By Mustapha Babalola Toheeb
Introduction.
Payment of taxes is both a civic and legal responsibility of every eligible taxpayer. Its payment confers on the payer the right to ask questions and demands that government should give an account of what it has done or is doing with tax revenue. There is therefore a sense in which we can claim that tax payment strengthens a right to being a part-owner of a country. This civic duty is a responsibility and an opportunity.[1]
Tax revenues have been of great importance to many governments of the world, especially in developed countries compared to developing countries like Nigeria. Prior to democracy in Nigeria, tax revenues had not been significant contributors to the Government revenues, and minimal attention had been paid to it. The shift to take to critical consideration to increase tax revenues in Nigeria became more interesting in the 4th Republic (from 1999). Still, the concentration did not reach this height until the oil revenues accruable to the Nigerian Government started to dwindle in the last decade, and, most especially, in the current administration.[2] Now, the country is faced with a dilemma on how to increase the revenue being generated in order to cater for the day-to-day affairs of the country as it is high time to look beyond oil which had been generating a lot of revenue for the country until recently.
In view of that, there have been divided opinions amongst experts as to whether the government should expand or increase the taxes being collected, which implies that there would be an increase in tax rates, and some other experts are of the view that instead of expanding or increasing the tax rates, it would be logical and wise on the part of the government to resort to the expansion of tax net which means that there would be expansion and increase of those that will be paying taxes.
Although some merits and demerits 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.
It is really important to discuss the two options being considered as their understanding is very pivotal in solving this conundrum. Starting with the first option, expansion or increase in tax rates implies that whatever is the rate of increase will apply 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 have 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 an increase in the government’s tax revenue.[3]
Now, various experts and stakeholders have given their opinions on what would be the best way forward for Nigeria. The International Monetary Fund (IMF) has 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).[4]
If we are to consider what the IMF has recommended then it can be interpreted to mean that the government should increase the rate of taxes being paid in Nigeria, then the reactions of the Organized Private Sectors (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 is justified. After all, members of these bodies are the ones that suffer from the burden of the tax.[5]
After looking at what both positions entail, it is important to discuss the effect of both sides as they have their merits and demerits.
EXPANSION OF TAX NET.
In advocating for expansion of tax nets rather than expansion of tax rates, experts are of the view that taking into consideration 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 organizations) are already traumatized 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 the government is doing with the money, in concrete and judicious terms. All that have befallen them are lack or poor provision of social services, rising inflation, worsening foreign exchange rate, stagnated economic performance, increasing unemployment, worsening health care, education, transportation, electricity, water and other services.[6]
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 Organized Private Sectors (OPS) is saying which makes a sense is that, giving 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 emphasizing that there are many persons who have not been captured in government’s tax net and do not pay needed taxes.[7]
An increase in tax rate may most likely lead to a far larger increase in the cost of goods sold at the formal markets, like malls, supermarket, amongst others. This increase would have to be passed on to consumers; otherwise, the above formal market’s long-term profitability and viability may be impacted.[8]
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. 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.[9]
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 ostracized 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.
It is important that every eligible taxpayer needs to contribute and acquire the right to make demands on government. But a lot of 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, such as: 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 deterrence to others. [10]
Another key point of those against an increase in the tax rate has always been the high poverty rate in the country. As at 2018, over 86 million Nigerians (46.7% of the population) were reported to be living below the poverty line, defined as earning less than $1.90 per day. Therefore, any increase in consumption tax would effectively impact these people more, and might even be the basis for many more people to move below the poverty line.[11]
EXPANSION OF TAXES
Another option to be considered is the expansion of the rate of tax: increase the rate, but not in the manner currently being contemplated. Let us use Value Added Tax as an example. Today, participants in the informal sector avoid accounting for the tax even though they may have paid it over to the manufacturer or importer (the recently signed Finance Act, 2020 seeks to exempt small business from the administration of the tax, thereby exempting small players in the informal sector from registering for and charging the tax).[12]
To use numbers, an item which has a retail price of 100 naira should attract tax at the rate of 5 naira that should be paid to the tax authorities. Assuming the retailer bought the item at 50 naira from the manufacturer, whose direct cost of production was 40 naira, then the amount that would be paid to the government would be 2.50 naira rather than 5 naira, a 50% loss in revenue as the manufacturer would be able to recover the 2 naira it must have paid to its own vendors, thus paying only 0.5 naira of the 2.5 naira that it would have charged on the cost of the goods to the retailer.[13]
To cover for that potential loss, the FG can opt to increase the rate of tax on goods sold to parties in the informal sector who do not show evidence of VAT compliance—the VAT certificate typically issued by the tax authorities in the past may serve as appropriate evidence. The large manufacturers typically maintain extensive records of their customers anyway, and run computerized systems, so it may not be too difficult to request them to obtain the evidence of VAT compliance issued by the tax authorities as part of the set-up system (several companies already make this request from their vendors). A higher VAT rate would, therefore, apply to those unable to provide it.[14]
This would also apply at the port of importation where importers of goods above a certain volume threshold (to exclude imports for personal use) would have to provide evidence of VAT compliance; otherwise they may be subject to the tax at a higher rate.
Relying on the arguments canvassed in favour of the expansion of tax net, it is my firm belief that expansion of the tax net is the way forward and an ideal solution to our inability to generate funds. Considering the current economic and social reality, expanding the scope of tax net can allow it to reach and catch more persons beyond the subsisting band, it won’t overburden the current tax payers and there is high chance that there would be an increase in the revenue the government will be generating subsequently.
Even though experts have raised concerns about the high cost of carrying out the task of expanding and how it can be hard to implement, considering the enormous size of the informal sector. Notwithstanding that their concerns are quite realistic, the use of technology is the best solution to this and it will be instrumental in driving compliance within the informal sector.[15]
The use of technology has often been discussed, but sadly the focus again has been on the formal sector and how technology can be utilized to make this sector bear a lot more of the burden than it already does.
A case in point is the VAT at source software, which the tax authorities have been looking to deploy at various companies, that is able to track the VAT being charged at source and notify the Federal Inland Revenue Service (FIRS) of this amount without recourse to an audit. This may be commendable, but it would also need to be extended to the informal sector, as a number of the companies approached for the deployment of the software so far file their returns on a monthly basis without fail, and also pay the tax due.[16]
There may be cost implications, but this cost, which would have to be borne by the Federal Inland Revenue Service(FIRS), should clearly be offset by the additional collection. [17]
One of the technological mechanisms that can be used is the Bank Verification Number (BVN), which may provide a basis for the deployment of technology to apply the tax on the informal sector. Nigeria has a significant “unbanked” population, while a good number of the registered BVNs are active (37% of Nigeria’s population are unbanked). However, there are more active BVNs today than registered taxpayers across the country. The FIRS has commenced the use of bank accounts to track tax defaulters, but their search is limited to taxpayers with banking turnover over a certain threshold.
It is advisable to use a system that puts all BVNs and account holders in play. All banks are expected to conduct a Know-Your-Customer (KYC) process on all their customers at the point of opening accounts for them. It is, therefore, not improbable to expect that details of the addresses of these customers should be with the bank and can be accessed at any point in time.[18]
The FIRS can, therefore, in conjunction with the various State tax authorities, establish a lottery system whereby all BVNs are put into the mix at the end of the year. A certain percentage of BVNs would be picked on an annual basis and any BVN picked would be subject to an audit to determine their level of tax compliance. Though companies do not have BVNs (as they would have used the BVN of their directors) the BVN of any signatories to a company’s account will form the basis for the audit of that company.[19]
The penalties for non-compliance should also be better administered, for any non-compliance noted. It is possible that this may deter many people from opening or operating bank accounts, but these people would also be realistic about the growth of their businesses without access to a bank and its facilities. The chances that an individual may be picked for a routine audit and punished if found wanting may increase their desire to do the right thing when it comes to tax compliance.[20]
This should serve to increase tax compliance among the populace, as even individuals in paid employment can be subjected to the audit. Today, many individuals with multiple streams of income do not feel the need to register and account for taxes, including VAT, on these other income streams, but only focus on their employment income. They would after all be able to provide a tax clearance certificate if required for any purpose solely based on the taxes paid on their employment income alone[21].
This should increase the level of compliance without necessarily increasing the cost of collection. It would also improve the ease of doing business in the country, as companies would no longer be bogged down by routine audit exercises and investigations without course.[22]
CONCLUSION
To crown it all, the road to increased tax collection in Nigeria has some obstacles, but they are surmountable. There are no shortcuts and no easy fixes, as every option has its own merits and demerits. However, I would suggest the expansion of tax net be implemented as it is the best option, considering its overwhelming advantages and it will bring the most revenue to the government or country.
ABOUT THE AUTHOR.
Mustapha Babalola Toheeb is a pupil of law and a penultimate year law student of Faculty of Law, Bayero University Kano. He is interested in advocacy and writing on contemporary issues, he can be reached via +2348106244072 and [email protected]
[1] Expand tax net, not tax rate, an editorial of The Guardian Newspapers.
Accessed on 10/10/21 via https://guardian.ng/opinion/2019-let-decency-rule-2/
[2] Much Ado About Vat Administration In Nigeria by Olumuyiwa Adebayo. Accessed on 10/10/2021 via https://www.thisdaylive.com/index.php/2021/09/15/much-ado-about-vat-administration-in-nigeria/
[3] Ibid, para 5.
[4] Ibid, paragraph 6.
[5] Ibid paragraph 7.
[6] ibid, paragraph 9.
[7] Ibid,paragraph 11.
[8] Ibid paragraph 5.
[9] ibid, paragraph 13.
[10] Ibid, paragraph 15.
[11] Insight: Widening the Tax Net in Nigeria—is an Increase in VAT Rate the Way to Go
Accessed via https://news.bloombergtax.com/daily-tax-report-international/insight-widening-the-tax-net-in-nigeria-is-an-increase-in-vat-rate-the-way-to-go
[12] Finance Act,2020
[13] Ibid,para 18.
[14]Ibid,para 19
[15] Ibid, para 28.
[16] Ibid,para 29.
[17] Ibid para 30.
[18] Ibid, para 33.
[19] Ibid,para 34.
[20] Ibid,para 34.
[21] Ibid,para 35.
[22] Ibid,para 35.
