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Reforming tax system to boost economic growth

Reforming tax system to boost economic growth

Within a three-year period, 2016-2018, Nigeria earned N12.65 trillion in tax revenue but experts say there are other burning issues that must be addressed in the nation’s ongoing tax reforms, ZAKA ABD-KHALIQ writes. For any nation to grow, it must possess the power to generate its own income internally.

This will allow government meets its civic obligation of providing infrastructure, such as roads, electricity, water, among others, as well as meeting recurrent expenditure. No doubt, taxation is the key to unlocking the resources required for public investment and infrastructure growth. Over the years, the country has struggled to generate enough tax to fund its budget, owing to uncoordinated tax system that gives room for lapses and corruption by the officials of the tax generating agencies, low tax awareness as Nigerians could not juxtapose the tax paid with the level of infrastructural growth in the country, even as, high net worth individuals and companies were not paying tax and ax debts hit the roof top. With a serious reform needed in Tax system, the Federal Inland Revenue Service (FIRS) came up with various technology -driven initiatives aimed at increasing the number of taxpayers, and reducing taxpayers’ burden by making tax payment more convenient. Some of these initiatives were the deployment of electronic payment channels for registration, filing, payment, receipt  and tax clearance certificate to facilitate easy remittance of taxes by taxpayers.

The service also came up with information exchange for third party databases which was implemented in collaboration with government agencies such as the Nigeria Customs Service, and the Corporate Affairs Commission, among others. Since the implementation of these reform, the number of registered taxpayers had increased from 10 million in 2015 to about 19 million in 2018. Data gotten from FIRS showed that within a three-year period covering January 2016 and December 2018, the country earned a total of N12.65 trillion in tax revenue. Speaking on the development, Executive Chairman, FIRS, Mr Babatunde Fowler noted that the service had  intensified its tax compliance strategies through collaboration with public and private sector organisations. He said the FIRS had issued letters to all commercial banks in the country requesting for a list of companies, partnerships and enterprises with a banking turnover of N10bn and above.

This initiative, he noted, was aimed at ascertaining those that were compliant with the tax laws and those that had yet to fully comply. He said, so far, non-compliant organisation had paid about N21.75bn in taxes to the coffers of the government through the initiative. In 2018, FIRS disclosed that about 6,772 billionaire businesses in Nigeria do not pay tax, adding that this category of organisations have between N1billion and N5 billion turnover in their accounts, but had no Tax Identification Number (TIN). A whopping 57 million Nigerians are economically active, but the vast majority are not registered to pay Personal Income Tax. Why Tax ? Taxes are paid because the state or federal governments implement tax laws. Although taxes are considered as a legal requirement, paying taxes is also considered a civic duty.

If you neglect to pay, the mediating body that oversees taxes (the Federal Inland Revenue Service) will require that you do so, otherwise, you might face penalties such as large fines or jail time. There are different types of taxes in Nigeria, which includes; Companies Income Tax(CIT), Petroleum Profit Tax (PPT), Value Added Tax (VAT), Personal Income Tax (PIT), Withholding Tax (WHT), and so on. The agencies responsible for Tax collection in Nigeria are;  Federal Inland Revenue Service(FIRS), State Inland Revenue Board and Local Government Revenue authorities. Fowler, while speaking at a conference in Lagos, said,  government determines tax rates and tax laws, hence, government has to be very careful about simply increasing tax rates while making it difficult for taxpayers to comply, even as higher tax rates trigger higher tax evasion behaviour. However, Fowler stressed that,  stronger tax enforcement that reduces tax evasion  can also result in greater shareholder value.

This, he said, is because those companies that are more compliant are more transparent and therefore more attractive for investment, noting that, a country’s corporate governance system affects the degree to which tax changes affect the growth (or not) of tax revenue. Therefore, he said, tax revenue increases can only be sustainable when taxpayers adopt good corporate governance which is checked by strong enforcement of polices. Increased tax enforcement, according to him, also leads to substantial organisational changes in the targeted companies, changes that make managerial diversion more difficult. Insurers Tax Complaints Apart from paying tax on management expenses, short term lending, among others, insurance companies were also mandated to pay tax on claims, which is the core business of underwriting, meaning that, the higher the claims paid by an underwriter, the higher the tax to be paid on such claims.

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The federal, state and local governments had embarked on aggressive revenue generation, picking on corporate bodies of which are insurance firms, as the major source of their tax revenue. Enforcement of these taxes reached an alarming rate last year with some insurance companies shut down by FIRS, until they were made to clear off their outstanding taxes. While the situation has a negative implication on the books of some struggling insurers, some had their little profit cut short by these taxes, while the big underwriters were not exempted from the impact of these taxes.

NIA, under the leadership of its past chairman, Mr. Eddie Efekoha, had complained that insurance industry is being subjected to multiple taxation that is gradually eroding the profits of insurance companies, thereby, affecting their ability to give good returns on investment to shareholders as well as stakeholders. Efekoha, however, believes the permanent solution lies in amending the tax code which takes some times to amend, as it has to be amended through the National Assembly. “’Giving returns on investment to shareholders and stakeholders has a lot to do with how much you make as profit but in a scenario like ours, where we are subjected to multiple taxation, it becomes difficult to pay dividend to shareholders. The more tax we pay, the more the returns to our stakeholders diminish. If you are to pay tax on claims and on management expenses, what this means is that you have little or nothing left to pay dividend to shareholders,” he pointed out.

However, there was an ongoing discussion between NIA and FIRS to try to address this challenge. Last year too, the General Manager, Retail Life, AIICO Insurance Plc, Mr. Sola Ajayi, had said, the tax code in Nigeria is too hard on both life and non-life insurance companies as they were not allowed to take advantage of deferred tax, especially, for life business. According to him, “If you pay claims of any amount, the law does not allow claims as expenses, it only allow 25 per cent of it. So, why are we in operation? Is it not to pay claims?” The Proposed VAT Increase The federal government through FIRS had earlier mooted the idea of increasing VAT, a development that was met with strong condemnation, especially, from manufacturers and business owners, among other stakeholders.

Reacting to the development, the Director-General, the Manufacturers Association of Nigeria (MAN), Mr. Segun Kadir, stated that the association do not support increase in Value Added Tax (VAT), urging government to explore other avenue in its tax reform process. The country, according to him, presently has a high poverty rate, high unemployment and income is distributed unequally, stressing that, an increase in VAT will compound the situation on ground. ‘Our competitiveness may be impacted if we go ahead with the increment. Because it is largely a consumption tax, it will affect overall consumption in the economy,’ he pointed out.

Reforming The Tax System According to a report titled: ‘Fiscal Policy for Financing Sustainable Development in Africa,’ increasing tax revenue generation in ways that are equitable and sustainable will enable African countries to achieve the Sustainable Development Goals and Agenda 2063. On tax policy and performance in Africa, the report calls on African governments to address the tax system holistically to ensure that the tax system is progressive, neutral, fair and efficient, rather than deal with each tax system separately. In this way, it says governments may find additional opportunities for expanding the tax base, create more certainty for tax payers, and contextualise any global standards.

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The report said improvements in tax policy and performance in Africa will depend on more than tax efficiency, but also on the provision of essential public services to reduce inequality and encourage economic growth. To widen the tax base, it suggests African countries need to include more and more diverse payers in the tax net such as rural farmers and workers in the informal sector who have not yet been captured in the tax bracket. This, it stressed, should be done without harming the low-income workers, noting that, VAT regulations need to reduce policy gaps such as the excessive use of or reduced rates. The executive director, Fate Foundation, Mrs. Adenike Adeyemi, on her part, said, a lot needs to happen with respect to tax and information for Micro, Small and Medium Enterprises (MSMEs).

She called for more enlightenment and harmonisation of different taxes by government to make compliance easier. “If you look at countries where it is easier to do businesses, even if the tax rates are high, there is very limited number of taxes where the government now decides where they want to spread the disbursement. Particularly at the state and local government levels, many people don’t know until tax consultant come to inform them to pay for radio licence or signage,” she pointed out. If the number of taxes is reduced and streamlined and the collection is made simpler, she said, ‘it will be a win-win for the MSMEs because it will easier for them to know the taxes they should pay for and for the government because it can increase the collection and levies.’ Moreover, the Nigeria Economic Summit Group (NESG), Private sector Think-Tank,  is set to unveil the findings of its nationwide survey on tax perception and drive government-citizen engagement for sustainable fiscal reforms through the launch of its ‘Better Tax initiative.” Better Tax, scheduled for launch in Lagos on May 15, is a product of the NESG’s Fiscal Policy Roundtable’s commitment to building a globally competitive Nigerian economy through fiscal consolidation that impacts the citizenry and drives holistic national development. It seeks to create a platform for discourse between government and the citizenry that will reshape tax perception. It is expected to transform tax from being perceived as a burden to a tool for socio-economic development.

According to the chairman, NESG Fiscal Policy Roundtable,  Dr. Sarah Alade, the Project Better Tax is distinct from previous tax reform initiatives because it adopts a multi-pronged approach to easing the tax burden.   The project, she stressed, leverages the findings of nationwide surveys to cascade information on Nigeria’s current fiscal position in a concise manner designed to educate stakeholders on the role of taxation, and the dual responsibility of citizens and the government to actualise the social contract envisaged through strict tax compliance and fiscal responsibility as obtains in developed economies.   Other experts, who spoke on this development, however, called for harmonisation of federal, state and local governments’ taxes in a coordinated manner to address the current multiple taxation that is killing businesses. The ongoing tax reform, according to them, would be incomplete without addressing this lacuna, while taxes collected must be utilised to fix the infrastructural deficits across the federation.   The organs responsible for tax collection in federal, State and Local levels, they said, must collaborate to avert multiple taxation and enhance transparency in the nation’s tax system.

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