By Omodele Adigun
Both the federal and state governments should look inwards on how to develop new products that would boost their revenues. According to Mrs. Adebimpe Balogun, the former President of the Chartered Institute of Taxation of Nigeria (CITN), since each state of the federation is endowed with both human and natural resources, “we should look inwards and look at the areas we can actually improve on productivity, not just taxes,” she stated. Mrs. Balogun particularly frowned at the attempt by some people to increase Value Added Tax (VAT ) rate in the country even in the face of hardship, saying, “anybody that is thinking of increasing the VAT rate from 5 per cent is making a suicidal attempt. Right now, people are talking under the burden, under the inability to pay for this, to pay for that. You want your child to go to the best school, the school system is not good enough. So you painfully take your child to a private school that asks you for an arm and a life; the rents are soaring and yet you still have to pay your tax. This is not the time to start asking taxpayers for higher rate,” she advised.
At a public forum recently in Lagos, she x-rayed the tax system in the country , among other national issues, and concluded that the system should be regularly reviewed.
So many challenges we have in the system. There are at least opportunities, we should ensure sustainable tax regime. Sustainable tax regime has to be dynamic. We hardly review our tax laws often enough. In the UK, tax laws are reviewed every year. Once there is perceived loopholes in the Act, they quickly announce the perceived loopholes and everything gets to be normal. But here, we identify loopholes, loopholes are presented; the National Assembly takes its time in putting it into a legislative format. The Petroleum Industry Bill (PIB) is there till today. I am not sure how relevant it is any more. It was meant to have curtailed various incentives in the oil and gas industries given the fact that these people are supposed to have recovered all their capitals by now. But the PIB has not been signed into law, and is creating so many furore in that industry. Now that we are not even getting much out of oil, why are we leaving all those incentives out there?
So our tax has to be dynamic in order to have sustainable tax regime. Since the beginning of democracy, we have been having static tax regime. It was only during the military era that we had dynamic tax system. Once there was a military decree, it would go into operation immediately. If the President announced a change in the tax law, that was what would be applicable. But these days, you will wait and wait for the bills to be sent to the legislature.
Tax refunds must be painless and prompt. It is never a tax system that you won’t get your money back when it is clear that the government owes you. It does not impact confidence into that system; there would be no trust. VAT is supposed to be a refundable system. Now unfortunately, you have to go through too much procedures: tax audit goes through Finance Ministry, etc, before you can even get any amount due to you back and that would take years. If you overpay withholding tax, they say they would give you (tax) credit. What if you are in persistent credit position, which happens to some organisations in the country. So refund has to be prompt so that taxpayers feel comfortable that even if I overpay, I would get my money back. I tasted VAT refund process in South Africa recently. It was totally painless. At the point of departure, I was issued a credit card. That all I had to do was to give them 48 hours. Once I get to my country, by the way, I would have indicated in what currency I wanted my refund. Is it pound sterling? Is it dollars? Is it naira? If it is naira, I just put the credit card inside their ATM machine, and money came out. This is the kind of system we need to start developing for ourselves in Nigeria.
What strategic planning and thinking does Nigeria require to redefine itself and its tax regime in the face of contemporary development? It is not time to increase taxes. Anybody that is thinking of increasing the VAT rate from 5 per cent is making a suicidal attempt. Right now, people are talking under the burden, under the inability to pay for this, to pay for that. You want your child to go to the best school, the school system is not good enough. So you painfully take your child to a private school that asks you for an arm and a life; the rents are soaring and yet you still have to pay your tax. This is not the time to start asking taxpayers for higher rate. It is the time to widen the tax base; it is the time to expand the tax net; to start asking those who are not in the tax net at the moment to come in. We talked about the informal sector. The informal sector is not just about the traders; informal sector is not about the Igbo traders in Ojo or the Balogun market women. The informal sector is about those who do portfolio contracts. They are the ones who collect juicy contracts from the government. Now, the question I want to pose to the Federal Inland Revenue Service (FIRS) is: To what extent are we using our withholding tax system to capture these people? This is because the federal agencies who give out these contracts are obliged to ask for their tax. How much of that do we leverage to be able to extract taxes from these people in the informal sector? And they are the ones from whom we should collect bigger taxes, not the employees.
It is time to develop new products. Each state has natural resources, agriculture, and even entertainment. Entertainment industry now employs quite a number of people. They are earning salaries and they pay taxes on the salaries; improve on the entertainment industry; look into tourism industry. Dubai is actually surviving on tourism. Visa fees to Dubai is what sustains that country. Let’s look inwards. Let’s look at the area we can actually improve on productivity, not just taxes. Yes, Internally Generated Revenue (IGR) increases taxes but it also includes revenue you can make out of exporting goods and creating attraction for investors.
What are the ills of the Nigerian tax system as of today? We have the problem of fiscal federalism. I am not saying that fiscal federalism is not appropriate but I think when you borrow any kind of policy, any kind of structure from anywhere, we need to ensure that such a policy can fit into our type of system. Remember I said we had regional tax jurisdiction in the pre-colonial era.
The colonial masters brought in a unitary tax system and we have actually dovetailed that into what we call fiscal federalism, meaning it is a kind of unitary system of government. That is one of the problems of our tax system in Nigeria today where you have VAT being legislated and collected by the Federal Government. Personal Income Tax (PIT) is being legislated by the Federal Government but is collected in the various states of the individuals. That is the difference between the VAT and PIT. The VAT has created a lot of problems in the system where you have Lagos State government taking the Federal Government to court that it has no jurisdiction to collect VAT in its states. And when VAT is collected, it is collected centrally and distributed according to some Federal Government’s sharing ratio, which might not favour a particular state but favour another state more. That particular VAT problem is a constitutional problem. It was based on the fact that the 1999 Constitution was not drafted in such a way that would determine specifically who should legislate on VAT and who should do the administration. So we have constitutional problem in our tax system.
The structure of jurisdiction of Nigerian tax sysem was okay until the FIRS Act came into place under the National Tax clause. I will give you an example of what the problem is in that place. There is what we call the Tax Tribunal. The Tax Tribunal is established by the Federal Inland Revenue. That is the only tribunal on tax issues in the country. It means if the various states want to have their tax issues resolved, they have to go to the federal tax tribunal before they can get any adjudication result.
We have talked about oil revenue dwindling and the need to start looking inwards to the issue of tax collections. There is a lot of tax reforms going on, previously done and still being carried out.
However, what we have in the country today is the Moo Moo situation where 75 per cent of all states’ IGR are dependent on the oil revenue. We can’t continue that way because it means that once the oil revenue, which is dwindling, goes further down, dependence on 75 per cent will continue to affect the states’ IGR very negatively. Like I said, only Lagos State; I think Ogun State has joined now, I see also Kano. These are the states whose IGRs are relatively effective in taking care of their expenses.
I have talked about Lagos State. What is responsible for the tax compliance? It was part of the fact that they had very limited revenue generation. They made tax payers to be aware of their civic responsibility. They engaged aristes, actors and actresses to depict the issues of paying taxes. There was an increase in automation for those states that actually improved, maybe slightly. They have to automate their processes, otherwise, it will become very difficult to follow through with the tax trove you need to have.
Expansion of the tax net
We talked about the informal sector the other time. The informal sector in Lagos State, where other states are crying that they are unable to attach to the informal sector; that it is so difficult to collect and assess the informal sector, what Lagos State has done is actually to go to the cooperative groups in those market areas. And to try and get them to collect taxes on behalf of the state. What the state has done was to give them a flat tax rate that was collectable or payable by those market people even though I am sure if you put some of them properly in the tax net, they probably might be paying much higher; they are paying comparatively. That is what most states need to do. They need to look for a way of attracting tax payers into the tax net to be able to get cooperation and compliance. Some states have used external consultants over the time. Remember the time of Adekanola & Co. Athough that was Draconean, but it did have some effects. Lagos State still uses consultants, they call them the TAMA (Tax Assessment Monitoring Associates). This TAMA goes out to various companies to monitor, assess and come back to report. And then the state takes over. So the use of tax consultants has also helped to increase compliance in states like Lagos.