By Helen Oji The Federal Inland Revenue Service (FIRS), is currently implementing small businesses-friendly tax policy that temporary exempts operators with annual turnover of N25 million and below from charging Valued Added Tax (VAT), while deploying technology to ensure continued quality service delivery to taxpayers across every segment of the economy. Helen Oji examines the impact of the
reforms on revenue growth in Nigeria.
Tax revenue has for centuries remained the backbone for economic growth and development in advanced economies. The huge infrastructural development in Europe, America and some parts of Middle East and Asia were majorly built with tax proceeds.
For Nigeria, tax collections were for years relegated to the background, with the country’s Tax-to-Gross Domestic Product (GDP) of six per cent one of the lowest in the world.
Unfortunately, improving crumbling infrastructure and poor services in Africa’s largest economy is one of the top priorities for Nigeria’s government.
But with debt repayments swelling to nearly two-thirds of revenues, it has struggled to find the money to tackle the problems and is ramping up efforts to boost tax collection.
However, the challenge will be formidable in a country with one of the lowest tax-to-GDP ratios in the world, analysts say.Indeed, tax potential in Nigeria are underutilised, with several ills besetting collection, assessment and enlisting of eligible payers, have also become expedient given Nigeria’s falling revenue profile, the uncertainty of its major earner – crude oil, the need to diversify the economy, as well as exploit tax opportunities.
FIIRS has said it loses about $15billion annually to tax evasion and that it has roughly doubled the tax base since 2015. With the several plans made in the past to borrow for infrastructure projects, the government wants to raise its tax revenue from roughly six per cent of the GDP in 2017 to nearer 15 per cent, the threshold the World Bank says is necessary for economic growth and poverty reduction.
Despite being Africa’s biggest oil exporter, Nigeria is among the world’s poorest countries, with 87 million of its 200 million people living on less than $1.50 a day. Economic growth is stagnant at about two per cent, below the country’s population growth rate of about 2.6 per cent.
According to the latest World Bank economic report for the country, “tax morale is low” in Nigeria because of the systems complexity, and because the population receives few services or infrastructure improvements from the tax the government collects.
Nigerians have essentially not been given public services, so there is tremendous resistance to raise revenue where the social impact of paying taxes and receiving services is not functioning.
One of the major challenges of tax collection and administration in Nigeria is bad governance. Taxpayers are not encouraged to pay more taxes because there is no visible evidence of good governance.
Furthermore, most of the tax authorities (especially the states and Local Government) lack the desired institutional capacity to administer tariff and taxes under their purview effectively.
State and local governments collect tax revenues from three primary sources: income, sales, and property taxes. Income and sales taxes make up the majority of combined state tax revenue, while property taxes are the largest source of tax revenue for local governments, including school districts
Moreso, capacity in terms of staffing, skills, salary pay, other funding, computer and IT infrastructure etc are grossly inadequate
Again, the tax collection and administration is often prone to corruption. The corruption risk erodes the tax yield and confidence in the system. The FIRS under the current leadership is implementing reforms aimed at bringing more people into the tax net and ensuring that the right taxes are paid into the government’s coffers through seamless technology.
Analysts argued that if Nigeria is to reduce its budget deficits and increase revenue mobilisation, it must widen its tax base, and the informal sector provides an opportunity to do so.
For instance, a professor in the Dept of Business Law, College of Law, Igbinedion University, Okada, Professor Nat Ofo said no doubt in view of the dwindling revenue from oil, government has to be creative in generating revenue to implement the programmes in the budget, noting that one area that readily offers itself is taxation.
“Over the years attempts have been made to overhaul the tax system, but there is still room for improvement.
” Perhaps if the populace feel that government revenue is judiciously used, there would not be much resistance from the people.
“Instead almost on daily basis we hear and read about several billions being misappropriated. This does not encourage voluntary tax compliance.
“Put differently, the first step in achieving voluntary tax compliance is for government to be responsive to the people and their needs.
He pointed out that where people feel that the tax they pay will end up in the pockets of government officials, there would be resistance, subtle or otherwise, to the voluntary payment of taxes; thereby denying government of needed resources.
He urged government to ensure that people begin to see the benefit of the abundant resources the nation has in the improvement of the life and welfare of the people.
The Chief Research Officer of Investdata Consulting Limited, Ambrose Omodion said the number of people currently in the tax net is low, not because people are being too poor or not aware but because people cannot see taxpayer money at work.
According to him, if the tax administrators are honest, reliable, hardworking and patriotic enough, it is anticipated that the performance output of the tax system will be efficient and effective.
He also pointed out that most of the tax agencies suffer from limitation in manpower, money, tools and machinery to meet the ever increasing challenges and difficulties.
” In the area of tax collection, the number of people in the tax net is low. If we have 200 million Nigerians and your tax base is five million, you have not done well.”He suggested that there should be a broad base tax strategy focusing on all key areas of the tax system with measurable outcomes in order to improve tax revenue in Nigeria.
The tax agency set a new revenue collection record in the first quarter of 2020, as total tax collections rose to N1.12trillion above the N1.04trillion recorded in Q1 2019.
FIRS boss, Muhammad Nami, attributed the feat to widespread policy reforms and institutional re-organisation he initiated on assumption of office in December 2019.
The Q1 collections have traditionally been extremely low as a result of limited economic activities within the period, which business analysts trace to the festive hangover among other factors.
The feat was achieved despite the global fall in crude oil prices and shutdown of global economic system due to the COVID-19 pandemic. Analysis of the collections showed that capital gains tax recorded 568 per cent increase to N643.9billion from N96.4million, gas income tax rose by 420 per cent from N2.97billion to N15.4billion, while petroleum income tax increased by nine per cent.
The companies’ income tax increased by 152 per cent to N102.6billion among other positive indicators. In addition, stamp duty collection during the period stood at about N4.6billion a 36 per cent increase above the N3.38billion in Q1 2019.
The FIRS also recorded an 81 per cent increase in education tax with N13.1billion collected in Q1 2020 compared to N7.22billion a year ago. Both the Nigeria Customs Service, and non-import VAT also increased by 11 per cent to N63.29billion and N261.2billion, respectively, against 2019 figures of N57billion and N236billion, correspondingly.
Besides, the recently signed 2019 Finance Act is improving the ease of doing business environment in Nigeria, especially for small businesses, noting that the Act exempts businesses with annual turnover of N25 million and below from paying VAT.
However, these businesses would eventually enter the tax net through continuous assessments, as the Act is already impacting positively on small businesses as well as the economy. Nami has advocated increased tax payment by the informal sector. For him, taxing the informal sector may also be a way of promoting good governance and political accountability of the states, because tax strengthens the social contract between the citizens and the government.
“The informal businesses that contribute to tax revenues are likely to assert their rights to receive certain services from government, thereby ensuring national development and accountability.
“Paying taxes is likely to promote responsiveness by the state to the needs of the informal sector in a bid to encourage voluntary compliance. It is also likely to encourage collective action, collective political engagement and bargaining by the informal sector,” he said.
The FIRS, in its response to the impact of the Coronavirus pandemic on its operations, launched business continuity plan and measures to ensure the safety and well-being of taxpayers and other stakeholders. It is projected that Nigeria as a country has a low tax base and will most likely face unprecedented revenue challenge due to the pandemic.
To cushion the effects, the tax agency introduced some measures, which are designed to relieve taxpayers of the burden of compliance at this time, while also ensuring their safety and those of its staff, and the general public.To this end, FIRS has extended the time for filing VAT and withholding tax from the 21st of every month to the last working day of the month, preceding the month of deduction.
Also, the due date for filing company income tax returns has been extended by one month while taxpayers will be allowed to file returns using unaudited accounts. However, they must subsequently submit audited account within two months after the revised due date of filing.
The agency equally outlined some measures to reduce physical visits to the various tax offices, and enhance operational efficiency.These include extension of the filing deadline of some taxes. Taxpayers were encouraged to use available electronic platforms for filing tax returns, including withholding tax, transfer pricing, and company income tax returns and so on electronically.
The FIRS also plans to publish information requests for desk reviews and tax audits on its website, and create a portal where such information can be uploaded by taxpayers for online review by the Service.
The new leadership is also building a motivated workforce that is committed to ensuring the agency achieves its N8.5trillion target this year. The Domestic Tax Operation Group (DTOG) of the FIRS already pledged that with the new management’s determination to empower and motivate the staff, the target would not only be achieved, but would be surpassed.
The DTOG said the FIRS would keep track of the compliance behaviour of all taxable entities, especially by integrating FIRS e-solution platforms with the Integrated Payroll and Personnel Information System (IPPIS), Government Integrated Financial Management Information System (GIFMIS), and the Taxpayer Identification Number (TIN), with Bank Verification Number (BVN). The promotion of quality service delivery to taxpayers necessarily requires the adoption of technology.
The Service was, therefore, admonished to intensify efforts towards completing the various ICT interventions, including the on-going VAT automation as well as the need to build a centralised taxpayer database to ease access to information.
Lead Consultant, Dshield & Buckler, tax and management consultancy firm, Lagos, Oludayo Adeosun, said the FIRS under the current leadership has taken strategic steps meant to lift the Nigerian tax figures, adding that current corporate segmentation of taxpayers would boost compliance.
He explained: “There are low, medium and large tax payers. There is appropriate segmentation of taxpayers, which is leading to improvement for tax collection for the nation. Tax segmentation in line with the new Finance Act, where companies with less than N25million turnover are now being exempted from payment of taxes. It is a new dimension that never happened before. But this new revision, allows companies that are coming up to have time to find their feet, while those that have been in business will now be faced by the tax offices to ensure that adequate and correct taxes are paid.”
He commended FIRS for the continuous sensitisation to let the people know that payment of their taxes is a civic responsibility, noting that under the new administration, “it will be very hard, for someone to evade tax.”
Also, Vice President, Chartered Institute of Taxation of Nigeria (CITN), Adesina Adedayo, stressed the need for Small and Medium Enterprises (SMEs) to have effective information exchange with tax authorities to guide decisions on taxing them.
“SMEs should know what they achieved in a particular year. If you cross a N25million threshold in 2019, you can tell the tax office on the basis of openness, I achieved N25million plus in 2019, whether you will be able to achieve it in 2020, is subjective. That information management will become the basis for dealing with you, and you need to be transparent, truthful and straightforward,” he said.
Adedayo further noted that “There could even be a year that you (SME) did not do any business in a large part of the year; you also need to inform the tax authorities. The challenge is when business owners want to play a fast game on FIRS, which has enough capacity now to determine how you are able to make income and ensure you pay the right taxes,” he said.
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