Reviewing Nigeria’s tax policy

By formally adopting the draft National Tax Policy for Nigeria last week, the Federal Executive Council moved closer to addressing a major clamour of stakeholders for a review of the country’s archaic and chaotic tax system. Arising from the efforts of a Study Group inaugurated by the Federal Government in 2002 and a subsequent Working Group in 2004, the national policy seeks, among others, to grow tax revenues at all tiers of government, expand non-oil tax and instil transparency, accountability and efficiency in tax administration.

Tax policies represent a key resource allocator between the public and private sectors with taxes imposed on individuals and corporate entities to fund and support public projects and government activities.

There is no doubt that the current tax policies are in need of a drastic review, as they are characterised by multiple and often arbitrary taxes imposed by the federal, state and local governments. The Organised Private Sector has repeatedly complained that multiple taxes impose extra costs on businesses. To be effective, therefore, the new tax initiatives must harmonise the tax structure at the three levels of government and eliminate double taxation.

According to the Minister of Finance, Dr. Mansur Muhtar, the new policy will lay out a new set of rules, correct the inherent lapses in the existing tax structure and promote fiscal federalism. He said the policy would also help the three tiers of government to improve their internally-generated revenues, block the glaring leakages in the system and facilitate economic growth.

These are laudable objectives that should be vigorously pursued and which deserve the support of all stakeholders. The imposition of arbitrary, oppressive taxes has been cited by some firms that have either closed down or relocated to neighbouring countries. The latest initiative should completely prevent local authorities from harassing individuals and corporate bodies for dubious taxes.

It is also known that many well-heeled individuals evade tax while a few law-abiding corporate institutions and salaried workers carry a disproportionate share of the tax burden. Henceforth, tax policies should aim at bringing all taxable adults into the tax net with a graduated rate that should ensure that the well-off pay their own share while the low income earners are given savings-enhancing incentives. For an economy still in the throes of a recession, the tax regime must be versatile enough to encourage savings, stimulate investment and reward social responsibility and research funding.

To widen the tax net, policy makers must never forget the urgency to provide infrastructure; create jobs and reduce unemployment; expand the productive sectors of the economy; stimulate exports, and substantially raise public revenues from non-oil sources.

Modern taxation was first introduced in the old Northern Nigeria in 1904 by colonial rulers who placed emphasis on income tax. This continued in the three regions after the amalgamation of British colonial territories in 1914 and later incorporated in the Direct Taxation Ordinance No 4 of 1940.

Despite efforts since then to reform, experts say that the country’s fiscal regime is laced with distortions; complex, repetitive and inequitable tax laws that have hampered the private sector. Since the enactment of the Income Tax Management Act of 1961, personal income tax has been based on the pay-as-you-earn system with several amendments since then that raised the top PIT rate to 40 percent of taxable income, which is too high.

In August 1993, the Federal Government replaced the sales tax in the states with the value added tax of five percent on all goods and services. This was raised to 10 percent in 2007 but has yet to be implemented. The new policy should return fiscal sovereignty to the federating states. The current centralised VAT regime is unjust and discourages entrepreneurship by taking tax revenues from points of production and sales to distribute on the basis of political considerations. States and LGs should keep tax revenues generated from economic activities in their turf rather than share them inequitably with others.

Moreover, the right to tax imposes on the various governments a responsibility to provide infrastructure, social services, education and health facilities, create a conducive environment for business and ensure internal and external security.
Policy makers should take a cue from the United States and Western Europe that used tax policies to power their way out of the worst global recession since the mid-20th century. There should be a conscious effort to widen the tax net and the plan to reduce direct income tax and emphasise indirect taxes under the new policy is a welcome move. Tax policies must be aligned with other fiscal measures and monetary policies to stimulate agriculture, industry, mining and exports.

Since the policy must go to the National Assembly before it can be codified into law, workers’ unions, the OPS, farmers and other interest groups should make inputs by taking an active interest in the new tax policy whose impact will be far-reaching.

The government should also employ tax holidays for certain strategic industries such as medicines and textiles to achieve domestic self-sufficiency and global competitiveness. But the gains from the new tax system will remain very limited if rampant corruption and leakages in the tax collection machinery are not eliminated.