packages by more advanced economies, but I think we can stretch ourselves to adequately mitigate the adverse economic impact of the pandemic. As such, far reaching measures are required.
To put the proposal in perspective, expected total rebate for the initial 10 months in 2020 will translate to about N335 billion of tax savings by employers based on 2019 PAYE data by the National Bureau of Statistics (NBS), and assuming there are no layoffs in 2020 which could shrink PAYE collections. The projected tax rebate figure appears significant. However, from an employer’s perspective, the proposal translates to savings of just 9 percent – 10 percent of total wage bill using an Average Effective Tax Rate (AETR) of 18 percent – 20 percent (PAYE), possibly less, which to my mind may not be adequate. If the bill is passed into law as proposed, the options before employers is to either keep their employees and claim 9 percent savings from total wage bill through the special tax rebate or contemplate deep cut in staff strength and save much more than 9 percent of the total wage bill, more so that the profit impact of the economic downturn for some entities could be as high as 50 percent, if not more.
I will therefore suggest that 30 percent of companies’ wage bill be considered for special tax rebate as against 50 percent of PAYE deductions as proposed. This is likely to be more effective in mitigating the impending job losses, profit erosion, depressed demand, and negative GDP growth. Let me quickly mention that the revenue implication for government if this option is considered will be in the region of N1.1 trillion spread over one to three years depending on when the special rebate is utilised. The budget constraint that will result from forgoing potential revenue of N1.1 trillion seems too high a cost to bear on the part of the Federal Government – to look at it purely from that perspective is not a 360-degree view. Massive layoff by employers portends deep consequences fiscal status of states especially PAYE component of states’ revenue which constituted 61 percent of total IGR in 2019. The only resort for states at that point will be Federal Government bailout. Meanwhile, Federal Government revenue from taxes may plunge precipitously as well if the economy is not given a shot in the arm, and in large dose. The social upheaval that may erupt from massive job losses is better imagined.
On another note, clarification is required with respect to situations where a company does not have taxable profit or where taxable profit or tax payable is less than the special rebate. Can the rebate be carried forward and for how long? Should the minimum tax provision in CITA be suspended until such a time when the rebate is fully utilised? These questions need to be addressed in the bill.
Lastly, the bill seeks to exclude exploration and production companies in Nigeria. Such a blanket exclusion is counterproductive in view of the number of Nigerians working in the sector. The upstream petroleum sector is one of the hardest hit with players contending with low crude prices, high production cost and huge facility repayment obligations by independent/indigenous players. One way to look at this is to identify players in the upstream sector that are more susceptible to the plunge in crude oil prices for inclusion in the economic stimulus bill. This way, it will be a win-win situation for employees, employers and government.
Glenn Ubohmhe
Glenn writes from Lagos
