THE problem with Nigeria’s tax system is Tax Policy Mix and Design. Tax Policy Mix and Design is the organisation of tax structure – taxing rights, tax types, number of taxes, the rate of taxes, and base of tax types – in a nation. An appropriate Tax Policy Mix and Design facilitates tax buoyancy and elasticity, which optimises tax revenue for prosperity.
The tested and sustainable tool for economic development and prosperity is taxation, not sale of natural resources such as crude oil. According to the World Bank, nations are able to spur economic growth and inclusive prosperity when they achieve 15 per cent tax-to-GDP. The average tax-to-GDP ratio in Africa is 16 per cent while Nigeria is turning out paltry 6 per cent. Nigeria’s “tax gap” appears to be one of the highest in the world. “Tax gap” is the difference between the potential tax collectable and the actual tax collection from taxpayers or paid voluntarily by taxpayer and on time. It is the uncollected tax revenue in relation to the market value of goods and services produced in a fiscal year. For instance, in 2020, with a GDP of $432.30 billion, the minimum expected tax revenue is $64.8billion (about N29.2trillion), but total tax collection by FIRS, Customs, 36 states and 774 local government areas is less than N7trillion, which is approximately a tax gap of 76 per cent. We are not doing well!
It behooves futurists like me to, for the umpteenth time, sound a note of caution on the Nigerian tax system. Futurists do not essentially predict the future; they provoke, influence and shape the future by deploying foresight tools. In 2014, with the lens of a futurist, I peeped into the future of the economy of Nigeria, and the probable future was the devalued naira, high inflation, high debt profile, low revenue, not-fit-for-purpose infrastructure and many other social challenges that Nigeria grapple with today.
With a sense of responsibility, I articulated the cogent changes and steps required to mitigate the economic woes. I also communicated my thoughts to Nigerians and the world through my book: Tax Strategy: Craft and Implement Fiscal and Monetary Policies for Economic Growth and Prosperity. My sole aim for writing the book is to set the agenda for policy makers on how to cultivate and sustain prosperity in Nigeria for Nigerians.
If our Tax Policy Mix and Design is right, Nigeria will not be in the doldrums. I believe every state and local government in Nigeria is economically viable and can consummate enduring prosperity. In fact, wherever the sun shines is economically viable. The difference between poverty and prosperity is knowledge, pure and simple!
Competitive advantage is the infallible thesis that enounces the sources of sustained prosperity in modern global economy. The repository of natural endowments in a nation and the distribution of resources through derivative parameters among interest groups do not guarantee nations’ prosperity or equitable welfare of citizens The prosperity of a nation is cultivated by the choices nations make rather than by allocation of natural resources.
Michael Porter, the proponent of competitive advantage of nations, warned and advised that prosperity is guaranteed where nations organise their policies, laws and institutions to favour productivity; where nations upgrade the capabilities of their citizens and invest in the types of specialised infrastructure that allow commerce to be efficient; where nations ensure that knowledge and skills are not reserved for a few; and where nations create a fair society in which business success is not secured by nepotism but on the basis of competence.
To avoid delving into the sentiments of political, sectoral and the legal tussle on VAT in Nigeria, which is the prominent issue of the day, I would like to provoke a national discourse: “centralised vs decentralised VAT administration, which of the two create prosperity for Nigerians?” Here are some ideas for consideration.
To facilitate economic competitiveness, industrialisation, infrastructural development and employment, VAT should be administered by state governments. State governments will have the liberty and flexibility to set VAT rate, modify VAT rate, and determine the scope of taxable supplies or the choice not to charge VAT at all (this should also apply to personal income tax). For instance, a state government may decide not to charge VAT in order to promote employment in the state, and to attract industries to the state. The VAT lost will be gained from personal income tax. Another option for state government would be to reduce personal income tax rate in order to increase the disposable income and consumption. The personal income tax lost will be gained from VAT.
FIRS should be empowered to charge VAT on goods and services carried out in the FCT as well as international transactions (imports and digital services). Federal Government retains 1 per cent and shares the balance equally to state governments, while retaining 100 per cent VAT on Federal Government contracts and FCT transactions.
Taxpayers should be able to claim input VAT regardless of the state the input VAT is incurred (with documentary evidence) but can only be entitled to refund if the transaction (purchase and sale) is complete within the same state.
State governments should build capacity to administer taxation by appointing seasoned tax expertise to manage the tax affairs of their states. The chairman and board members of State Internal Revenue must not be indigenes of the state. Taxation is driven by knowledge and skill; it is a delicate sector that must not suffer in the hands of party loyalty or indiginity. The model of appointing consultants to collect taxes is obsolete and fraught with fraud. State governments should employ and train staff and deploy predictive analytics models to drive the tax function of their state.
Nigeria has the potential to generate N30trillion annually from taxation with the appropriate Tax Policy Mix and Design. To optimise tax revenue in Nigeria, only few taxes with broad base should be in force; double and multiple taxation should be eliminated, while the taxing rights of the tiers of governments should be realigned. Taxation is not like selling goods and services, wherein increase in number of products sold translates to revenue. Rather, the fewer the number of taxes or tax types, the higher the revenue from taxation. The lower the tax rate, the higher the number of people in the tax net, and hence the higher the tax revenue. This unassailable postulation is an established model that is based on an empirical research by the World Bank.
For tax policy optimisation and effective tax administration, there should not be more than 15 tax types in force in Nigeria as against the current over 60 tax types. I recommend these 15 tax types and collecting authority; Companies Income Tax (Federal Government), Hydrocarbon Tax (Federal Government), Customs duties (Federal Government), Personal Income tax (Federal & state governments), Nigerian Social Security Tax (Federal & State Government), Value Added tax (Federal & state governments), Withholding Tax (Federal & state government), Stamp Duties (Federal & state governments), Casino and lottery Tax (Federal & State Government), Entertainment Tax (State Government), Environmental Tax (Local Government), Property Tax (Local Government), Council Tax (Local Government), Capital Gain Tax (Federal & local government) and Road Taxes (State & local governments)
David, a futurist and author of Tax Strategy and The Tax Manual sent this piece via email@example.com
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