FG may focus more on indirect taxes as new tax regime beckons

Informal sector in tax net as committee rallies OPS, trade unions for support
Barring any adjustment to the proposed tax regime of the Taiwo Oyedele’s committee’s report by the National Assembly, the Federal Government would likely focus more on indirect taxes.

An indirect tax is collected by one entity in the supply chain, such as a manufacturer or retailer, and paid to the government.

According to aspects of the recommendations of the Presidential Fiscal Policy and Tax Reforms Committee’s report, given the relative ease of collection, broad-based nature and the less distortionary impacts, the government shall focus more on indirect rather than direct taxes.

The 39-page document, which is yet to be ratified, noted that such taxes should be progressive in terms of rates, exemptions, compliance thresholds, or credits as appropriate.

Accordingly, the document noted that indirect tax rates should be accompanied by reductions in direct taxes as much as possible to ensure that the overall tax burden is moderate while protecting the government’s tax base.

The document noted that technology should be adopted to automate compliance and ensure the effective administration of indirect taxes on and offline.

Other aspects of policy also revealed that Nigeria may refocus its tax policies towards wealth redistribution, stressing that the country will likely see an upward rate adjustment on non-essential items to partly offset the impact of the reduction in rate and exemption for essential items ensuring that the masses are protected and providing some cushion for states who earn 85 per cent of VAT revenue.

On his verified X account, the Chairman of the committee, Taiwo Oyedele argued that data by the NBS justified the decision of the committee to push for zero tax on basic household items that consumed more than 70 per cent of the earnings of the majority of Nigerians.

He listed specific areas to include food, health, education, and exemption for rent, transportation, and small businesses.

While stressing the need for the non-essential items to part-fund the zero tax for essential household items, the committee noted: “The upward rate adjustment is on non-essential items to partly offset the impact of the reduction in rate and exemption for essential items.”

Under the new deal, one of the most welcoming news to the business community is the recommendation that they will not get full credit for the Value Added Tax (VAT) they pay on their assets and services, thereby lowering their overall costs and moderating inflation.

Under the current tax regime, many essential items constituting 82 per cent of the total consumption of an average household attract VAT while some are exempt.

While other forms of consumption taxes exist in some states in addition to VAT, businesses are also unable to recover VAT on their assets and services, thereby increasing their costs, which they pass on to consumers.

Many small businesses are required to charge VAT on their sales and VAT refunds require extensive tax audits and take a long time to process.

On the need to respect taxpayers, the committee seeks to grant them fair treatment within the tax system, adding that taxpayers have civic obligations that must be discharged while being entitled to certain rights.

The rights, the committee said, include access to relevant, clear, understandable, and timely information about the tax laws and procedures for discharging their tax obligations.

Under the proposed tax that is expected to be ratified by the Federal Executive Council before transmission to the National Assembly for legislative action, taxpayers are entitled to receive prompt, courteous, and professional assistance in dealing with tax authorities.

They also have the freedom to raise objections to assessments and decisions and receive responses within a reasonable time threshold set by the tax laws and regulations.

The new tax law also tasks the agency responsible for the collection and administration with ensuring efficient implementation of tax policies, laws, and international treaties as applicable and also facilitates inter-agency cooperation and exchange of information.

The committee stressed that the main thrust of the National Fiscal Policy is to establish fundamental principles to guide the orderly development of the Nigerian tax system, government spending and borrowing towards meeting its overall objectives.

The document also suggested the use of data to target non-compliant payers while penalties must be moderate and used only as a last resort. It also seeks a level playing field between formal and informal businesses and among informal sector actors.

Adding that proper taxation helps to shape a nation’s economic and social landscape, it said this proposed tax system will promote industrial and manufacturing productivity, provide support for investments, provide basic infrastructure, ensure tax certainty, encourage innovation and ensure fairness across all levels and forms of businesses. “It would also create employment and guide the framework for providing tax incentives and waivers. It would also improve the ease of doing business by ensuring fewer numbers of taxes, promoting ease of compliance and eliminating informal taxes.”

It also added that the new tax system will be utilised to attract investments in all sectors of the economy with a focus on critical sectors as well as improve the country’s revenue base by ensuring investor protection, infrastructure investment, investment promotion and promotion and protection of the tech and digital economy.

The committee called on the Organised Private Sector (OPS) and Trade Unions (TUs) to ensure employees, suppliers and contractors are registered with the relevant tax authority, deduct and remit applicable taxes, support the identification and capturing of the informal sector into the tax net; promote tax education among members; encourage tax registration and compliance and facilitate stakeholder engagements with tax authorities or revenue agencies.

According to the document, the media should promote tax education and awareness, articulate taxpayer’s rights, promote accountability and transparency in tax revenue utilisation, ensure accurate and balanced reporting as well as advocate for fair and equitable tax policies and protection of taxpayer’s rights.