There are many tools at the disposal of government for the management of the economy. Monetary policy and fiscal policy are the two most widely recognized. These two policies have various mechanics available to government to drive the economy in a given direction. Monetary policy is primarily concerned with the management of interest rates and supply of money in circulation. Open Market Operations (OMO), setting Cash Reserve Ratio and Monetary Policy Rate are examples of monetary policy. The Central Bank uses these tools to influence the total supply of money in circulation, manage inflation, etc.
Fiscal policy on the other hand involve the use of taxation and government expenditure to influence the economy. For example, by increasing tax rates, government reduces disposable income just like it does by issuing treasury bills through OMO. Government could reduce tax rates to stimulate economic activities and boost production.
While presenting the 2016 Budget, President Buhari highlighted the direction of the government’s fiscal policy. With a budget of N6.08 trillion, the highest in history, the objective was said to be about “putting more Nigerians to work”. The President put it more pointedly when he said the budget “seeks to stimulate the economy…” The budget was put together to galvanize economic activities, help “industry, commerce and investment to pick up” and deal with youth unemployment. Job creation as conceived in the budget is expected to be led private sector. This was nicely linked with taxation with a promised tax reduction for small businesses in priority sectors to drive employment.
The importance of taxation as a tool for national development was well articulated in the National Tax Policy. The National Tax Policy made a good attempt at articulating the direction Nigeria intend to go with taxation. Taxation can be used to influence the direction of economic activity, generate employment and create wealth. This in turn create a cycle of revenue to government as part of income earned by citizens is contributed in taxes. Contribution by those who are productively engaged is used to create opportunities for the unemployed who pay in future. The new converts go ahead to earn income which are taxed and used to sustain the cycle of development.
Tax is both a source of revenue to government and a means of citizens participation in governance. Through taxation, citizens contribute directly to national development with a feeling of sense of ownership. In recognition of this critical roles, it is important that adequate attention is paid to making the system work. One of the ways to simplify the tax system, as duly noted in the national tax policy, is reduction in number of taxes. This doesn’t necessarily lead to reduction in amount of taxes collected, but harmonisation of different taxes.
For example, a registered company in Nigeria may be liable to 3 different types of income taxes every tax year. I’m talking of Company income tax (CIT), tertiary education tax (TET), information technology tax (ITT). These are income related taxes which also include Nigeria Contents Development levy (LCD) for applicable companies. With Capital Gains Tax (CGT), you may have 5 different direct taxes for which annual tax return is required. Of course, CGT applies only where there’s capital gain on which tax is required. ITT (like NCD) applies to specific companies – telcos, banks, insurance – but a case of multiple taxes hold still. Indirect taxes and sundry levies and charges of different names and colour exist.
Let’s take the argument further. CIT, TET, ITT are calculated using different tax bases at 30%, 2% and 1% respectively. For each of these taxes, different form is required and the complication of different bases add to the headache. The 3 taxes could be merged together into one, at say 33% or even 35% to compensate for the different bases. Harmonisation makes a world of difference to an investor who is particular about a simple tax system that we seek to build. It reduce compliance cost, which is one of the guiding principles of the Nigeria tax policy. To achieve a high level of compliance, cost of compliance must be kept low. Ditto for cost of administration.
Some will argue that revenue from the various taxes are applied to different use. But really, makes no difference. The number of taxes, levies and charges in Taxes and Levies (Approved list for collection) Act are just too many! 9 different taxes are listed as collectible by FG, 25 by State Governments and 21 by Local Governments. That’s 55 different taxes! Come on! Many of these items are levies and charges that could be put consolidated into one or two.
We seems to be masters at creating new (more complicated) problem while attempting to resolve a simple issue. If we think of poor funding in the education sector, we think of creating a new education tax. If it’s technology promotion, we invent technology tax. Cabotage issue? We quickly think of cabotage tax. When the discussion shift to road and infrastructure, then someone think of infrastructure tax. A bill is pending for a new National Security Tax Act to deal with security issues. Coming soon! If the rich are not paying personal income tax and property tax, we invent luxury tax to catch them. And then you wonder why we are not generating enough tax revenue! It’s not about the number of taxes.
You can’t become effective by aggravating headache. It will only promote inefficiency. Many of these laws can be merged into one and legally backed distribution formula. By reducing the number of taxes, tax compliance and administration is simplified and efficiency is enhanced. Taxpayers are attracted to a simple and efficient tax system. Even the administrators are better off with a simple system. This is one specific step that must be taken in order to improve Nigeria’s ranking on the paying taxes index.
Nigeria’s overall ranking in the most recent Paying Taxes survey carried out by the World Bank Group is 179 out of 189 countries covered. To put it in perspective, Ghana is ranked 101, South Africa is ranked 19. Nigeria is 11 from the bottom. For Africa’s largest economy, deliberate efforts aimed at changing the narrative is long overdue. The variables used in assessing the tax system include number of taxes and length of time required to comply. A simplified process can be achieved by reducing the number of taxes to as few as possible.
An overhaul of the system is required. A reform of the tax laws and system is urgently required. The length of time it takes to effect amendments to tax laws must be brought in sync with current realities. Times are changing; the system must respond to changing circumstances. Law making process must get better and faster. It requires the combine efforts every one – the 3 arms of government at federal and state levels, and citizens. Expectation are high that the 8th Senate will change the narratives with speedy passage of bills, particularly those on fiscal issues.
Nigeria could generate far more than it currently do from taxes. By making the process simple, more can be achieved. My rough estimation is that Nigeria is exploiting below 10% of its tax potentials. I always use a simple extrapolation. About 75% of potential taxpayers are alleged to be outside tax net and 65% of those registered are not fully compliant. This leaves you with 25% of 35% which translate to about 9%. That’s a tough idea of gap that must be covered.
By keeping it simple, the power of making 10 times more is activated. Let’s wrap it up today on that note of possibilities.
Footnote:
This article was posted in verses via my Twitter handle, @YomiOlugbenro, on Wednesday13 January 2016, during my weekly “tweetax” session with hashtag #TaxWiseNG. The tweets are subsequently posted as an article on my blog www.yomiolugbenro.com and my social media accounts – facebook.com/YomiOlugbenro and LinkedIn.com/YomiOlugbenro.
Recent Comments