Revolutionising tax for Nigeria’s sustainable growth
The Federal Inland Revenue Service (FIRS) is currently implementing small businesses -friendly tax policy that temporarily exempts operators with an annual turnover of N25 million and below from charging Valued Added Tax while deploying technology to ensure continued quality service delivery to taxpayers across every segment of the economy.
FIRS performance showed that tax revenue rose to N1.12 trillion in the first quarter of 2020, higher than N1.04 trillion received in the same period of 2019. Helen Oji examines the impact of the reforms instituted by the new leadership of the FIRS 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 the 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 potentials in the country are under-utilised, with several ills besetting collection, assessment and the 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.
The Federal Inland Revenue Service has said it loses $15 billion 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 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 complexity of the system and because the population receives few services or infrastructure improvements from the tax the government does collect.
Nigerians have essentially not been given public services, so there is tremendous resistance to trying to raise revenue where the social compact 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.
Moreso, most of the tax authorities (especially the States and Local Government) lack the desired institutional capacity to administer effectively. The taxes under their purview (capacity in terms of staffing, skills, salary pay, other funding, computer and IT infrastructure etc).
Again, the tax collection and administration is often prone to corruption. The corruption risk erodes the tax yield and confidence in the system. But the FIRS under the current leadership has in recent months, initiated reforms aimed at bringing more people into the tax net and ensuring that right taxes are paid to the coffers of government 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.
Surprisingly, the FIRS set a new revenue collection record in the first quarter of 2020 with total tax collections rose to N1.12 trillion, higher than the N1.04 trillion received in the corresponding period of 2019.
FIRS boss Muhammad Nami attributed the feat to widespread policy reforms and institutional re-organisation he initiated on the assumption of office in December 2019.
The first quarter collection results have traditionally been extremely low as a result of limited economic activities within the period, which business analysts trace to the festive hangover of the New Year celebrations 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 N643.9 billion from N96.4 million, gas income tax rose by 420 per cent from N2.97 billion to N15.4 billion while petroleum income tax increased by nine per cent.
The companies’ income tax increased by 152 per cent to N102.6 billion among other positive indicators.
In addition, stamp duty collection in the first quarter of 2020 stood at about N4.6 billion about 36 per cent increase compared to the first quarter 2019 figure of N3.38 billion.
The FIRS also recorded an 81 per cent increase in its collection of education tax, with N13.1 billion collected in the first quarter of 2020 compared to N7.22 billion in the corresponding period in 2019.
Both Nigeria customs service and non-import Value Added Tax (VAT) also increased by 11 per cent to N63.29 billion and N261.2 billion respectively compared with first-quarter 2019 figures of N57 billion and N236 billion 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 an annual turnover of N25 million and below from charging Valued Added Tax.
However, these businesses would eventually enter the tax net through continuous assessments. This Act is already impacting positively on small businesses as well as the economy.
Nami has continually 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 state 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 the 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 leadership has in its response to the impact of the Coronavirus pandemic on its operations, launched a 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 an unprecedented revenue challenge due to the coronavirus pandemic.
In order to cushion the effects, the tax agency introduced some measures, which are designed to relieve taxpayers of the burden of tax compliance at this time while also ensuring the safety of its staff, taxpayers and the general public.
The agency 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.
The measures include an 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 planned 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 of FIRS is also building a motivated workforce that is committed to ensuring the commission achieves its N8.5 trillion 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 behavior 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”.
Speaking on the success achieved at the new leadership of FIRS, 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. He said the ongoing corporate segmentation of taxpayers by the FIRS would boost tax 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 N25 million 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 the FIRS for the continuous sensitisation to let the people know that payment of their taxes is a civic responsibility.
He said: “With the regime of Federal Revenue Service, with the reconstruction of the service now, it will be very very hard, for someone to evade tax,” he said.
Also, Chartered Institute of Taxation of Nigeria (CITN) Vice President, Adesina Adedayo, said there was a 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 N25 million threshold in 2019, you can tell the tax office on the basis of openness, I achieved N25 million-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 advised that the way SMEs share information with the tax authorities must be based on the truthful part of their transaction. “There could even be a year that you 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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