Since the days of the “Greek eisphora”- tax was used for special wartime expenditures, taxes have been a significant constituent of governance across the world. Taxes are a major source of government revenue and a strong driver for economic development in any country, as long as collection and utilisation are approached effectively.
In simple definition, taxes are compulsory financial contributions imposed by the government on the income and properties of persons and organisations for the purpose of funding public expenditure. In most economies, the payment of tax is a compulsory legal requirement on legitimate incomes of inhabitants; often used to raise revenue for government operations, infrastructure development and funding of budgetary decisions.
In some developed economies with no mineral resources to which they can make considerable gains, an effective tax system is used to fund public expenditures. Apart from revenue generation, taxes are also used as tools for reducing inequality, redistributing resources, protecting local industries and discouraging the production and consumption of certain products. In developing and under-developed economies, taxes are a crucial source of revenue for the provision of essential public goods. Hence, the role of taxes cannot be underestimated in socio-economic development.
The Evolution and Hiccups of Taxation in Nigeria
Apart from those derived from the export of crude oil, revenues generated from taxes are the second most important source of income for the Nigerian government. However, the continuous dwindling income from oil exports has placed increased importance on tax revenues in recent times. Nevertheless, it is a well-known fact that tax administration in Nigeria is plagued with challenges ranging from non-identification to non-compliance. Moreover, the clamour for effective utilisation of tax revenues have remained a constant occurrence in the country.
There are three tax authorities conferred with the power to levy taxes in Nigeria – The Federal Internal Revenue Service (FIRS), responsible for evaluating and collecting taxes due the Federal Republic of Nigeria, the various State Boards of Internal Revenue, as well as Local Government Revenue Services.
In order to ensure that taxes are adequately collected, accounted for and serve the developmental purposes for which they are collected, the Nigerian tax system has been subject to constant reviews and updates. For instance, the Tax Identification Number (TIN) which was introduced in 2008 as an initiative of the Joint Tax Board, the Federal Inland Revenue Service (FIRS) and the State Boards of Internal Revenue (SBIR). TIN is a ten digit number unique to each taxable entity earning a steady source of income. The aim of creating the Tax payer Identification number was to create a platform for accessing reliable and centralised information of all taxpayers in the country which would allow for the sharing of information among all tax authorities and aid effective tax administration process. However this initiative was unable to adequately identify and capture a large portion of taxable persons as well as track hidden incomes.
A more recent example is the Voluntary Asset and Income Declaration Scheme (VAIDS), an initiative of the Government to provide a time-limited opportunity for taxpayers to regularise their tax status by paying previous taxes due in exchange for tax amnesty of overdue interest and penalties payments. The reception to the scheme was extremely low, hence the extension of its avail period to June 30th, 2018.
Taxpayers have often been accused of jeopardising the effectiveness of the Nigerian tax system. Prior to the introduction of the TIN, a lot of awareness was carried out to educate the citizenry on the need to pay their taxes but, a large portion of individuals and corporate bodies deferred compliance.
More often than not, SMEs are caught up in this line with a large percentage choosing to remain in the informal sector because of the high cost of compliance. Their size and nature makes the issue of tax compliance one of particular importance, especially since most SMEs have limited access to resources and inadequate expertise to comply with diverse and complicated regulations.
Apart from SMEs, many large organizations, particularly multi-nationals are also guilty of tax evasion in varying degrees.
The 2-Stakeholder Approach
It is important Nigerians realise that the current ineffectiveness of tax for socio-economic development in Nigeria is not a one-way cause, both the government cum tax administrators and taxpayers cum citizens have roles to play for there to be true value from taxes.
Update of tax Laws is now expedient: There is an urgent need for the tax laws to be constantly updated to reflect modern business activities. It is important they are made clearer, simpler and constantly communicated to tax payers accordingly especially as businesses need certainty in planning future business activities.
Transparency in revenue utilisation is key: With the seeming loss of trust in government’s utilisation of taxes, greater transparency on tax use decisions is needed. Tax payers need to be assured that their taxes are being properly utilised for the financing of projects that will ultimately benefit them. It is very essential for Tax Payers to hold the Government accountable with respect to how their taxes are being utilized.
Policy makers – Business Partnership: A partnership between businesses and tax policy makers is now imperative as it would help to ensure tax laws currently in existence help to create a business-friendly and competitive environment.
The SMEs Way: Nigeria may explore the French approach of imposing lower tax rates on Small and Medium Enterprises to ease the burden of taxation on SMEs and facilitate business growth, which will also better equip them for survival in the competitive market. Tax policies can be designed in such a way that they do not only directly affect SMEs but also indirectly encourage voluntary compliance and growth. The important question however is how much tax can SMEs conveniently afford?
Tax Incentives: Increasing tax incentives and exemptions will not only attract investors who are potential tax payers but will also encourage voluntary compliance.
Engagement in Corporate Social Responsibility: Rather than evading taxes, companies, both Large and small, can engage in Corporate Social Responsibility in order to enjoy a tax reduction.
Technological Advancement: One of the reasons necessitating a difficult tax process in Nigeria is the continued use of traditional methods of tax collection. In developed economies, technology plays a major role in tax collection, the Chinese Government being a major example. The Chinese Government recently adopted the Blockchain technology which is a decentralised online record-keeping system that is maintained by a network of computers.
Progressively, the Lagos Inland Revenue Service (LIRS) has increased efforts with respect to Tax Collection via the introduction of technology and automated solutions. An example is the Electronic Revenue Assurance system (ERA) which ensures financial accountability and efficiency for collecting agents, accurate deduction and automatic, transparent remittance of consumption tax, as well as rewards for consumers.
With new technology in place, increased sensitization on the need to pay taxes coupled with increased manpower activities, the total Internally Generated Revenue has been on an increase since 2015. Lagos State recorded Internally Generated Revenue of N436.3 billion in 2016 as against N399.4 billion realized in 2015. A Federal Government attempt of this method will no doubt improve national tax collection and ultimately, position the country for better tax utilisation and results.
Clearly, unstable price of oil in the global market has resulted in serious negative implications for government revenue and its ability to meet its budgetary needs. The budget deficit for 2018 is estimated at N2.01trillion, hence the need to strategically seek ways of boosting revenue from other sources and also bridge this funding gap.
Already in many other countries, tax has become the main source of government revenue whereas in Nigeria, tax does not currently play a significant role. For instance, the contribution of taxes to GDP in Nigeria is 6% whereas Ghana, Morocco, South Africa and Tunisia, respectively, have 15, 26.1, 26.2 and 30.3 per cent, respectively.
In summary, tax provides revenue for the government to create an environment that will ease the running of all businesses, SMEs inclusive. Tax policies and use need to be more strategic, effective and accountable whilst businesses perform their civic duties by committing to tax payment as well as holding the government accountable for its use. The tax system can thus be revitalised for true socio-economic development in Nigeria through a strategic 2-stakeholder approach. This will provide more revenue for the Government whilst supporting the growth of businesses and the long term sustainability of the economy.