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Revolutionising tax for Nigeria’s development

By Chijoke Nelson, Adeyemi Adepetun, Femi Adekoya
18 July 2016   |   4:30 am
Tax potentials in the country are under-utilised, with several challenges besetting collection, assessment and the enlisting of eligible payers...
Minister of Finance, Mrs Kemi Adeosun

Minister of Finance, Mrs Kemi Adeosun

To get the best of tax potentials for the development of Nigeria, tax institute, private sector representatives, financial analysts and accountants are now unanimous in their conclusions that some of the nation’s tax laws need review, while the entire processes are also due for a revolutionised reform. CHIJIOKE NELSON, ADEYEMI ADEPETUN AND FEMI ADEKOYA report.

Tax potentials in the country are under-utilised, with several challenges 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 which became manifest in the wake of Gross Domestic Product (GDP) rebasing.

President Muhammadu Buhari, represented by the Minister of Finance, Mrs. Kemi Adeosun, at a tax conference of the Chartered Institute of Taxation of Nigeria (CITN), lamented the low level of tax to Gross Domestic Product, currently estimated at seven per cent, saying it is a key factor in the country’s financial woes and symptom of the fundamental over-reliance on oil now manifesting.

Reiterating his readiness for a new tax governance in the country, he said that era of non-tax compliance by government contractors is over as the Federal Government is now determined to enforce “no tax, no payment” on any company, which compliance status is in doubt in the books of the Federal Inland Revenue Service.

Besides, government will collect every dime related to tax, as it embarks on tax reform that is driven by technology, in efforts to widen the base and enthrone a regime of efficiency in collection, as his administration has strengthened control and budget monitoring processes to ensure that the people gets value for every kobo.

But the Publisher and Chairman of The Guardian, Lady Maiden Ibru, at the just concluded maiden edition of Economic Forum Series on Tax in Lagos, titled: “Unlocking Nigeria’s Tax Revenue Potential for Sustainable development”, agreed that tax is civic responsibility, but noted that the processes call for human face, as well as considerations over charges.

“We feel tax revenues are critical to sustainable development because they provide governments with independent revenue for investing in development, reducing poverty and delivering public services, increasing state capacity, accountability and responsiveness to citizens.

“Nigeria is faced with ‘taxing’ challenge, a situation where its tax receipt compared to its potentials and vis-à-vis other developing countries has been dismally low…Nigeria is not earning enough to take care of itself anymore,” she said.

The President CITN, Dr. Olateju Somorin, has pointed out that the huge gap between tax collection and the quantum left uncollected year after year must be addressed if the nation must make meaningful and sustainable progress in the face of parlous infrastructure across the country.

“A review of some of the tax laws has become overdue. Moreover, sustainable economic growth cannot be attained with only tax reform, without the review of the obsolete laws and tax rates in consonance with macro-economic objectives and efficient tax administration machinery.

“Despite growth in terms of GDP, our tax ratio has only managed to record seven per cent, compared to 15.3 per cent for Cote D’Ivoire; 15.4 per cent Benin Republic; 15.8 per cent, Egypt; 18.2 per cent, Cameroun; 20.8 per cent, Ghana; 23.2 per cent, Cape Verde; and 26.9 per cent, South Africa.

“Our tax system must be well structured such that the framework of tax exemptions, tax incentives and waivers are streamlined,” she said.

Immediate Past President, Chartered Institute of Taxation of Nigeria (CITN), Anthony Chidolue Dike added that to wean the economy away from oil taxes, there is a need for shift from direct to indirect taxes especially in the non-oil sector.

“Nigeria has an underground economy that is so large. Reigning in their activities provide great scope for widening the tax base. Government needs to reduce cost of doing business by reducing Company Income Tax and Personal Income Tax rates, as shifting to indirect taxes would still not lead to a shortfall in meeting revenue requirements.

But the Director-General of the Lagos Chamber of Commerce and Industry, Muda Yusuf, noted that transparency in the use of public fund encourages the taxpayers to voluntarily comply.

He lamented the dire straight in which the state governments have found themselves because of the plummeted revenue profile, saying that property tax remains a veritable source of revenue for them, which proceeds must be used in the development of the areas they are collected.

He however noted that there is a dilemma over tax administration in the country, with structural issues calling for urgent attention.

He noted that revenue generation could only go as high as the prosperity of the institutions in the country, especially when weighed against the tax burden being placed on them by government.

“The conditions of business operations should be evaluated vis-à-vis the tax burden placed on them. Businesses are concerned about too many demands on them through taxes and levies as many government agencies depend heavily on internally generated revenues when they should be serviced from taxes paid to the Federal Government. Businesses are the ones suffering for this dysfunctional system.

“When Nigeria is compared with other African countries, the advocates of increased tax payments forget that the privileges across countries differ. While an average entrepreneur in Nigeria provides virtually the entire infrastructure needed, other countries provide a good environment for operations.

“With the wealth of the country being held by a few, such few should be made to pay more rather than burdening corporate entities. Equity and creativity matter in tax administration”, he said.

Also, a tax professional, Dr. Mark Abani, called on the leadership to reflect the change that is currently being preached, while and tax administrators must set the pace in paying VAT and mandating their clients to do so too.

For government, he canvassed continuous engagement and capacity building for taxpayers and stakeholders, as opposed to crisis management approach, which typifies what tax officers are currently doing.

“In many developing countries, there is little public information or debate about taxation – even at election time. Wealthy and influential people evade tax, and public attitudes to taxation are often overwhelmingly negative.

“A growing body of research shows that tax matters for governance. If governments do not depend on taxpayers for revenue, they have little need to be accountable and responsive to citizens. Likewise, if taxpayers see governments wasting their money or believe that others are unfairly avoiding tax, they will be reluctant to pay.

“Widespread tax evasion leads to a narrow taxpayer base and reduced willingness to pay. There is evidence that better-off people and companies negotiate private bargains with the tax authorities, leaving them with less incentive to press for accountability or reform.

“Corruption and a lack of transparency in public spending further strengthens people’s reluctance to pay tax, while coercive and arbitrary tax collection – often a problem in rural areas – makes people resentful of paying taxes,” he said.

The Registrar/Chief Executive, Institute of Chartered Accountants of Nigeria (ICAN), Rotimi Omotoso, advised against encouraging orthodox and aggressive method of tax collection noting that electronic filing of tax returns is the safest, fastest and easiest way to submit individual and business tax returns.

According to him, every Nigerian individual and business must be able to e-file his or her tax returns, and low income earners should be able to e-file Individual tax returns for free.

But the Executive Chairman, Federal Inland Revenue Service (FIRS), Babatunde Fowler, has said that the global drop in oil prices is currently having a profound and significant effect on our national revenues leading to a sharp drop in our national revenues.

“A three year review of tax collection figures showed that while collections from non-oil taxes have been growing, collections from oil taxes, have steadily declined and perhaps, set to decline even further in 2016.

“The fall in crude oil prices has impacted the collection from oil taxes, thereby making the contribution from non-oil taxes compare favourably with that from oil taxes, such that oil taxes only contributed 35% of total tax collection in 2015,” he said.

While these statistics give cause for concern, they also present an opportunity for us as a nation to grow our non-oil tax revenue base, which is in tandem with the theme of this forum “unlocking our tax revenue potential”.

Speaking on the prospects of increasing non-oil revenue through Value Added Tax (VAT), Tax Partner, Akintola Williams Deloitte, Seye Arowolo attributed the low revenue from VAT to heavy dependence on oil revenue, adding that there are viable alternatives yet to be explored.

According to him, there are opportunities for Nigeria to earn a share of the globally projected income of $4 trillion in revenue from VAT on e-supplies.

He explained that until the Federal Government focuses on non-oil revenue generation through tax as primary option rather and not a child of necessity, the potential for improved earnings may not be realised.

“E-commerce rules need to be addressed as the use of payment cards accounted for $640 million added to the Nigeria’s Gross Domestic Product (GDP) between 2011 and 2015. With many transactions being completed online, there is a great opportunity to earn more if the potential is fully explored.

While comparing trends in selected African countries, Arowolo noted that Nigeria’s VAT rate stands at five per cent unlike South Africa at 14 per cent, Kenya, 16 per cent, and Ghana, 17per cent.

On the prospects for VAT increase, Arowolo urged government to eliminate leakages like ambiguity in the VAT Act, information asymmetry, constraints to innovation, limited automation, illegitimate input VAT claim, transfer mispricing as well as protracted audit processes.

To do this, Arowolo said: “Government needs to adopt strategies to get the 20 per cent that contribute 80 per cent or more of Nigeria’s tax revenue to as near 100 per cent compliance as possible, adopt strategies that nurture compliance by those not yet in tax net, destroy the perception of “untouchable taxpayers through relentless detection and enforcement measures and accelerate data integration across all available databases”.

Earlier in the year, the Association of Licensed Telecommunications Operators of Nigeria (ALTON) said that it might increase the tariff chargeable for calls originating and terminating from networks in some states as a result of increased cases of multiple taxation and incessant closure of sites and increased cases of multiple taxation.

Adebayo said that the states to be affected include Ogun, Ondo, Akwa Ibom, Ebonyi, Osun and Kaduna, due to arbitrary closure of telecoms sites and actions of governments impacting on telecoms operations.

He said that the association was very concerned about the recurring cases of telecoms sites closure by government agents in some states.

According to him, service providers continue to record cases of arbitrary site closure in many states of the federation.

‘’This is in an attempt to force operators to pay local taxes and levies, some of which are multiple in nature and most of which are only aimed toward telecoms operators.

‘’What has telecoms operations got to do with ‘Eco Tax for gaseous emission and gaseous emission’, when we do not have moving machinery and production lines?

‘’What has telecoms service got to do with sewage, sanitation and public convenience levy, when we are not hotel and bar operators?

‘’What has telecoms services got to do with sanitation and refuse effluent tax, when we don’t operate fast food centres?

‘How can a base stations situated in farmland be regarded as business premises and therefore liable to business premises tenement rate payment?’’

Adebayo said that the rate charged per base station in the urban areas was different from the rate applied for residential and commercial buildings, when the infrastructure occupied the same land.

According to him, the operators have resolved that, arbitrary sealing of their sites, without following the guidelines clearly provided by the Nigerian Communications Commission and in line with best practices will no longer be tolerated.

Meanwhile, except urgently addressed, a major crisis might loom in the telecommunications sector over a proposed bill currently at the National Assembly, which seeks to enforce a nine per cent Communication Service Tax (CST) on charges payable by a user of an Electronic Communication Service (ECS) including Short Messaging Service (SMS), Multi Media Messaging Service (MMS), data and Pay-Television services supplied by service providers.

Already, industry groups including the ALTON) Association of Telecommunications Companies of Nigeria (ATCON) and the National Association of Telecommunications Subscribers (NATCOMS) have jointly wrote a letter to the Minister of Finance, Mrs. Kemi Adeosun and Minister of Communications, Adebayo Shittu, about the dangers the new tax system portends for the industry if it becomes a law.

The Global System for Mobile telecommunications Association (GSMA), the body, which represents mobile operators worldwide, also joined them in the letter, dated March 30, 2016.

According to findings, the bill, titled, “The Communication Service Tax (CST) Bill, 2015,” is a private member bill. For CST purpose, “User” is defined as “a customer or subscriber of any electronic communication network or broadcasting service and includes a customer that is an operator or provider of electronic communications network or service.”

In effect, customers who purchase ECS solely for resale (middlemen) are also required to pay CST on their purchases. As contained in the bill, providers of ECS are required to collect CST upon supply of services and remit the tax to the Federal Inland Revenue Service (FIRS) no later than the last working day of the month following the month of transaction. However, this timeline may be extended in certain circumstances, according to the proposal of the bill.

Failure to submit CST returns by the due date would attract a penalty of N50, 000 plus N10, 000 for each day of default, and interest at the rate of 150 per cent of the average prevailing commercial bank lending rate published by the Central Bank of Nigeria (CBN).

Also, refusal of service providers to provide government access to the network nodes attracts a penalty of five per cent of the yearly gross revenue of the last audited financial statements.

According to the letter sent to the ministries of Finance and Communications respectively signed by Mortimer Hope, Director Africa, GSMA; Gbenga Adebayo (ALTON); Lanre Ajayi (ATCON) and Chief Adeolu Ogunbanjo (NATCOMS), the bodies stressed that if introduced, such tax will result in an increase in prices for consumers, have adverse impacts on the adoption of mobile services and industry investment, and be counter-productive to the longer term national digital strategy objectives set by the government.

Speaking to The Guardian the Chief Executive Officer of Airtel Nigeria, Segun Ogunsanya, said the planned tax bill would lead to increase in call charges resulting in less minutes of use on networks.

Ogunsanya seeks sector’s engagement with the NASS to dock the tax bill and the communications bill, 2016 in view of the potential adverse impact on the industry.

Furthermore, the bodies reminded the lawmakers that the socio-economic impact of mobile penetration has been widely recognized.
They made reference to a research conducted by the World Bank, which predicted that a 10 per cent increase in mobile broadband penetration in low to middle income countries led to 1.38 per cent increase in GDP growth.

According to them, to connect the yet to be connected Nigerians to the mobile platform, affordability remains a key challenge to connect the unconnected, who are typically lower income population groups.

Further taxation on electronic communication services would hit lower income consumers the most, who are already struggling due to the adverse economic situation and increased price pressure and for whom affordable access to information and communication technology is critical to their social and economic inclusion

They posited that further taxation on electronic communication services would hit lower income consumers the most, who are already struggling due to the adverse economic situation and increased price pressure and for whom affordable access to information and communication technology is critical to their social and economic inclusion.

“Moreover, this will result in a double taxation for consumers who already pay Value Added Taxes on telecommunications services”, they stressed.