Fiscally prudent politicians like to characterize opponents they consider fiscally irresponsible as being advocates of tax and spend. The accusation creates deep blue water between conservatives and socialists. In common with most negative labelling, however, it has very little substance. Governments everywhere have some spending obligations and can only meet them by taxing the population. Even the minimalist state protects its citizens.
The new administration pledged to create a basic social safety net, centred on regular payments to the lowest income Nigerians, in its election manifesto. It has said repeatedly that it will introduce the net over time, as and when resources permit. This recognizes the pitiful level of revenue collection. Gross non-oil revenue amounted to N3.4trn or just 3.8 per cent of GDP in 2014.
The Federal Inland Revenue Service (FIRS) collected N2.4trn of this total, gathering most non-oil taxes as well as petroleum profits tax (PPT). It achieved its collection targets every year between 2000 and 2014 with one exception (2006). Those targets have to become far more challenging if the fiscal element of what we might call the diversification agenda is to be achieved.
PwC has released its “Paying Taxes 2015” report, which has been covered by BusinessDay. It does not flatter Nigeria, which stands at no 179 out of 189 countries in the survey. The report constructs a league table for companies on the basis of four pillars: the time required to prepare and pay their taxes, the number of taxes paid, the payment method and the total paid as a proportion of their commercial profits.
Nigeria’s tax rate is shown at 32.7 per cent, lower than Kenya (38 per cent) and Angola (52 per cent) but above South Africa (28.8 per cent). We would have expected a lower rate than South Africa had it not been for the multiplicity of levies by all tiers of government in Nigeria. Large companies dread appeals from the federal authorities in Abuja for the state governments to boost their internally generated revenue because they are the easiest targets. If the state government has the choice between setting and collecting new property taxes across its jurisdiction, and thereby creating a sustainable revenue base, or tapping the telecoms companies on an ad hoc basis, it is likely to opt for the latter. This practice is set to accelerate now that the monthly distributions by the Federation Account Allocation Committee (FAAC) have fallen over the past year in tandem with the oil price.
The total tax rate may be higher than we would think but this raises an issue of methodology. The report rightly works with case studies so that it can measure the ease of paying taxes. The middle sized companies selected are free with their time and information. They know their tax obligations and, we assume, honour them. We also assume that many Nigerian companies do not pay their dues. We look forward to seeing a report with country comparisons on the ease of avoiding taxes. The then acting chairman of the FIRS, Samuel Ogungbesan, told the media last month that probably no more than 125,000 of the 450,000 corporate entities in Nigeria paid their taxes. Other estimates show a worse picture.
In our view, the new administration should increase selectively some indirect taxes, reduce the waivers and exemptions granted, simplify the system wherever possible and, above all, work hard on compliance. These policies are consistent with the broader vision of dismantling the rentier state, and would complement the ongoing steps by the new administration to plug the many leakages in the system.
Ogungbesan, since removed, also told the media that he favoured a doubling of the VAT rate to 10 per cent. This would be a decision for the new federal finance minister. The FGN has declined over many years to raise the rate in line with fellow members of the Economic Community of West African States. The VAT pool in June for distribution between the three tiers amounted to N65bn. A number of indirect taxes on luxury goods and services were introduced by the previous administration to tap high income Nigerians. These are overdue but together generate far less revenue than would a doubling of VAT.
Turning to compliance, the office of the accountant general has high hopes of the new mechanism for e-collection. It is clearly a step forward. The greatest driver of compliance, however, is political will. A report commissioned by the last House of Representatives found that 60 revenue-generating federal agencies had failed to remit dues totalling N9.4trn between 2009 and 2012. If those agencies were subjected to political pressure and financial penalties, their remittances would have been greater.
Much rests upon the stature of the president and his ministerial appointments. There have been some promising signs in official reserves and FAAC distributions. The new order has to be unrelenting in its mission if the fiscal leg of the diversification is to be attained. Yes, it can!
Gregory Kronsten
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