Nigeria’s unjust tax system needs reform – Punch

As the federal and state governments roll out their annual budgets for fiscal 2017, the sad reality of a weak national tax revenue base is again apparent. All have to borrow to fund expenditure as oil revenues have fallen sharply. While the Federal Government laments that only 13.4 million individuals and enterprises pay tax, all the 36 states are grappling with a very narrow tax net. Unless urgent reforms to widen the net and modernise the collection system are put in place, the current recession will be a long one indeed.

The reality is scandalous. The burden of taxation has been distributed in increasingly unfair ways. According to Babatunde Fowler, Chairman of the Federal Inland Revenue Service, only 16 per cent of Nigerians regularly pay income tax. In Lagos where huge infrastructure projects are being implemented for the past 16 years, only 4.6 million persons and companies in a population of about 22 million are registered for income tax payment. The figures become even more depressing when broken down. Consider that of the 13.4 million regular taxpayers nationwide, only 10 million are individuals. That is not all: some states have an almost insignificant tax base, but rely almost entirely on federal allocations to fund virtually all their activities. One such state is Gombe, whose figure of 33,000 taxpayers is the lowest. The National Bureau of Statistics put the national workforce – the number of adults aged 15-64 – at 77 million by the end of 2015, effectively putting the 10 million people in the tax net at a weak 13 per cent.

The problem is known, but the political will and discipline to right the self-destructive national fiscal revenue template are lacking. We have, therefore, a federation run on an unsustainable formula of relying on revenues from oil and gas extracted from only a handful of states and shared on an inequitable basis among all tiers of government. Long accustomed to this rent-taking system, the federal and state governments have failed to effect the radical reforms required to make the country a truly self-sufficient economy. But viable states are run with taxes, not vanishing commodity revenues.

The leadership must move from homilies to effective strategies to capture more people in the tax net and adopt a more efficient collection system. With the future of oil more or less sealed by contemporary reality, the Nigerian state may simply unravel unless drastic action is taken and soon. Of the 36 states, only Lagos generates enough to sustain itself. Without federal allocations, Yobe, with internally generated revenue of N2.25 billion throughout 2015 as per the NBS survey, cannot maintain its executive mansion; the same applies to Zamfara, N2.74 billion IGR; Ekiti, N3.29 billion IGR; Borno, N3.53 billion IGR; Kebbi N3.59 billion IGR; and Taraba, N4.15 billion IGR, these being the six worst performers. But this applies to all other states, save Lagos. Oil-rich states like Akwa Ibom, N14.79 billion IGR; Bayelsa, N8.71 billion IGR; Ondo, N10.09 billion IGR, and Abia, N13.34 billion IGR, are not exempted.

The FIRS and its state counterparts must think outside the box. Fixing the wobbly tax system should start at the base. A PwC study found that federal, state and local governments, by far the largest employers of labour, are not fully compliant in deducting and remitting taxes taken from their workers through the PAYE platform. Even the vaunted tax system that fetched N700 billion in 2015 is leaking, with 75 per cent of registered companies not logged in the tax net, while 65 per cent of those in the net do not pay taxes. Officials are perpetually seeking to burden the few tax payers instead of compelling compliance by those not paying.

A logical way to help raise the additional needed revenue is for the FIRS to reform itself and deploy the most modern technologies to, first, ensure full compliance by all taxable individuals and corporate bodies. Then, it should identify and draw in the tens of millions in formal, seasonal and informal employment. It is grossly unfair for a few to shoulder the tax burden of all; every citizen who earns an income must be compelled to pay tax. Nigeria’s aspiration to become a major emerging economy cannot be realised on a weak tax base. South Africa, with only one-third of our population and smaller economy, collected $57 billion tax in 2015, compared to Nigeria’s $27.5 billion. Our tax-to-Gross Domestic Product ratio of 6.1 per cent is miserable compared to South Africa’s at 26.9 per cent, South Korea’s at 26.8 per cent, Ghana’s at 20.8 per cent, and Botswana’s at 35.2 per cent.

A novel scheme by the Lagos State Inland Revenue Service to bring in artisans, commercial vehicle operators and traders should be streamlined, adopted by all the states and the Federal Capital Territory and backed by law. Experts recommend a broad-based strategy and capacity building, using technology and continuous training of personnel. Government should implement the National Tax Policy adopted in 2010 and gradually phase out the now prevalent – and controversial – use of consultants.

Modern states are run with taxes, not booty. The welfare states of Europe demonstrate how efficient tax systems create high standards of living. Tax revenues averaged 40-45 per cent of the GDP in Norway, Denmark, Sweden, Belgium, Italy, France, Finland and Austria in 2012 and traditionally fund social services like education, health care and transport. Low level of tax compliance in Nigeria is often attributed to incoherent fiscal policies, cumbersome and inefficient bureaucracy, tax evasion and corruption. The challenge for Fowler, who heads that Joint Tax Board, is to lead reforms to reverse these negatives.

Nigeria sorely needs a tax reform to dig a hole out of recession.  More revenue would also reduce budget deficits, helping to put the nation’s finances on a stable path. Laws should be strengthened to impose harsh punishment of jail terms and hefty fines for tax dodgers. The system should impose high taxes on luxury items. Buyers and owners of luxury homes, cars and jets should be compelled to pay commensurate taxes even when they hide such property under corporate umbrella.