Taxing Nigeria’s Fledgling Economy: Between Tax Penetration and Economic Recovery (1)

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Nigeria has rolled out another tax amnesty scheme. Backed by Presidential Executive Order No 8 signed on 8 October 2018, Voluntary Offshore Assets Regularization Scheme (VOARS) became the latest effort at combating money laundering and tax evasion.

For the next twelve months, all persons and entities that hold offshore assets and generate offshore income but for which appropriate Nigerian taxes have not been paid could take the opportunity to declare those assets and income with a one-time payment of 35% of the asset value. The Scheme, which will be operated through a Swiss-based intermediary sovereign advisory services provides immunity from prosecution for tax offences and penalties in exchange for voluntary disclosure and a one-off payment.

With the number of initiatives aimed at deepening tax penetration, combating illicit financial flows and raising revenues, the country seems to be forging ahead in dealing with the serious revenue challenge that is plaguing the country’s fledgeling economy.

From year to year, the implementation of the budget has not only been impacted by delays in the signing of the budget but by limited revenues. The 2017 budget implementation report released by the Budget Office of the Federation showed an acute revenue shortage. Gross oil revenue stood at N4.084 trillion representing 23.43% below budget. The shortfall in gross non-oil revenue for 2017 was 34.46% as the country only generated N2.791 trillion.

According to the Budget Office, the net distributable revenue shared by the three tiers of government in 2017 after cost deductions were N4.944 trillion, representing a shortfall of 41.92%. With limited revenue, the country is said to be spending over 60% of its revenue on debt servicing. An Assistant Director in the Fiscal Affairs Department of IMF was quoted to have put Nigeria’s debt to revenue ratio at 63%. There’s therefore, an understandable pressure on the need to grow tax revenues.

To raise the country’s tax revenues from the current 6% of GDP to the dream of 20% will require a complete rethinking of the taxation ideology. There’s definitely no magic wand that could deliver the ambitious 20% target overnight, it requires a holistic review of the entire tax system. What the country has seen so far in the area of taxation are short-term measures that have helped within the limits of the underlining philosophy. But truth must be told, the taxation landscape in Nigeria is changing. The tax has become a buzzword and efforts are ongoing to change the country’s poor tax-paying culture.

It has been widely publicized that Nigeria had just about 14 million tax-registered individuals and had only recently made a quantum leap by raising the number to 19 million. Also, prior to the aggressive chase during the Voluntary Asset and Income Declaration Scheme (VAIDS) which led to the increase of 5 million registered taxpayers, only 214 persons paid up to N20m annual income tax and 96% of that number are in paid employment. The list of tax-registered corporate entities shows similar depressing realities.

Beyond the attitude issue, Nigeria’s Tax system was hitherto bedevilled by a myriad of other challenges that partly explain the country’s predicament. These challenges include the multiplicity of taxes (and levies), use of aggressive and unorthodox methods for tax collection, insufficient use of technology in tax administration, limited inter-agency cooperation and lack of a comprehensive database of eligible taxpayers. The regulatory framework itself is a major headache as tax legislation are largely out of sync with modern business realities.

One of the commendable steps taken towards reshaping Nigeria’s taxation system is the revision of the National Tax Policy which was approved by the Federal Executive Council in February 2017. The 15-page document is a reader-friendly articulation of what the ideal system of taxation in Nigeria should be. But it is what it is – tax policy without any force of law. The much-needed regulatory reform that should have followed to herald the birth of a new tax order is still a dream that we hope will be birthed in the future.

While the country awaits a comprehensive reform of the regulatory framework for taxation, some steps have been taken to tweak the current regulations and make them more adaptable to current business realities. The Federal Government set up a National Tax Policy Implementation Committee for the review of tax laws and submission of proposals for tax reforms. While the Committee’s work appears to be ongoing, some of its recommendations are receiving attention.

Following the Committee’s recommendations, in June 2018, the Federal Executive Council approved Executive Orders to effect changes in the Value Added Tax Act and Excise Duties Act.

The VAT (Modification) Order exempts public transport services, leases and rental of residential property and life insurance premiums from the VAT. Also, the Review of Goods Liable to Excise Duties and Applicable Rates Order provides legislative backing for approved changes in the rates and bases for levying excise duties on alcoholic beverages and tobacco, amongst others. The changes were earlier communicated via a circular issued by the Minister of Finance, which became effective on 4 June 2018.

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