Non-oil revenue through taxation: Will the informal sector engage?

With taxation becoming the new “TINA” in Nigeria’s fiscal and economic space, there is a general consensus that the prospects for enhancing non-oil revenue generation through taxation rests potentially on two mutually inclusive pillars:

• Completing the shift to indirect taxation as well as implementing all the associated considerations outlined in the National Tax Policy as far as is possible to make this a robust shift; and

• Expanding the tax base in terms of taxable persons and transactions.

One major imperative before the tax authorities, notably Federal Inland Revenue Service (FIRS), has been the need to accelerate the expansion of the tax net. Expanding the tax net has varying dimensions but the focus of this column is increasing the number of taxpayers or bringing potential taxable persons in the tax base by whatever strategy or combination of strategies howsoever developed. Given that this will reduce the ranks of defaulting taxable persons, this must be rigorously and relentlessly pursued. In which case, the shift to indirect taxation should not mean a perpetuation of leakages on what is assessable, collectible and enforceable through direct taxation.

A significant catchment of potential taxable persons that must be brought within the tax net therefore are those operating in the informal sector of the Nigerian economy. In an article featured in this column two years ago titled “Harnessing the Bottom Billions”, we emphasised the necessity of a SMART approach to bringing potential taxable persons in the informal sector into the tax net. A SMART approach is one which is specific, measurable, achievable, realistic and time-bound.

One major diagnostic conclusion in the National Tax Policy (NTP) is that “compliance has been a great problem in the Nigerian tax system as a result of the large scale informal sector”. The NTP admits that “the administrative burden of applying tax laws may be cumbersome for some of these entities and therefore efforts should be made to deal effectively and efficiently with them. This involves strategies to increase both compliance and revenue whilst keeping the cost of administration as low as possible”.
With Gross Domestic Product (GDP) of over USD500 billion according to the World Bank 2016 GDP forecast for sub-Saharan Africa, an estimated population of 178 million people with a significant proportion falling within the working class group, the potential for tax revenue generation from the informal sector is enormous!

The NTP envisages already that tax authorities need to evolve strategies which would enable them increase compliance and revenue from the informal sector. This reflects implicitly the limitation of any present approaches adopted so far (whatever these are)1. In evolving fresh strategies to drive increased compliance and revenue from the informal sector, it may be necessary to pose and seek answers to the following questions:

• Is there a need to stratify the informal sector?
• If so, along what lines to achieve optimum stratification?
• Is the current tax regime optimal for the informal sector?
• Is there a need for an alternative tax regime for the informal sector?
• Is the informal sector eligible for incentives? If so, what type?
• Should focus be on direct or indirect taxation for the informal sector and what level or degree of focus between the two policy approaches?

• What assurances are available in respect of voluntary disclosures of tax default?

The issue of stratification is important in that Micro, Small & Medium Enterprises (MSMEs) are sometimes classified within the informal sector. A relevant question would be: are they? Are there some classes of MSMEs that have outgrown that level and should be migrated to large taxpayers? This is to ensure appropriateness of strategy and focus. There is also the concern that the existing tax rates whether at personal income tax level or companies income tax level are still too high in relation to the margins earned from the respective businesses of qualified MSMEs.

One key factor to improve tax compliance in the informal sector would be to accelerate integration of relevant data scattered across several databases in the country in relation to potential taxable persons and their transactions and thereby eliminate information asymmetry that has precluded optimal collection of tax revenue. It may also be necessary to adopt compliance strategies that speak to the identified attitudes of taxpayers and/or taxable persons. In which case, the tax authorities must demonstrate the following capacities

• capacity to deploy the full force of the law in the case of taxable persons who have decided not to comply

• capacity to deter by detection those who do not wish to comply

• capacity to help those who are struggling to comply

• capacity to make compliance easy/easier for those who always want to comply

A more effective reward-based approach could be also adopted in lieu of the existing sanction based system to compensate taxpayers in a tangible manner with fiscal reliefs for sustained significant high compliance level as direct taxpayers and in their capacities as tax collection agents for withholding tax and value added tax. The golden handshake of awarding a plaque (whilst it enhances positive brand reputation) does not go far enough in terms of benefit to the bottom line.

The NTP emphasises sustainable pattern of revenue generation which is able to meet the needs of the present generation of Nigerians without negatively impacting the ability of future generations to meet their own needs. The prospects of tax as a sustainable source of government revenue are linked to the stability and certainty of the tax system.

Accordingly, strategies to engage and bring the informal sector players within the tax base must be pursued within an end-to-end wholistic fiscal agenda for non-oil revenue generation through taxation.

1 Roll out of an electronic tax returns filing system by FIRS, reduction of the form for the return of income and claims for allowances and reliefs (Form A) from a 6-page document to a 2-page document as well as the move to translate the Form A to native languages by the Lagos State Internal Revenue Service, are laudable efforts in this regard.