Every economy that depend largely on commodity export is facing one form of challenge or the other. The degree of impact is what varies. Nigeria is groaning under the weight of falling price of crude due to lack of foresight. Attention has been devoted to the metric of falling price of crude, but that’s not the only danger about oil revenue. It seems we have forgotten and are paying less attention to the reality that Nigeria’s oil reserve my dry up by 2050. Unless we pursue policies of hydrocarbon reserves replacement, Nigeria will be out in the cold when crude oil reserve is depleted.
These are definitely tough times for the country and those charged with responsibility of running the affairs of the country. With a daring crude oil benchmark price of $38, the budget already has a deficit of 37%. Imagine what the deficit level will be if crude is sold at $20 as some are already projecting! Daily crude oil production is estimated at 2.2 million barrels. What happens if it falls due to pipeline vandalism?
If revenue target is not met, either borrowing is increased or planned capital projects are abandoned. Neither option is desirable. Debt servicing in 2016 represents 24% of total spending. How will increased borrowing be serviced? There’s an urgent need to diversify the economy, but this may not translate to immediate inflows. It takes time! Developing the manufacturing sector, solid minerals, agriculture and exports are not projects of 10 months!
One immediate solution which Government is already exploring is to focus on tax revenues, but this itself has its challenges. Due to lack of implementation of the National Tax Policy, Nigeria’s tax revenue is largely from direct taxes. Direct taxes are essentially taxes payable on income/profits of individuals and companies. Income tax payable is directly proportional to profit/income made by the taxpayer, individuals or corporates.
Companies are suffering from high operating cost, with power being a major culprit. Compound cost of power by impact of currency devaluation, high interest cost and soaring inflation. Government cannot collect tax from businesses that may fold up or become non-operational due to current tightening measures.
There are companies that closed shops as a consequence of banning 41 items from access to official window for forex. BDC operators that rely solely on sourcing forex from CBN may face similar fate due to discontinuation of policy. Those that didn’t shut down and struggling to survive may consider down-sizing of employees. Every business that shuts down is CIT revenue loss to government. Every employed individual that is out of job translates to loss of PAYE tax revenue to government. With the current challenges, it will be childish to assume that these are not currently happening.
For these and many other reasons, a shift to indirect tax becomes more appealing. The National Tax Policy advocates a shift to indirect tax. Indirect taxes are levied on goods and services rather than on income/profits. Indirect tax is more convenient and cheaper to administer. Because it is tied to consumption pattern, it fits us better as a country that is reputed for its consumption prowess. We consume what we don’t have and long for things we can barely afford. We take pride in importing everything and brag about importing even the toothpicks on our dining table. Nigeria’s propensity to import is said to be higher than 0.6. That is, every N1 spent, has 60k import content. The rich don’t like to pay income tax, but they can’t run away from VAT and consumption tax. With import duties, high revenue can be raked in from the import-crazy folks.
A company may report hundreds of millions of Naira in turnover, but may have little or no profit depending on operating cost. With indirect tax, the volume of business directly impact amount of taxes payable, not the bottom-line. By the time companies file their 2016 income tax returns, the impact of the tough economic conditions will be obvious. Shrinking bottom-line should be expected and by extension lower income taxes. This may however be compensated by broadening of the tax net and bringing those who were previously non-compliant to book. Enforcing compliance, making sure taxes are correctly computed and promptly remitted will also help.
Government must therefore focus on reviewing the tax system and policies with a shift towards indirect tax. Direct taxes should be lowered to increase disposable income which raises the level of consumption and then taxed. The higher the disposal income, the higher the consumption and the higher the indirect taxes. It is the only model that aligns with government’s plan of stimulating the economy and boosting production. Raising direct taxes work in the opposite direction, except for the impact on inflation.
While government seek ways to broaden its tax revenue, it must be mindful of the overall tax burden of taxpayers. The approach must be holistic. It will be tough to hold on to direct taxes as it is, and continue to push for increasing indirect taxes. So far, government has resisted temptations to increase VAT and other tax rates even when it looks unavoidable in the short to medium term. If VAT rater is subsequently increased, a good counter-balance will be to review direct tax rates downwards. It can’t be a hurried job. It must be painstaking and well thought-out.
Thankfully, the various revenue agencies of government appear to be awake to the realities and pushing hard. They all must be appreciated and supported. FIRS has been up and running, trying to support government’s efforts by making sure taxes are collected. CBN is also pushing from its end, same with NNPC, Customs and other agencies. The tax laws are being combed to identify “idle provisions” that could help raise more revenues. A goldmine was found in Stamp Duties Act. (I’m still looking for how 2kobo per transaction of N4 and above become N50 per transaction of N1,000 and above).
The challenges are daunting, we must be awake to our realities and match with appropriate actions. In tough times as this, collective actions are required to navigate the turbulence. Nigeria can rise to the level of sustainable tax revenue if we do the right things. It’ll be tough, but let’s try tax.
Thank you for following.
Footnote:
This article was posted in verses via my Twitter handle, @YomiOlugbenro, on Wednesday 27 January 2016, during my weekly “tweetax” session with hashtag #TaxWiseNG. The tweets are subsequently posted as article on my blog www.yomiolugbenro.com and my social media accounts – facebook.com/YomiOlugbenro and LinkedIn.com/YomiOlugbenro.
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