Finance Act 2021 and personal income tax – Sparing a thought for the sick geese
The recent practice of passing Finance Act alongside the Federal Budget, with a view to curing defects in the tax laws, grant or alter taxes and duties, block loopholes and generally align public finance with changing economic landscape, is deeply commendable. In both the Finance Act 2020 and 2021, sweeping changes have been made with sufficient clarity brough to bear on some of the contentious provisions in the tax laws while adjusting the scope and rate of taxes to meet government fiscal policy objectives.
With specific focus on Personal Income Tax, there are certainly some positives from the recently enacted Finance Act 2021. The exemption of minimum wage from minimum tax is definitely a step in the right direction. However, the amendment by substitution of S33(2) of Personal Income Tax Act (PITA) with respect to the definition of gross income for the purpose of Consolidated Relief Allowance (CRA) computation impacts negatively on employees’ disposable income.
S33(2) as amended provides thus: For the purpose of this Section, “gross income” means income from all sources less all non-taxable income, income on which no further tax is payable, tax-exempt items listed in paragraph (2) of the sixth schedule and all allowable business expenses and capital allowance. Before we proceed to ascertain the components of what the Act excludes from the definition of gross income for CRA computation, let us take a step back to examine how consolidated relief allowance is computed in line with S33(1) of Personal Income Tax Act (PITA). It states: There shall be a consolidation relief allowance of N200,000 subject to a minimum of 1 percent of gross income whichever is higher plus 20 percent of gross income and the balance shall be taxable in accordance with the income table in the sixth schedule to this Act.
What S33(1) means in very simple terms is that about 20 percent of an employee’s income is shielded from tax while government shares from the balance of 80 percent based on specified tax rate(s). Without necessarily adjusting the ratio, government can expropriate more of a taxpayer’s income as tax by redefining the components of income that qualify as gross income for the purpose of applying the CRA rate. That is precisely what the new S33(2) has achieved. The net effect of the amendment is a reduction in the base upon which the relief is applied thereby producing a lower CRA, and effectively increases the effective tax rate.
Now what are the tax-exempt deductions excluded from gross income? In line with the sixth schedule of PITA, tax-exempt deductions are National Housing Fund (NHF) contribution, National Health Insurance Scheme (NHIF), Life Assurance Premium, National Pension Scheme and gratuities. On the surface, the exclusion does not seem eminently unfair and not too unreasonable. Presumably, government view is predicated on the fact that since these deductions from income are already exempt from tax, to further include them for the purpose of CRA (another tax-exempt item) determination amounts to double relief and therefore constitutes a loophole that must be blocked to boost government revenue. But such a view misses the point, by some miles.
The reality of some of these deductions is that they do not confer any of the intended benefits on employees. Therefore, since no contributory benefit can be realistically referenced, the only benefit derivable by employees, before now, is the tax shield from their inclusion in calculating CRA. That benefit has now been nullified by the amendment of PITA through Finance Act 2021. By implication, such deductions in their entirety can be deduced as crypto tax, which raises the effective tax rate of employees – inadvertently unleashing a double whammy.
Also, Finance Act has excluded pension contribution from gross income for the purpose of calculating Consolidated Relief Allowance. But that is not very straightforward in the case of Voluntary Pension Contribution (VPC or VC) by Exempt Contributors. S33(2) of PITA (as amended) states: For the purpose of this Section, “gross income” means income from all sources less all non-taxable income, income on which no further tax is payable, tax-exempt items listed in paragraph (2) of the sixth schedule and all allowable business expenses and capital allowance. But the Guidelines on Voluntary Contribution Under the Contributory Pension Scheme (Clause 3.29)states that voluntary pension contributions withdrawn by Exempt Contributors (including principal and income earned) before the end of five years from the date the VC was made (this does not refer to VC by Mandatory Contributors) shall be subject to tax.
Does that mean voluntary contribution withdrawn by Exempt Contributors within the defined period shall benefit from CRA before such withdrawal is subject to tax, since in the contemplation of S33(2), only tax-exempt deductions/contributions are excluded from gross income in calculating CRA? After all, the objective of the amendment is to avoid double relief and voluntary contribution so withdrawn and taxed accordingly subsequently meets the definition of gross income for CRA computation.
Lastly, government is the biggest beneficiary of pension contributions in Nigeria with circa 67 percent of total pension assets as part of public debt as at H1 2020. These funds are usually borrowed below inflation rates (real inflation in the marketplace not in the airwaves) even during high treasury bills rate regime. The corrosive impact of spiraling inflation and exchange rate devaluation on pension assets in Nigeria have conspired to erode the value of pension contributions over time. Therefore, to remove the CRA benefits from pension and other statutory deductions/contributions is clearly not in the interest of employees. Understandably, governments at all levels are, more than ever before, in dire need of revenue to fund social investments and discharge its obligations but this should be done within the broader context of citizens’ welfare.
It is often said that the art of taxation consists in so plucking the geese as to obtain the largest possible number of feathers with the smallest amount of hissing. For employees that are barely keeping heads out of water with wages/salaries that have no in-built inflation adjustment mechanism, tax legislations, rather than expand the tax net, continue to target the same set of taxpayers and as such plucking too many feathers from a set of terribly sick geese. These geese are not only hissing, they are also screaming really bad. Therefore, government may want to amend Finance Act 2021 to include NHF, NSITF and pension contributions in the definition of gross income for the purpose of the new S33(2) of PITA.
Glenn Ubohmhe (FCA,FCTI), writes from Lagos.