Monday, 29th May 2023

Tax hike and potential damages to the economy

By Editorial Board
20 February 2023   |   3:06 am
Plans by the Federal Government to hike taxes both in the form of excise duty and new rates, spell nothing but disaster for an economy struggling to get by even though economic decisions appear to favour the government’s decision.


Plans by the Federal Government to hike taxes both in the form of excise duty and new rates, spell nothing but disaster for an economy struggling to get by even though economic decisions appear to favour the government’s decision. For a private sector already overwhelmed by multiple taxes, the imposition of additional taxes and excise duty on all services will make the business community more vulnerable with a trade off on growth and job creation.

In an environment where individuals and corporate entities provide services and infrastructure that should have been provided by the government, the best the government can do is to support and ease their burdens rather than making them pay for its inefficiencies and fiscal indiscipline. Notably, it is not every recommendation from development agencies that should be implemented without considering the peculiarity of the context in which such policies will be implemented.

Tax economics encompasses more than just public funds. Taxes are crucial growth promoters and tools for economic policy. Countries tend to reduce taxes during economic lull but increase the same during a boom. And there is often a trade-off between a higher tax burden and economic growth. Indeed, the questions relating to these decisions are not often as straightforward as they seem. Sometimes, such decisions could be as complicated as the devil’s choice; the alternative could, indeed, present themselves as the proverbial devil and the deep blue sea, a situation in which Nigeria currently stands.

Nigeria’s documented sovereign debt has ballooned to about N44.06 trillion, with the Federal Government alone looking at borrowing more as captured in the 2022-2024 Medium-term Expenditure Framework and Fiscal Stability Paper (MTEF/FSP). Thus, the country should, as suggested by the World Bank as well as the International Monetary Fund (IMF), look inward for resource mobilisation and think urgent tax reform as an important route to achieving this. The impact of such reforms in the form of additional burden spells hardship for existing tax payers.

Citing concerns about the rising burden of taxation on businesses, members of the organised private sector, warned that the current tax regime in Nigeria will further stifle investment as corporate taxes may hit 36 per cent. According to them, corporate tax in Nigeria is 30 per cent. But effective corporate tax is much more than that. There is a tertiary education tax of 2.5 per cent of the profit; NITDA Levy of one per cent of the profit; a NASENI Levy of 0.25 per cent of the profit; Police Trust Fund Levy of 0.005 per cent of the profit. This brings effective corporate tax to about 34 per cent. This rate is one of the highest in the world. The average corporate tax rate for Africa is 27.6 per cent; the Asian average is 19.52per cent; the European Union is 19.74 per cent and the global average is 23.37 per cent.

In February 2020, the government adjusted the value-added tax (VAT) upward by 50 per cent through the Finance Act 2020 and argued that it would not have much impact on the poor as essential consumption was exempted. Three years later and a revised Finance Act, Nigerians know better the implication of the increase. Inflation increased to a crisis level, pushing many companies into desperate cost-cutting options, including layoff and many consumers’ household incomes weakened.

The same year, the government expanded the band of excise duty, a category of tax originally known as sin tax (a name rooted in its prohibitive rather revenue-generating role). It was extended to the telecommunication sector. For a country whose unemployment, especially among the youth, has reached a crisis level, a contemplation of more taxes on businesses is like adding fuel to fire. At 33.3 per cent unemployment rate according to data from the National Bureau of Statistics (NBS), the country is in the league of five countries with the worst unemployment rates globally. Hence, some economists advocated the use of fiscal incentives as opposed to taxes to encourage the private sector to create the much-needed jobs.

Meanwhile, new taxes are still being proposed by the National Assembly. These include a Tertiary Health Tax of one per cent of the profit; and an NYSC levy of one per cent of the profit. There are numerous other taxes imposed on businesses by the states and local governments.

Chief Executive officer of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, cited the need for an accommodating tax regime, noting that an economy that desires job creation, economic inclusion, investment growth and poverty reduction, should have an accommodating tax regime for investors. Even employers in the food and beverage sector have threatened to leave Nigeria and relocate their factories to neighbouring West Africa countries over alleged outrageous excise duty on carbonated drinks and multiple taxations by the Federal Government. The employers, who called on the Federal Government to take urgent action to save the business environment from collapsing, said relocating their factories to neighbouring countries was the next line of action, where production cost is lesser and the finished products will be brought back to Nigeria to sell, making Nigeria to be at the receiving end.

For any discerning government, a higher tax in an environment with troubling inflation rate is not the best decision. More taxes, of course, weaken the purchasing power of individuals and stifle consumption, with attendant consequences for social cohesion. Already, many Nigerians think the tax burden is unbearable especially with the rising implicit component (the unnecessary cost inflicted on households because of neglect of social responsibilities of government).

The same Bretton Woods institutions recently warned about Nigeria’s inflation problem, citing it as a key driver for the rising number of poor people in the country. While many have blamed the Russia-Ukraine crisis for the present inflation trigger, what has been equally ignored are the lingering structural and security challenges driving prices of food and basic services beyond the reach of the poor and the almost non-existent middle class.

The painful rise in prices for everything, including mainstays like food and oil, is both an economic and political problem. While monetary authority appears to have been overwhelmed by several interventions to the economy, the fact remains that the present administration has done a poor job at managing inflation and everyone is paying the price.

Already, consumer purchasing power has continued to drop with preference for cheaper commodities taking the centre stage in many of such purchases. Despite declining revenues, companies continue to play their roles as responsible corporate citizens, paying their taxes and other collectibles, in billions yearly, while shouldering virtually the responsibilities of government in their host communities. Last year alone, the Federal Inland Revenue Service (FIRS) announced that it collected over N10 trillion in tax revenue, the highest tax collection ever recorded in its history. Of the N10 trillion, Companies Income Tax contributed N2.83 trillion; Value Added Tax N2.51 trillion; Electronic Money Transfer Levy N125.67 billion and Earmarked Taxes N353.69 billion.

Rising from the ruins of COVID-19 and now the lingering impact of the Russia-Ukraine war, countries have created several bounce-back schemes to help organisations survive the impacts of the pandemic and the war. From Europe, Asia, America to Africa, companies are getting a helping hand to keep jobs and save the economy from the cliff. It may be understandable why the government cannot do much now to help struggling businesses cope with existing challenges, perhaps, the least the government could do now is to resist the temptation to impose more taxes on businesses. High tax burden on businesses is detrimental to investment and job creation and could ultimately undermine revenue generation prospects of the government. Any revenue drive that does not focus on efficiency, effectiveness and equity as major policy objectives is bound to fail. Imposing new taxes will be as good as auctioning the few available jobs. A nation of jobless youths is a looming disaster not just to itself but to its neighbours and the world.

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