What is the way forward for Nigeria post COVID-19? – Part VI

*Achieving sustainable economic growth through tax incentives and administration
Nigeria is currently facing three shocks: COVID-19 pandemic, oil price collapse and a contraction in world trade as a result of COVID-19. Nigeria is very dependent on the exports of crude petroleum as a source of her national income. With the decline in oil prices, Nigeria is very vulnerable and the need to rethink our revenue generation model is top priority. Moreover, the global pandemic has impacted on the country’s trading activities with top trading partners including Brazil, China, India, Japan, US and the European Union. This ‘plague of the triad’ presents an opportunity for the nation to become innovative now and in a post COVID-19, whenever that is. The World Health Organisation (WHO) has already hinted that the COVID-19 might be with us for longer.

The strain on trade as a result of COVID-19 and the plunge in oil prices have significant impacts on Nigeria’s fiscal administration. The opportunity to tackle specific challenges of high informality, revenue diversification and optimisation is immediate. Tax incentives, if properly thought through and efficiently managed, offers temporary relief to boost the economy alongside the implementation of fundamental economic reforms. Such tax incentives could be targeted to specific sectors of the economy including Small and medium scale enterprises (SMEs), and at foreign investors and multinationals. Many of these are looking for new opportunities to put their capital to use. Nigeria is the largest economy on the African continent with a robust population. Nigeria stands a better chance to attract sustainable local and foreign investments by committing to innovative decisions in the fiscal space. This has the potential to give a new lifeline to the economy through induced spending.

Efficient tax administration through tax incentives can stimulate economic growth that is sustainable. These tax incentives must be set realistically, monitored and effectively evaluated in order to stimulate growth. As a starting point, the federal government must review the current tax incentives policy and avoid granting incentives and waivers that undermine the tax base of the country. Such incentives should be fiscal tools aimed at offsetting challenges investors may face in investing in Nigeria. Some of the current challenges are lack of coordinated national infrastructure; complicated, ambiguous and antiquated laws; stability agreements without triggers or exit clauses; bureaucracy and uncoordinated areas of responsibility between the issuer of tax incentives and the fiscal administrators; and weak administration by the various levels of government.

The suggested tax incentives must target investments in non-renewable energy. Nigeria’s current vulnerability due to the shocks presents a golden opportunity to shift to revenues from non-oil sectors of the economy. The volatility in non-renewable resource tax has generated concerns about the fiscal sustainability of resource rich countries. Consequently, this high dependency will hinder economic growth in the event of continuous fall in oil prices thus triggering budgets deficits. This could hinder infrastructure development and economic diversifications that aim to increase sources of revenue to counter dependence on oil revenue. This concern may put strain on the revenue performance in the coming years.

Nigeria must implement a strong tax compliance framework. This must be a clear robust policy framework that enables the effective deployment of appropriate technologies and processes. Likewise, the presence of contemporary expansive tax laws to address the concerns in the nation’s fiscal administration is very relevant. The lack of applicable legislations based on global good practices as it relates to e-commerce taxation, encourages arbitrage and creates loopholes in policy and tax administration.

A blended approach to Nigeria’s fiscal administration is recommended. This blended approach acknowledges our local content and peculiarities within the current realities. This specifically targets businesses across the federal, state and local governments, including start-ups and SMEs. It is important to manage this tax mix, strike a balance and consider a tax relief to better manage the impact of COVID-19.

Start-ups and SMEs have to be treated favourably. While big businesses may find it relatively easier to survive through the current pandemic, start-ups and SMEs will struggle. They do not have the liquidity most big businesses have and might lack the understanding of the technicalities and good practices in tax management. SMEs should be supported through a basic act of book keeping on how to stay compliant by the relevant regulatory agency. If the blended approach is managed imaginatively, this is could be an opportunity to better understand them in this crisis and aim at increasing their tax contribution in a post COVID-19 environment. Start-ups and SMEs are drivers for growth, generating employment and creating avenue for the development of entrepreneurial skills. The National Bureau of Statistics (NBS) reported that SMEs contributed about 48% of the national GDP in the last five years with a total of about 17.4 million Nigerians involved in the sector. SMEs are responsible for 50% of industrial jobs and nearly 90% of the manufacturing sector. Adding to these, SMEs are responsible for 84% of employment in Nigeria. The flaws in previous policies of the government to support SMEs to achieve the intended growth may be due to the absence of investment in data and analytics to drive the level of desired outcome.

The Nigerian government through a well-articulated policy document should create short-term tax deferral opportunity for businesses. The government should consider writing off debt in some critical corporations to the economy by way of short-term equity participation. The recommendation to write-off debt should consider careful risk assessment and impact. This includes risk assessment on bank loan charges on some entities for possible deferral and re-negotiation of repayment plan. Banks should be supported through the Central Bank of Nigeria (CBN) to achieve this proposition. We acknowledge the current tax incentives of federal and state government tax revenue agencies drive. At different times, they have relaxed the enforcement of infractions on filing and payment due dates by providing extension and incentivising taxpayers that settle their obligations before due date. However, for these efforts to be effective on the longer term, there is the need for a harmonized and well-coordinated approach. This policy options will contract the revenue generation capacity in the short-term, but has a multiplier effect for a higher future streams of revenue.

The greatest challenge for the execution of these incentives is the issue of identity and proper documentation. These recommendations should be data driven with the support of appropriate technology. A reliable strategy to do this is through blockchain technology for national and state tax management. It has proven to be a sustainable, long-term solution with the decision to implement promptly. We argued for the importance of block chain technology in the fifth article in this series. Through the use of block chain technology, the challenge of multiplicity of taxes and levies would be addressed to promote conducive fiscal environment for businesses in Nigeria.

*Gbenga Falana (@Falana_Gbenga)
Emmanuel Ojo (@Emmanuel_Ojo)