Hello Tweeps, it’s another episode of our weekly tweetax session. It’s time for #TaxWiseNG.
Today’s episode of is titled PRESUMPTIVE TAXATION. This topic has previously featured on Deloitte Nigeria‘s weekly newspaper tax publication – “Inside Tax”. InsideTax is published every Monday in Guardian Newspaper by tax professionals at Deloitte Nigeria. We will try to break it down here today for the benefits of everyone. Let’s examine what presumptive taxation is all about.
The Federal Government of Nigeria launched a National Tax Policy (NTP) in April 2012. NTP was developed through a wide stakeholder’s’ consultative process. It began with the report from a study group established in 2002. The Group examined the tax system and made appropriate recommendations towards entrenching a better tax policy. There was a clear drive toward improving tax administration in Nigeria.
What the Government seek to achieve with the NTP is to have a nation and a people who see taxation as a partnership with government. The National Tax Policy sets broad parameters for taxation and other ancillary matters connected with taxation. It made profound statements on the principles governing tax administration and revenue collection in Nigeria. It also provide a set of guidelines, rules and modus operandi that would regulate taxation in Nigeria.
Taxation is basically the process of collecting taxes based on the applicable laws within a particular jurisdiction. The NTP identifies Presumptive Income Tax Assessment (PITAS) as one of the strategies for achieving tax compliance. In particular, it was noted in NTP that PITAS would help tax authorities to deal with historical tax defaulters. Particularly, taxable persons who have historically failed to comply with the tax laws due to their size or difficulty of being tracked. This category of taxable persons appear to be predominant in the informal sector.
With falling oil revenues and clamor for alternative sources of funds, it is no surprise that new ideas for tax collection must emerge. It is equally not surprising therefore that FIRS has expressed an intention to introduce PITAS into the Nigerian tax system. In FIRS’ opinion, PITAS is a strategy that would promote voluntary compliance amongst taxable persons in the informal sector. A scenario that would ultimately lead to increase in tax revenues.
What then is Presumptive Income Tax Assessment (PITAS)? Is it legal? What are the merits? What are the demerits? If PITAS does bring the informal sector into the tax net (an acceptable consequence), what are the likely challenges? These are issues that would require a much bigger space than this tweetax session affords to exhaustively analyse. Let’s attempt some of these issues associated with presumptive taxation here today. Your thoughts are welcomed.
Nigeria operates a self-assessment system where a taxpayer calculates and pays tax, based on its own assessment. For those in paid employments, the employers calculate the tax due and deduct from employees’ monthly income. The employer remits whatever tax is deducted from employees to the relevant tax authorities under the PAYE system. For corporates and self-employed business owners, the process is the same. It’s self-assessment filing. Taxpayer would prepare and submit financial statements and its tax calculations and relevant forms.
Tax returns will typically be companied by duly completed self-assessment forms and evidence of tax payment. The tax authority reviews the return and either accept or raise appropriate queries or additional assessments. What happens where taxpayers keep no record and/or fail to submit tax returns? That’s where PITAS could help.
Under PITAS, there is no documentation as the taxpayer may typically not have kept complete records. With PITAS, the tax authorities assess a taxpayer on the basis of perceived income. That is, being subjected to tax on the quantum of income the taxpayer would be perceived to have make during the period. The income may be estimated by examining whatever document is available. For example, through bank statements or other source documents such as invoices, receipts, cash book etc.
Income may also be estimated by the nature of taxpayer’s type of business. For example, by benchmarking the taxpayer against similar businesses whose records are available. Other indicators could include value of assets, number of employees or even the location of the business! Or perhaps on the popularity of business. Like saying – “we know how much businesses like you make in this country”!
With all these exercise of judgment and presumption, is PITAS legal? Is there any legal basis for such approach? Well, there may not be any expressly stated statutory provision that advocated implementation of PITAS. Nonetheless, there are provisions in the tax laws that impliedly points in the direction of PITAS. For instance, Section 65 of Companies Income Tax Act (CITA) empowers FIRS to use its ‘best of judgment’ to determine the total profits of a taxpayer. Best of Judgment (BOJ) is, in principle, Presumptive Income Tax Assessment (PITAS).
Of course, there are arguments for and against PITAS. Whilst PITAS would increase revenue collection, taxpayers may argue that it creates room for uncertainty and subjectivity. Perhaps, the whole message is that taxpayer that wants certainty should keep proper books and embrace compliance. Tax Authorities would not turn to PITAS or BOJ in the first place where there is voluntary disclosure.
Of course, it is understandable that improper management of PITAS has the propensity to keep tax collection sub-optimal. For instance, taxpayers could intentionally fail to keep proper books (even when it could have done so) in order to play the system. Such loopholes must not be permitted. Tax Authorities should continue to encourage taxable persons who wish to make voluntary disclosures to come forward.
Attention must be focused on fixing the real issues associated with taxing the informal sector. The issue around increasing tax revenues from the informal sector is not a lack of the tools to subject them to tax. The challenges with the informal sector is largely the inability to identify the taxable persons in this sector. How do you assess a taxable person you do not know?
To this end, the issue will persist if taxable persons who have rendered themselves “invisible” are not identified. FIRS’ proposed collaboration with the Banking sector is one of the many plausible steps to uncover “invisible” taxpayers. The problems around collecting taxes from the informal sector is not peculiar to Nigeria. Experience in other countries shows the reality of this problem and the many approaches at resolving them. Taxpayer identification doesn’t require rocket science, but if that’s what is required, let’s launch to the space.
Former President Goodluck Jonathan was quoted to have made the following remark at the launch of NTP – “most social critics who come on TV, radio stations and talk in the newspapers don’t pay tax”. “If at all because they want to buy land or one thing or the other and the Governor insist they must pay tax, they undervalue themselves.” “Somebody travelling abroad almost every month in first class but pays less tax than Grade Level 4 officer in civil service”. You’ll feel genuine anger when he lamented further – “in other countries, those are criminal offences, but here, they are celebrated as heroes.”
These taxable persons can be uncovered with the help of effective data management and analytics. With all the efforts at getting a unique identifier for everyone in the country, we should be getting closer to the solution. With Bank Verification Number (BVN), National Identity Number (NIN), Tax Identification Number (TIN) etc, we can’t continue to argue invisibility.
We should be serious about creating an economy that is self-sufficient through tax revenue rather than finite oil resource. PITAS, no doubt, has the potential to increase tax revenue accruable to governments by enlarging the tax net. It will also help to eliminate the distortion arising from “free-riding” wealthy taxable persons who pay little or no tax.
Whether PITAS would deliver on its promise or be undermined by challenges would depend on its implementation. Let’s see how things evolve over the coming days, or perhaps in the coming months and years. We’ll catch up next week on another episode. Please share your views on these tweetax sessions. Do remember to retweet, favourite and share.
Thank you for sharing your time with me.
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