SMEs and Taxation: Building Sustainable Businesses through flexible tax systems
“Funding the SDGs is an economic and ethical imperative with major implications for taxation. Countries themselves need to raise more revenue in an equitable way. And the entire international community needs to eradicate tax evasion and tax avoidance.”
- Christine Lagarde, Managing Director, IMR
One of the major preconditions in the 2005 United Nations Millennium Project was that “a minimum of 4 percentage-point increase in the tax to GDP ratio was necessary for developing countries to achieve the millennium development goals (MDGs).” This implied that countries were expected to increase their tax/GDP ratios from an average of about 18% to 22%. The goal proved unattainable and unrealistic as evidence showed that no least developed country (LDC) was able to achieve this target.
Consequently, in 2011 the IMF recommended a less ambitious goal of just 2 percentage increase in the tax/GDP ratio suggesting that most countries were able to achieve this increase with VAT alone.
According to the revised National Tax Policy (2017) some of the challenges that have undermined the efforts of the Nigeria tax system from attaining its objectives include:
- Insufficient information available to tax payers on tax compliance requirements thus creating uncertainty and non-compliance,
- Poor accountability for tax revenue,
- Use of aggressive and unorthodox methods for tax collection,
- Failure by tax authorities to honor refund obligations to tax payers,
- Lack of robust framework for taxation of informal sectors and high net worth individuals (HNIs), limiting the revenue base and creating inequality.
Undoubtedly, taxation has great potentials to drive sustainable national development. However, the Nigerian tax system has over the years been unable to attain its desired outcomes, presumably informing the recent decision by the Federal Inland Revenue Service (FIRS) to propose Value Added Tax (VAT) on online transactions by January 2020.
Quite predictably, the announcement sparked various reactions and outcry from many retailers and e-commerce platforms because the implication of this would change the dynamics for a lot of SMEs and online businesses. In executing this proposal, one of the ways the FIRS seeks to ensure compliance from online vendors would be by levying a 5% charge on purchases made by consumers which the banks then collect subsequently.
With this proposal, the FIRS intends to involve the banks as a key player in the implementation process because the responsibility of remittance to FIRS now lies with the banks and not the online vendors. Therefore, the banks would act as a sort of compliance body working with the FIRS to ensure businesses are indeed remitting their taxes as they are supposed to.
This attempt by the FIRS is one of many ways to ensure tax compliance across the broad gamut of business enterprises in the country. However, a bit of sensitivity is required in addressing the issues. Nigerian business owners do not need another reason to see taxation as a means by the Federal Government to compulsorily enforce compliance. Financial analysts worry that another valid concern would be the probability of multiple taxation and levies and the risk of creating more avenues for extortion and unfair pricing.
The issues highlighted do not exhaustively capture the challenges the tax system in Nigeria faces but provide insight to some proactive steps required for the FIRS to achieve success in the orderly development of Nigeria’s tax system and become the hallmark of revenue services on the African continent.
Many international funding organisations like the International Monetary Fund (IMF), and the World Bank Group, development organisations like the Organisation for Economic Cooperation and Development (OECD), and the United Nations are unanimously encouraging nations of the work to make concerted efforts to fortify the effectiveness of their tax systems. Therein lies the required domestic resources necessary for the attainment of the Sustainable Development Goals (SDGs), promoting inclusive economic growth.
Some of the ways to achieve this is by encouraging incentives like a tax holiday. A tax holiday works in instances where the government intends to boost the purchase of certain items or encourage citizens to participate in certain economic activities. Tax holidays occur for a temporary period in which time the tax rates that apply to certain products or services are either removed or reduced.
In a country like Nigeria with a poor VAT collection where taxation in general is still in the slow stages of becoming an acceptable norm of operating a business, the FIRS should work more on improving the tax culture and tax systems. One of the ways it can do this is by setting acceptable standards of VAT registration threshold. This principle is not so popular with developing economies but in general, the VAT threshold also known as VAT registration threshold is simply the amount of money you can earn before you need to register for VAT.
In the United Kingdom, businesses can only register for VAT if they fulfil the following preconditions:
- If the businesses expect that their VAT taxable turnover crosses the VAT registration threshold within the next 30 days,
- If the businesses have earned more than the VAT threshold (between £81, 000 – £85, 000) over any 12 month period from 2014 – 2018.
What this means is that the government of the UK has put certain preconditions and consideration in the whole dynamics for VAT remittances. The government has put systems in place to ensure the proper procedures for companies to complete their VAT registrations and begin remittances on goods and services sold to customers, payment of VAT on good and services bought, submissions of annual VAT returns and keeping proper VAT records and a VAT account.
Currently in Nigeria, companies are required to remit VAT regardless of the profits or losses the organisation recorded in the course of its business activities. This has made SMEs especially weary of remitting VAT as and when due. In its bi-annual consultation report on Nigeria the IMF released to Nigeria, the IMF proposed that the FIRS should consider establishing a minimum threshold so that more focus would be on bigger organisations in order to allow SMEs get their footing at least in the earlier stages of their existence. Doing this would give them better chances at strengthening their processes and organisational structures to become more financially stable.
The taxation ecosystem in Nigeria involves an interconnection of multiple players all working to actualise sustainable economic development in the country. Therefore, there is need for collaboration between the private sector, financial institutions, the FIRS, the government, business owners and individuals on our personal and collective responsibilities as it pertains to taxation. The benefit to everyone cannot be overemphasised.