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Tax revenue and non- tax revenue

tax

In all countries, Governments need to perform certain functions in the field of political, social & economic activities to maximise social and economic welfare. In order to perform these roles , government require large amount of resources. These resources are called Public Revenues. In business, revenue, also referred to as sales or turnover is the income that a business generates from its normal business activities, usually from the sale of goods and services to customers.

Revenue

Tax revenue is immensely important to national development as a key source of sustainable revenue and an indicator of economic wellbeing. Compared to other sources of revenue, tax revenues can be relatively predictable which makes planning easy for governments and are able to plan with a greater amount of certainty than when relying majorly on natural resources.

Revenue is the amount of money that a company actually receives during a specific period, including discounts and deductions for returned goods or merchandise. It is the  “gross income” figure from which costs are subtracted to determine net income.

Under the accrual basis of accounting, revenue is normally recognized when goods are shipped or services delivered to the customer. On the contrary, under the cash basis of accounting, revenue is usually recognized when cash is received from the customer following its receipt of goods or services. Ultimately,  revenue recognition is delayed under the cash basis of accounting, when compared to the accrual basis of accounting.

Sec.162 (10) (a) – (c) of   the  Constitution of the Federal Republic of Nigeria {1999} defines revenue to mean any income or return accruing to or derived by the Government of the Federation from any source and includes-

•any receipt, however described, arising from the operation of any law;

•any return, however described, arising from or in respect of any property held by the Government of the Federation;   and

•any return by way of interest on loans and dividends in respect of shares or interest held by the Government of the Federation in any company or statutory body.

Generally government revenues refer to the gross proceeds received from taxes, fees, and the like; or rather the total annual income of the State from taxes and other sources. In business, revenue is the amount of money that a company actually receives from its activities, mostly from sales to customers. To investors, revenue is less important than profit, or income, which is the amount of money the business has earned after deducting all the business’s expenses.

Revenue is defined in the National Tax Policy as the entire amount received by the Government from sources within and outside the Government entity. Government revenue includes proceeds from sale of crude oil, taxes (including import and excise duties), penalties, interests, fines, charges and other earnings received from Government investments (bonds, dividends, etc.), and the like. Revenue therefore “encompasses the entire gamut of Government income, which is realised and available for expenditure by Government within a particular fiscal year or period”.      

Taxes are the first and foremost sources of public revenue. Public revenue, apart from taxes, is also composed of revenue from administrative activities like fines, fees, gifts & grants. Public revenue can be classified into two types. Tax Revenue and Non-Tax Revenue

Tax Revenue

Thesaurus defined the term to mean government income due to taxation. Tax revenue is income available to the government. It is the main income for the state, funding public expenditure and other items. Tax Revenue gives a detailed report on revenue collected from different items like companies income tax/corporation tax, income tax, wealth tax, customs,  land revenue, stamp registration etc.

Taxes collected from both direct and indirect taxes are considered as  Tax Revenue. Examples of such taxes are companies income tax, personal income tax, capital gains tax, value added tax etc. Taxes, though a major contributor to Government revenue, are a sub-component of Government revenue. Other sources of internal revenue include fees, levies, rates, tolls.

According to the Organization for Economic Cooperation and Development (OECD) a unique forum which works to promote economic growth, prosperity, and sustainable development, Tax revenue is defined “as the revenues collected from taxes on income and profits, social security contributions, taxes levied on goods and services, payroll taxes, taxes on the ownership and transfer of property, and other taxes. Total tax revenue as a percentage of GDP indicates the share of a country’s output that is collected by the government through taxes. It can be regarded as one measure of the degree to which the government controls the economy’s resources.

The tax burden is measured by taking the total tax revenues received as a percentage of GDP. This indicator relates to government as a whole (all government levels) and is measured in USD, USD per capita, percentage of GDP and annual growth rate”.

Certain compulsory transfers such as fines, penalties, and most social security contributions are excluded from tax revenue. Refunds and corrections of erroneously collected tax revenue are treated as negative revenue.

The tax revenue, a key concept in Economics  is the sum of the revenues of different kind of taxes, depending on what is taxed. The OECD classifies a tax according to its base: income, profits and capital gains; payroll; property; goods and services; and other taxes. In developed countries, compulsory social security contributions paid to general government are also treated as taxes, though are classified under a separate heading.

Tax Revenue and GDP

According to the National Bureau of Statistics (Nigeria), GDP is the market value of all officially recognized final goods and services produced within a country in a given period. Gross Domestic Product (GDP) is an internationally recognised measure of economy size and strength. Nigeria’s GDP was rebased from about USD 270 billion to USD 510 billion for 2013. Following the emergence of Nigeria as the largest economy in Africa after the rebasing of her Gross Domestic Product (GDP), Federal Government  ordered the Federal Inland Revenue Service (FIRS) to increase the nation’s tax revenue to GDP ratio to 20 per cent. Before the rebasing, the country had a tax to GDP ratio of about 22 per cent, while the non-oil tax revenue to GDP ratio was estimated at 7 per cent.  In macroeconomic terms, GDP  is a major determinant of tax revenue. The higher the GDP, the larger the tax base, the higher the tax revenue. In recessions, tax revenues fall because of narrower.

NON-TAX REVENUE

Non-Tax Revenue is the recurring income earned by the government from sources other than taxes.

Examples of Non-Tax Revenue include:

• Aid from another level of government (intragovernmental aid) – for example, in the United States, federal grants may be considered non-tax revenue to the receiving states, and equalization payments

• Foreign Aid that is Aid from abroad.

• Tribute or indemnities paid by a weaker state to a stronger one, often as a condition of peace after suffering military defeat.

• Loans, or other borrowing, from monetary funds and/or other governments

• Revenue from state-owned enterprises.

• Revenue (including interest or profit) from investment funds (collective investment schemes), sovereign wealth funds, or endowments

• Revenues from sales of state assets

• Rents, concessions, and royalties collected by the state when it contracts out the right to profit from some good or service to a private corporation. An example are contracts for resource extraction (for such natural resources as minerals, timber, petroleum and natural gas, or marine resources) collected privately under license from state-owned lands

• Fines collected and assets forfeitured as a penalty. Examples include parking fines, court costs levied on criminal offenders

• Fees for the  issuance of permits or licenses.

• User fees collected in exchange for the use of many public services and facilities such as tolls charged for the use of roads; and

• Donations and voluntary contributions.

Fees

Fees are  important sources of revenue for the government. The Federal, state and local governments offer a number of services that come with a fee. Fees are charged by public authorities for rendering  services to the citizens. A fee is the direct payment for the service rendered to the payer and the government guarantees the services to the person who pays fees.

Unlike tax, there is no compulsion element  in imposition of fees. Fees are charged for issuing of passports and visas.  Among the services you might pay a fee for include a charge for copies of official documents, such as birth and marriage certificates, driver’s license renewal, pet such as dogs licensing and  vehicle tags.

Other eexamples include vehicle registration plate permits, registration fees, building fees,  hunting and fishing licenses, fees for professional licensing,  fees for demolition, rezoning, and land grading and sometimes for destroying native vegetation, and cutting-down of healthy trees.

At times, the government provides certain special services to the public and in payment for these services, it charges fees. Fee is that revenue which is paid to the government for the special services rendered by it.  With respect to licence fees, when a license fee is realised by the government, no direct service is rendered but permission is granted for doing certain things or activities.

Price

Another important source of non-tax revenue is the price. The government sells some services and goods and receives price in payment for them. By this method, government acts like a businessman and the public like its customers, the former sells the goods and services while the later buys them and pays prices to the former. These businesses of the government for which it receives prices may either be in the form of providing services like the city bus transport  popularly referred to as BRT in Lagos, and the newly resuscitated  train transport service.

User Fees

A user fee is a fee,  or impost  paid to a facility owner or operator by a facility user as a necessary condition for using the facility. Taxes differ from user fees in that paying them isn’t a matter of choice and what you pay is not tied directly to what you’re using. People pay user fees for the use of many public services and facilities. At the federal level in the United States, there is a charge for driving into many national parks, or to use particular services of the Library of Congress.

States may charge tolls for driving on highways or impose a fee on those who camp in state parks. Communities usually have entrance fees for public swimming pools and meters for parking on local streets as well as perhaps even parking spaces at public beaches, dump stickers and postage stamps.

The International Monetary Fund often recommends that nations start charging fees for these services in order to reduce their budget deficits. This position is more and more challenged by many who people who claim that user fees hurt the poorest the most.

Fines and Penalties

Fines or penalties are imposed as a form of punishment for breach of law or non- fulfillment or certain conditions or for failure to observe some Rules and Regulations.Along with the fees, fines and penalties might be charged for  infringement of regulations, failure to pay for the services in accordance with the Nigerian tax laws as well as the fines charged for breaking minor traffic laws.

Like taxes, fines are compulsory payments without quid pro quo. But while taxes are generally imposed to collect revenue. Fines are imposed as a form of punishment or to prevent citizens and visitors  from breaking the law.

Grants and Gifts

Grants-in-aid are the means by which one government provides financial assistance to another to enable it to perform certain specified functions, for example, education and health grants made to the states by the central government. A grant from one government to another is an important sources of revenue in the modern days. The government at the Centre provides grants to State governments and the State governments provide grants to the local government to carry out their functions.

Gifts are Voluntary contributions by individuals or institutions to the government. Gifts are significant source of revenue during war and emergency.

Foreign Aid

Grants from foreign countries are known as Foreign Aid. Developing countries receive different types of aids such as military aid, food aid, technological aid, etc. from developed countries.

Deficit Financing/Surplus from Public Enterprises

The Government also gets non-tax  revenue by way of surplus from public enterprises.

Deficit means an excess of public expenditure over public revenue.

This excess may be met by borrowings from the market. In case of borrowing from abroad, there cannot be compulsion for the lenders, but in case of internal borrowings there may be compulsion. The government may force various individuals, firms and institutions to lend to it at a much lower rate than the market would have offered.

Investments

Investments have been used  as a means of earning interests and dividends which are considered non-tax revenue. The investment opportunities might be in the form of mutual funds, bonds, foreign exchange rates and government-backed loans to businesses and individuals, such as small business loans and mortgages.

Rent

According to Robert Tollison (1982), economic rents are “excess returns” above the “normal levels” that are generated in competitive markets. More specifically, a rent is “a return in excess of the resource owner’s opportunity cost. Economic rent should be viewed as unearned non-tax  revenue and should not be confused with economic profit. For example, economic rent can be collected by a government as royalties or extraction fees in the case of resources such as minerals and oil and gas.

Alternative  Sources of Revenue to Oil Revenue

We are all aware  that revenues from oil have dropped significantly in recent times. Dwindling oil revenues are therefore challenging  government to rev up income, especially through other sources, such as taxes.

Of course, Government is not relying on crude oil revenue as much as in the past to fund this year’s budget, the budget implementation relies on a series of non-oil sources of revenue for 2016. Prominent among these are increased tax collection, blocking of revenue leakages, long term loans and reduction of recurrent expenditure as well as the Infrastructure Development Fund which will be employed to improve infrastructure while generating revenue to render the loans self-liquidating. Indeed it has  become necessary for Nigeria to source  alternative ways of revenue generation following a progressive fall in the prices of petroleum products at the international oil market. Nigeria undoubtedly is under severe economic stress. Therefore several measures are being put in place to address the shortfall.

FIRS Efforts Towards Increased Tax Revenue

Due to the significant drop in oil prices, a huge gap is existing in  the revenue generated by the FIRS; as a result, tax compliance is expected from all MDAs and companies and FIRS is prepared to remove bottlenecks associated with tax collection.

Another  intervention to address the shortfall is by “nationwide tax registration drive, with focus on VAT, which commenced on October 12, 2015, to bring  all unregistered taxpayers into the tax net.  According to its vibrant Executive chairman, Mr. Tunde Fowler, the Federal Inland Revenue Service (FIRS) is also  planning to  capture up to 500,000 new corporate accounts in its tax data base by the first quarter of this year. Besides, the Federal Inland Revenue Service (FIRS) is targeting a revenue profile of N4.5tr  in 2016 to raise the country’s tax revenue.

Closing of Tax Gap

Over the years, government’s focus on taxation of individuals has been on personal income tax (PIT) through the pay-as-you-earn (PAYE) system. This is due to ease of monitoring, by relying on employers as unpaid collection agents. Government is now posed to focus  on other taxes approved by the Order 2015 which harmonized taxes and levies, apart from the personal income tax.

Widening of Tax Base

The widening of the tax base by ensuring more taxpayers are brought into the tax net is very crucial. Monitoring and enforcement actions are  also being strengthened to drive compliance and collection. Public enlightenment and sensitization campaigns are also being focused on. It is interesting to note that tax payment is seen by many as an exclusive obligation of civil servants and those in paid employments. Some of the long term measures may include review of the tax policy and laws with a view to bringing them up to current realities and perhaps to have another tax reform.

Introduction of Luxury Surcharges

To cushion the negative impact of the declining oil prices on the economy,  the government in 2015  introduced  some short-to-medium term revenue and expenditure measures. To  expand its income base, the Federal Government  decided to target rich Nigerians who own private jets or fly in premium cabins (first and business classes) to pay the special levies known as luxury sur charges from which government  hopes to generate  billions of naira yearly. Thus, all local and foreign private jet owners in the country would now pay a yearly surcharge of N3, 200 per kilogramme on the weight of each aircraft.

Mansion Tax

A  mansion tax has also been introduced in the Federal Capital Territory, Abuja, whereby mansions worth N300 million and above, will  attract a charge of one percent, referred to as FCT Mansion Tax. The government expects to generate about N360 million from this.

Payment of Interim Dividends

Some provisions of the tax laws that were also not being enforced previously are now being brought to the fore for enforcement. Prominent among such provisions is the requirement for companies paying interim dividends to pay provisional tax.

Tax Filing By Non-Resident Companies

Tax filing by non-resident companies (NRCs) has also been reviewed. NRCs are now expected to file tax returns based on actual profits against previous practice of deemed profit.

Increase in Rate of Value Added Tax

The Federal Government is planning to increase the Value-Added Tax rate to perhaps 10 per cent, if the increase is achieved, this will help shore up government revenue eroded by the declining price of oil, which has been the country’s main export.

New Federal Capital Territory Internal Revenue Service

The Federal Capital Territory Internal Revenue Service (Establishment) Act, 2015 was enacted  for the purpose of establishing a revenue authority for the Federal Capital Territory (FCT). The Service is charged with the assessment, collection and accounting for revenues accruable to the Federal Capital Territory which used to be collected by the FIRS.

The new FCT IRS should generate  additional revenue if properly managed by competent and experienced revenue administrators. Recently, the Ministry of Finance  issued a Federal treasury circular dated 15 January 2016 which directed all Ministries, Departments and Agencies (MDAs) operating in the FCT to remit all deductions made under the Pay As Your Earn (PAYE)/Personal Income Tax (PIT) scheme for persons working or residing in the FCT to the FCT IRS. Additionally, all capital gains tax arising from the disposal of assets and property within the territory are also to be remitted to the Service.

Stamp Duties Now Payable On Banking Transactions

Likewise, in an effort to raise additional non oil revenue, the Central Bank of Nigeria has directed all banks to enforce collection of N50 stamp duty for receipted transactions and online transfers of N1,000 and above. It should be noted that these charges are only payable by receiving accounts. However, there are some exemptions from imposition. These are payments of deposits or transfer by self to self whether inter or intra bank  and any form of withdrawals or/and  transfers from saving accounts. The Central Bank’s Circular stressed that “as part of efforts to boost its revenue base, the federal government of Nigeria is exploring revenue opportunities in the non-oil sectors especially taxes and rates. It is in recognition of this fact that banks and other financial institutions are enjoined to support government’s revenue drive through compliance with the provisions of the Stamp Duties Act, LFN 2004 as reinforced by the court judgment in Suit No FHC/L/CS/1710/2013. In this regard, the CBN pursuant to the provisions of its enabling laws, hereby issues this circular to all DMBs other financial institutions.”