Expand tax net, not tax rate
As discussion points on the expediency of taxation continue to dominate public discourse in these times when even oil-producing nations are thinking through public finances beyond oil, public officers in the country should unlock their creative powers in the direction of expanding tax net instead of focusing only on tax rates – that can stifle entrepreneurship needed to forge the net.
No doubt, the need to increase the revenue base of the government remains an issue of strategic importance due to the requirements for adequate funding of government’s projects. In this regard, it is expected that various recommendations should be made for government’s action, in this regard. And so, one area that has received dominant attention is taxation, easily an organic source of revenue for governments in global context.
While some stakeholders and experts have been recommending increase in tax rate as a means of generating additional revenue for the government, others have been proposing expansion of the tax net instead. Although there are merits and demerits that will arise if either of the alternatives is adopted, a decision on the option government should go for must, of necessity, take into account the prevailing economic and social realities in the country.
Increase in tax rate implies that whatever is the rate of increase will be applicable to all persons liable to taxation. The consequence of this scenario is that it is only those who are in the tax net that will bear the burden. In other words, the tax burden will not affect those qualified but have not been paying tax.
However, if the tax net is expanded, the burden of payment of tax will catch up with those who, for one reason or another have not been paying tax even when they are qualified to do so. Consequently, while those who had been paying will continue to pay their normal tax, the newly caught up persons who had previously not been paying will begin to pay and thus, there will be increase in government’s tax revenue.
According to a report the other day, the International Monetary Fund (IMF) advised the Federal Government to urgently review the country’s tax policies with emphasis on taxing the richest three per cent of the country’s population, widening the tax base and increasing compliance on Value Added Tax (VAT).
These recommendations from IMF are profound and can facilitate the pooling of substantial amount of money into government’s coffers, if effectively and efficiently implemented. But, that will necessitate designing tax instruments to be exclusively targeted at the richest three per cent of persons in the country; getting more people who have not been paying tax to begin to pay; and ensuring appropriate collection and remittance of taxes (including VAT).
However, if what the IMF has recommended is interpreted to mean that the government should increase the rate of taxes being paid in Nigeria, the reactions of the organised private sector (OPS) as represented by the Manufacturers Association of Nigeria (MAN) and Lagos Chamber of Commerce and Industry (LCCI) that tax net should be expanded rather than increase in tax rate, cannot be faulted. Members of these bodies feel the heat of tax burden, after all.
Within the subsisting economic and social environment, it will be a gross lack of sensitivity on the part of government to even contemplate an increase in tax rates in the country. As it were, tax-paying persons (individuals and corporate organisations) are already traumatised by financial burden inflicted on them by huge outflow from their little and near-stagnant income. They pay tax but they do not see or feel what government is doing with the money, in concrete and judicious terms. All that has befallen them are lack or poor provision of social services, high prices, rising inflation, worsening foreign exchange rate, stagnated economic performance, increasing unemployment, worsening health care, educational, transportation, electricity, water and other services.
In other words, despite tax payments, they are still faced with coughing out money from their poor income to provide for themselves what government should have used the tax revenue to provide. Consequently, they are directly or indirectly made to pay more than is due for tax. To worsen the situation, most governments in the country curiously are involved in illegal multiple taxation.
So, what the OPS is saying which makes sense is that, given consideration to the state of things in today’s Nigerian economy, any increase in tax rate will portend hell-on-earth for the taxpayers. This will neither be in the interest of the government nor the public. They are also emphasising that, there are many persons who have not been captured in government’s tax net and do not pay needed tax.
The number of such non-tax paying but qualified to pay tax persons is substantial. Accordingly, revenue that should have been attracted from them is lost. Government should enlarge its tax catchment net to bring in such persons to fill or reasonably narrow the gap in its revenue size. Government incidentally, has acknowledged several times that there are many eligible taxpayers who are outside the tax net. Besides, it has been alleged that even some of those who pay are not paying correctly. What is worse, even tax revenue remittances are not correctly rendered. It is complicated.
No doubt, serious leakages exist in the country’s tax system and the need for the tax authorities to urgently plug identified loopholes to facilitate higher inflow of tax revenue into government accounts cannot be underplayed.
Tax payment is both a civic and legal responsibility of every eligible tax payer. Its payment confers on the payer the right to ask questions and demand that government should give account of what it has or is doing with tax revenue. There is therefore a sense in which we can claim that tax payment strengthen a right to being a part owner of a country. This civic duty is a responsibility and an opportunity.
It should be noted too that it is a criminal offence to evade tax payment. Those who are qualified and are in a position to pay tax but fail to do so, are enemies of the corporate entity and by implication have ostracised themselves from laying claims to being stakeholders in the nation. There is hardly any tax liable person who does not know that government needs money to assist in its provision of common goods and services for the public. Tax revenue is one major source of the needed money for the well being of the people. Thus, every eligible taxpayer needs to contribute and acquire the right to make demands on government. But many a time, for lack of knowledge and understanding or indeed, deliberate choice to cheat, several persons fail to pay tax. Some even believe that they are being ‘smart’ when they successfully evade tax payment. This is unfortunate and unacceptable.
Therefore, the challenge for government to increase its tax revenue is completely outside raising the tax rate. It is rather within a multiplicity of other issues: One, expanding the scope the tax net can reach and catch more persons beyond the subsisting band; effective tax collection via improved tax administration and management; consistent tax awareness and education; giving verifiable evidential account to the people of utilization of tax revenue for the benefit of the public and ensuring that those who may still choose to evade the tax system are expeditiously dealt with in accordance with the laws of the land. That will certainly serve as a deterrent to others.